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Advisor Concern on Client Income Surpasses Volatility: Eaton Vance

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Half of advisors in a recent poll by Eaton Vance said generating income for their clients had increased in importance over the past year in the face of expected Federal Reserve rate hikes and concern over any changes to the tax code.

Income ranked at 125.8 on the Q2 Eaton Vance Advisor Top-of-Mind Index, a 16% increase from the first quarter and the highest ranking since the index’s inception, according to the firm.

Advisors’ second top concern was protecting wealth from market volatility at 111.5, down from a peak of 129.7 reached in last year’s third quarter.

Nearly half of advisors believed that the American political environment would drive volatility in 2017. Fifty-five percent of advisors said fear was investors’ main motivator, a big drop from 82% in third quarter 2016. Forty-five percent said greed was clients’ primary motivator.

More than half of advisors professed to be bullish on U.S. equities over the next year, while a fifth were bearish.

“The political environment initially buoyed markets in early 2017, but the continued low rate environment combined with a longer term bearishness on the bond market has pushed advisors to more closely examine client income opportunities,” Eaton Vance’s managing director of retail sales John Moninger said in a statement.

“While current equity market sentiment is generally positive, advisors have trepidations about what lies ahead, including the potential for rising rates and policy changes and the resulting impact on the equity and bond market.”

Although 54% of advisors considered the markets fairly valued, 39% believed they were overvalued, and just 7% thought they were cheap.

Eaton Vance contracted with a third party to conduct the online survey from March 29 to April 20, using a methodology similar to that of the U.S. Consumer Confidence Index in that it calculates a weighted average of current perceptions (40% of the index) and what advisors think about the trends (60% of the index). The index set a baseline average of 100 for April 2014.

Rise of Responsible Investing

Forty percent of advisors in the new survey said responsible investing solutions were an important part of their practice, a dramatic increase from 21% who said this in the first quarter.

“The rise in popularity of responsible investing is something we are watching closely,” Moninger said. “Advisors are telling us they are hearing more about it from their peers, their clients and in the media.”

Investor demand for sustainable, responsible and impact investing has grown by 33% since 2014.

The increased focus on responsible investing coincides with the outcome of the U.S. presidential election and ongoing concerns over U.S. regulatory policy changes, according to Eaton Vance.

Forty percent of advisors said they had seen client interest in responsible investing strategies spike since the election, and 37% expected to increase their responsible investing recommendations in 2017.

Women advisors were likelier than their male counterparts to indicate interest in responsible investing strategies, and millennials were more likely than all other advisors to do so, according to the survey.

“Delivering solutions that reinforce investors’ personal values while generating comparable or better returns is a priority,” said Moninger.

Coming Challenges

The advent of the Trump administration met with general enthusiasm from advisors.

Seventy-six percent expected it to have a positive effect on the stock market over the next six months. Sixty-two percent said it would positively affect the U.S. dollar, and 80% believed it would be good for their businesses. This, even though 49% believed the administration would be the chief driver of market volatility in 2017.

Overall sentiment for bonds continued to decline in the second quarter, with 52% of advisors claiming to be bearish and only 18% bullish on the U.S. bond market over the next year. They were relatively more optimistic about municipal bonds, with 32% bullish and 23% bearish on the muni market.

“Advisors are looking to policymakers to guide investment allocation with a keen eye on potential Fed action and tax reform,” Moninger said.

Ninety-five percent of advisors surveyed believed the Fed would raise interest rates at least once more in 2017, and 56% predicted two or more hikes this year.

Advisors said they were adjusting client portfolios to prepare for the rising rate environment:

  • 55% favoring rate loan funds
  • 53% opting for dividend-paying stocks
  • 38% looking to high yield bond funds
  • 29% favoring multi-sector bond funds

Tax concerns, though rating lowest on the index at 86.4, increased by 20% from the first quarter.

Sixty-four percent of advisors expected the Trump administration to have a positive effect on taxes over the next four years, and 54% said they were likely to modify their clients’ investment strategies as a result of expected tax policy changes.