Affluent investors ended the first half of the year on a sour note, their confidence slipping seven points in June, to minus-12 on Spectrem Group's Affluent Investor Confidence Index, but advisers say that falling confidence presents an opportunity rather than an obstacle.
The last time affluent investors' confidence fell so far so fast was in June 2009, when the Spectrem index dropped by eight points. This June's decline means affluent investors, those with $500,000 to $1 million to invest, are feeling bearish.
Millionaires, too, lack confidence in the investment climate; their index fell six points, to minus-7. Though all wealthy investors were worried about their accounts, richer clients were less worried.
At 26% (29% for millionaires), the political climate is what most worries wealthy investors, particularly the uncertainty about future tax hikes and the potential impact of the nation's bloated deficit, said George Walper, the president of the Spectrem Group in Chicago. Other prominent concerns were the economy (24%), market conditions (10%), unemployment (5%), inflation (4%) and health-related issues (3%).
All this worry is a clear sign to advisers to expect gloomy clients, but Walper said the news is not all bad.
"This is an opportunity," he said. "Make sure you understand your clients' psychological feeling about the market and Washington; listen to that, and build solutions for them," be they additional financial planning or simply portfolio tweaking.
"People are shifting toward far more conservative investment strategies," Walper said. "The definition of that is in the eyes of clients, which is why it's so important to really know your clients well."
Barry Jones of Axa Advisors in Davison, Mich., said he agrees that what appears like a negative is actually a positive for advisers.
"Market gyration is a great reason to sit down with clients to articulate what's going on," he said. "A lot of people are keeping their money on the sidelines."
The goal is to get them to move that money into a relatively safe investment strategy that will reward the client far more than the certificates of deposit and money market funds many have chosen.
For the past eight months, Jones said, he has been talking to clients about Curian's dynamic risk account, a seesaw consisting of one- to three-year Treasuries on one side and a basket of global equities, commodities and emerging-market-debt exchange-traded funds, among other things.
When the portfolio falls any more than 1.2%, Jones said, assets are shifted to Treasuries. If it gains by 1.4%, assets are shifted from Treasuries to growth investments. Almost 10% of Jones' $60 million book is now with Curian, which he combines with annuities for guaranteed income and pools of "sometime" money in long-term growth strategies.
Maris Ogg, the president of Tower Bridge Advisors in West Conshohocken, Pa., also seesaws between market exposure and safety, depending on how the market is acting.
Most of her firm's clients fall between 60:40 and 40:60 ratios of stocks to bonds, she said. The firm uses a proprietary but "simple" market indicator based on factors such as bond and earnings yields and risk premiums to figure out whether the market is overpriced or underpriced relative to the past 25 years.
Right now, she said, the market is more undervalued 25% of the time, making it a buyer's market.
Typically, she said, "we'll pull back when stocks go up," that is, sell them and move the money to cash until a suitable bargain emerges or into hedges against sudden slumps with puts and covered calls.
Market volatility is making both advisers and clients skittish, so they are holding back until prices stabilize.
"With volatility so high, all you can do is offer sympathy and keep people calm," Ogg said.
However, she noted that it is sometimes an adviser's job to counter excessive client negativity. The market will become more stable in November when "there will be more of a balance in Congress, and a stop to the anti-business agenda. The underlying economic numbers are clearly moving in the right direction," she said.
In short, just because investors are scared does not mean they will stay on the sidelines if an adviser can offer a viable alternative for getting a return. What seems to work is active management that minimizes downside risk.
"This strategy works tremendously well in a sideways market," Jones said. "I think we'll be stuck in it for a long time, so it's very attractive to clients right now."