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DOL Rule, Election Weigh on Financial Advisors: Fidelity Survey

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Concerns about regulatory and political developments were top of mind for financial advisors in the third quarter, Fidelity Institutional Asset Management reported Thursday.

Fidelity’s latest advisor investment pulse survey found that some 28% of advisors they were focused on topics such as the Nov. 8 general election and the Department of Labor’s rule on investment advice, an increase from 21% in the second quarter and 16% in the first.

(Related: DOL Releases FAQs on Fiduciary Rule)

“Advisors have spent a large part of this year assessing the impact of the DOL rule on their business model and how they work with clients,” Scott Couto, president of Fidelity Institutional Asset Management, said in a statement. “On top of that, they’ve had to work hard to help investors manage through a backdrop of political uncertainty.”

Couto said it was “critical that advisors help clients focus on what they can control by making sure they stay the course and stick to a solid, long-term investment plan.”

Besides political and regulatory developments, advisors surveyed were also increasingly focused on interest rates through the first nine months of the year.

Fidelity noted that although interest rates had been one of advisors’ top five topics every quarter for more than two years, it dropped to No. 7 in the first quarter of this year, when only 7% of respondents cited it as a concern.

Since then, the number of respondents who expressed concern about rising rates increased to 11% in the second quarter and to nearly 14% in the third, when it was ranked No. 4.

Other top-of-mind themes for advisors in the third quarter:

  • No. 2: Portfolio management, cited by 25% vs. 27% in Q2
  • No. 3: Market volatility, a worry of 18% vs. 23% in Q2
  • No. 5: Finding yield and income, cited by 8% vs. 13% in Q2

The survey found that advisors’ greater focus on interest rates aligned with trends seen in the implied probability of a rate hike by the Federal Reserve in December. This increased from less than 10% at the end of June to more than 72% as of Oct. 25.

“Regardless of whether and when we’ll see an increase in interest rates, it is important for advisors to use the opportunity to educate their clients on the role of fixed income in a diversified portfolio,” Couto said.

Fixed Income Allocations

Fidelity said many investors hold a traditional view of fixed income: when interest rates rise, bond prices fall. As they await the Fed’s next move, advisors can support clients by helping them consider not only interest rate risk, but also credit risk, and educate them on the effect potential rising rates may have on the total return for bond funds.

Here are four questions advisors can help clients answer as they review their fixed income allocations:

1. How can I reduce interest rate sensitivity?

Many investors have turned to longer-term bonds in search of income. However, longer-term bonds have typically shown greater sensitivity to rising interest rates, while shorter-term ones generally hold their value better as rates rise, according to Fidelity.

It said advisors should also keep an eye on yields and the potential for a “low for long” interest rate environment.

2. How can fixed income strategies help reduce volatility?

Advisors should remind clients that bonds play a role in providing income and offsetting equity volatility. Fidelity noted that high-quality bonds have historically performed well when stocks declined, and they have typically provided steady income.

3. What are some ways to increase income potential?

Advisors should help clients who can tolerate more risk explore non-core-income options, which may offer higher income potential and diversification benefits, such as lower sensitivity to rising rates, Fidelity said.

Non-core-income assets include high-yield bonds that can be less sensitive than investment-grade bonds, leveraged loans that can move with rates, emerging-market debt and real estate securities, which generally offer low correlation to investment-grade bonds.

4. Can fixed income help generate tax-efficient income?

Municipal bond funds may play a role in generating tax-efficient federal income. According to Fidelity, they may add total return and attractive diversification benefits thanks to their low correlation to stocks and other fixed income investments.

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