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Portfolio > Economy & Markets

Advisors Cautiously Upbeat

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In the last three years, many advisors have benefited from having access to benchmarks against which to compare the performance of their practices in areas such as profitability, compensation, assets under management, and staff structure.

Last month, AdvisorBenchmarking introduced a new benchmark that will allow you to gain better insight into how your practice compares to those of other advisors. The Advisor Confidence Index was launched on April 26 to provide a gauge of advisors’ views on the U.S. economy. Partially modeled after the Consumer Confidence Index, it captures the sentiments of 150 independent registered investment advisors (RIAs) who participate in a monthly survey about their outlook on the economy for various time periods. The index’s results will be released on the last Monday of every month.

How the Index Works

The index’s value runs on a scale of 33.33 to 166.67, with a perfectly “Neutral” reading standing at 100. A “Very Negative” stance is 33.33; “Negative” is 66.67; “Positive” is 133.33, and “Very Positive” is 166.67. Every month, the change in the index’s value from the preceding month will also be calculated and reported as a percent change.

The participating advisors answer four multiple-choice questions every month reflecting their views of the economy. Three questions gauge their views on the economy for the “current” time period, the “subsequent six-month” period and the “subsequent 12-month” period. The fourth question gauges their outlook on the stock market for the subsequent six months. For each question, the advisors select one of five multiple-choice answers, ranging from “very positive” to “very negative.” Each of the answers carries a specific weighting. For each question, the mean is calculated. Those four means are then aggregated and the resulting mean is calculated. Using a deduced factor, the new mean is converted to a base where a “neutral” stance is equal to 100, as mentioned earlier.

Advisors Cautiously Optimistic on Economy

April’s results showed a reading of 123.96, as indicated in the chart below. This value shows advisors’ sentiments leaning toward positive.

Source: AdvisorBenchmarking, April 2004

April’s value also shows the index inching 1.56% higher from its March reading, which was when the first survey was completed. Of note, the Consumer Confidence Index, which is based on a representative sample of 5,000 U.S. households, rose 4.51% in April. This extra optimism on the consumers’ part and the discrepancy between the CCI and the advisor index will be interesting to note over the coming months.

Short-Term Outlook Stronger Than Long-Term

Not surprisingly, advisors are much more upbeat on the economy for the next six months than they are for the next year. Advisors’ outlook for the next six months stood at a 131.67, compared to just 124 for the next 12 months.

The disparity in the outlook for various time periods is partially due to the inherent difficulty in forecasting economic conditions for a whole year versus just six months. However, it seems that the November presidential election–which historically has created an artificially positive economic environment–and a recent slew of strong corporate earnings announcements have contributed to the more upbeat short-term outlook. Conversely, for the longer term, advisors’ optimism has been hampered by the recent surge in violence in Iraq, global terrorism, and speculation about rising interest rates.

Larger Firms Less Optimistic

Interestingly enough, it seems that among the representative sample of 150 firm principals, one trend persisted: the larger the firm, the less optimistic their outlook. Firms managing less than $100 million in assets had an average index value of 131.98; firms with assets between $100 and $399 million had a value of 124.25, and firms managing over $400 million had the lowest average value: 119.63.

We could not pinpoint any specific reason for this disparity from our follow-up phone interviews, but it is safe to assume that bigger firms with more seasoned principals tend to be more cautious in their investments and economic assessment than smaller, younger firms.

All in all, the latest index results indicate a more upbeat advisory marketplace. As with all our other practice-focused benchmarks, the Advisor Confidence Index can be a useful indicator to compare your views of the economy with what your peers are thinking.

Contact Robert F. Keane with questions or comments at [email protected].


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