Many U.S. financial advisors, surveyed by Fidelity Investments, said they were anticipating a rise in interest rates, while at the same time they focused on how to ensure a steady income stream for their clients in the current low interest rate environment.
Results of Fidelity’s fourth quarter Advisor Investment Pulse, released Wednesday, were based on a poll of 250 advisors seeking to capture the main investment topics on their minds.
Besides interest rate concerns, the poll showed that advisors continued to focus on market volatility, their next biggest concern.
Scott Couto, president of Fidelity Financial Advisor Solutions, said the prospect of rising interest rates had been a major area of focus for more than a year. But he offered several suggestions for advisors.
Couto suggested that advisors look at how fixed income can play a crucial role in their clients’ portfolios, particularly during periods of volatility and continued uncertainty over interest rates.
Interest rates, he said, may settle at relatively low levels, and for a longer time than many predict.
He explained that the global macro environment remained uncertain, and bond yields outside the U.S. remained low. And no extraordinary pressure exists for interest rates to rise rapidly.
Couto also pointed out that treasuries, mortgages and investment-grade corporate bonds, which make up most core bond funds, were among the only assets with negative correlation to equity returns, thus helping to provide diversification in a portfolio.
Core bond funds also offer principal protection and meet an investor’s need for income, making them a good choice for clients’ portfolios.
He said investors’ recent fears of rising interest rates had caused them to shun these core holdings and invest in unconstrained and absolute return bond funds.
This could result in their exposing themselves to unintended risks because those strategies are strongly correlated to equity returns, thus limiting their ability to provide diversification.
He noted that the U.S. economy was in a mid-cycle phase, which usually favors equity and high-yield investments. Eventually, the economy will segue into the late cycle, creating an environment in which credit-intensive bonds historically underperform against core fixed income.
Finally, Couto said fixed income assets could play an important role in a diversified portfolio, and advisors should contextualize short-term market events so their clients could remain invested to participate fully in the market’s long-term upward trend.
Couto suggested that advisors who were concerned about market volatility should look at the returns of the S&P 500 index since 1969. During that period, stocks have experienced bull markets, corrections, bear markets and even crashes.
For those investors who can maintain a long-term investment horizon, he said, equity returns may offer a very attractive way to build wealth.
“Significant market fluctuations occur more often than clients realize, and providing them with the historical context can help,” Couto said in a statement. More than one correction during the course of a bull market is not unusual, he said.
“By understanding their clients’ goals and risk tolerance, advisors can work to help their clients focus on developing and maintaining a sound investment plan.”
— Check out RIAs Rarin’ to Compete in 2015: TDAI Survey on ThinkAdvisor.