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November 01, 2004 at 02:00 AM
Advisors are overwhelmingly optimistic about the stock market and economy. The advisor market is segmented with RIAs targeting much wealthier clients than registered reps. About a third of advisors have beaten the market over the past year. These are some of the findings of our latest survey of advisors.
With the shadow of the worst bear market in decades still hanging over the investment advisory field, our survey finds that advisors have benefited from the upsurge in stocks that began after the Russell 3000, an index representing the total stock market, bottomed on March 11, 2003. The Russell 3000 has risen 27% since then, and advisors have regrouped and recovered. Although sales are up at the great majority of advisory firms, competition has stiffened.
This is the third time in the last 18 months that we have surveyed advisors by email. Our latest survey, conducted in late September, brought nearly 800 responses. To help refine the survey, I have enlisted the help of industrial psychologist Howard Gendel, who specializes in research about financial services.
Advisors are overwhelmingly optimistic, with 85% of those responding saying the stock market and economy would strengthen over the next 12 months. That level of optimism is in line with our survey results during the depths of the bear market in April 2003, when 86% of advisors said they believed the economy and market would strengthen over the coming 12 months. More advisors are optimistic now than in September 2003, when 10% of those surveyed predicted a stronger stock market and economy.
With the great majority of advisors optimistic about the stock market, many are putting their money where their mouths are. Twenty-six percent said they allocated more to stocks over the previous 12 months, while 20% said they had allocated less to stocks. The remaining 54% said they had maintained the same allocation to stocks over the past year.
Comparing advisor sentiment on the economy and stock market today with the results of our survey in April 2003, which coincided with the bottom of the bear market, reveals a less rosy picture. Then, as now, about half of those polled had maintained the same equity allocation over the previous 12 months. But that’s where the similarity ends.
In April 2003, when 86% of advisors brimmed with optimism as they do now about the prospects for the economy and stock market, only about 7% said they had over the previous 12 months allocated more to equities. According to the current survey, 26%, have allocated more to stocks in the past year. Another big difference: 45% of advisors had reduced allocations to stocks in the year leading up to April 2003, versus just 20% now.
Stock market sentiment indicators are reverse indicators. When more advisors reduce allocations to equities, the chance of gains in the stock market improves because their selling and lack of interest in stocks has already driven prices down. While you cannot draw any firm conclusions from a single indicator using advisor sentiment as a proxy for all stock investors, the data makes it seem less likely that the stock market will experience a pop in the coming year, as it did after our April 2003 survey, because we have seen half the number of advisors reducing allocations to stocks in the past year that we did then. There just have not been enough skeptics left on the sidelines to buy into the market.
Registered investment advisors are more likely to be skeptical about the stock market and economy than registered representatives affiliated with broker/dealers, according to our survey. While just 9% of the nearly 400 reps said the stock market and economy would weaken over the next year, 22% of the nearly 400 RIAs responding predicted a weaker stock market and economy. Skeptical about the market’s prospects, just 18% of the RIAs surveyed said they had allocated more to equities over the previous 12 months, while 32% of reps allocated more to stocks.
Commodities Gain Traction
For advisors allocating less to equities, no one asset class is drawing a huge portion of the freed-up cash. For advisors allocating less to equities, the favorite spot to deploy the cash among 24% of RIAs is in money market instruments, while the favorite spot for 30% of reps is in real estate. Commodities are getting more spare cash from 21% of RIAs and 15% of reps. Bonds are cited as the best spot for the freed-up cash by just 19% of RIAs and 20% of reps.
We wanted to see how closely aligned registered reps are with RIAs on key issues. So for the first time since we started surveying advisors online, we separated our respondents based on their classification. We found that the independent advisor channel comprises two distinct groups, with RIAs generally targeting a wealthier clientele than reps.
The market segmentation is most clear from the data we gleaned in asking about account minimums. Of the reps surveyed, 68% said their minimum account size was less than $100,000; only 34% of RIAs accepted accounts that small. Among RIAs, 25% said their minimum account was $100,000 to $249,000, and 19% said their minimum was $250,000 to $499,000. In contrast, among reps, 23% set a minimum of $100,000 to $249,000 and just 4% at $250,000 to $499,000. The difference in their respective sweet spots is clear at higher account minimum levels: Less than 5% of the registered reps set their minimum above $500,000, against 22% of RIAs.
Credentials, Please
RIAs are also more likely to hold a professional designation, with 31% saying they were CFP licensees, versus 25% of reps; and 15% of RIAs hold an MBA compared with 11% of reps. Fourteen percent of reps have no professional designation, half that for RIAs. In general, however, RIAs and reps were together on most issues. For instance, 80% of RIAs said they increased spending on compliance over the previous 12 months, while 85% of reps did, and about 70% of both reps and RIAs increased spending on technology. However, nearly 80% of RIAs said they increased spending on marketing over the past 12 months while only 61% of reps did.
Overall, the financial advice business has been stronger over the past 12 months. The great majority of advisors, 84%, say their revenues have risen over the past 12 months, while the rest experienced declining revenue. This stands in stark contrast to the survey we took near the bottom of the bear market, when more than half of those surveyed reported bringing in less revenue over the previous 12 months than they had three years earlier, when the 1999 bull market was still in full swing. Among advisors and reps, 41% reported revenues up over the past 12 months by between 1% and 19%. A quarter of all advisors reported sales up by 20% to 29%, while 21% reported sales gains of 30% of more for their business.
Respectable Performance
