Financial Advisors Upbeat on Equities

Financial advisors adopted a positive attitude toward U.S. equities at the start of 2017, with 56% feeling bullish about the year ahead, according to the Eaton Vance Advisor Top-of-Mind Index (ATOMIX) survey, a quarterly survey of more than 1,000 financial advisors. Yet despite this optimism, “managing volatility” emerged as advisors’ top concern, rating 114.5 on the ATOMIX scale.

“Advisors see opportunity in equity markets, but are also aware of potential volatility and the macro challenges ahead,” said John Moninger, managing director of retail sales at Eaton Vance. “As a result, they are working to find ways to manage risk while driving strong results for their clients.”

Although concerned, advisors appear poised to capitalize on the opportunities volatility presents, with 54% saying volatility should be both managed to avoid losses and harnessed to take advantage of opportunities. However, their clients had a different view – only 32% of advisors said their clients agree with this approach. Instead, 48% of advisors said their clients believe volatility only should be managed closely to avoid losses.

This sense of caution aligns with broader investor sentiment. Advisors reported 60% of their clients are motivated more by fear than greed. Although this fear indicator has declined from a high of 82% in August 2016, fear remained the dominant motivator.

“The current climate of elevated political uncertainty brings more potential volatility to the market, which could be beneficial for investors in search of value opportunities,” said Mr. Moninger. “Volatile markets provides advisors the chance to really deliver value and support to clients by helping them navigate uncertainty and stay on course to meet their investment goals.”

Politics expected to drive volatility

Sixty-five percent of advisors indicated the new U.S. administration will be a major driver of volatility in 2017, while the Federal Reserve’s decisions on interest rates ranked second at 46%.

“Advisors are telling us they are approaching 2017 and the new administration with a sense of cautious optimism,” said Mr. Moninger. “Politics have moved to the front of the national discussion right now, and advisors are addressing the topic to better understand client motivations and financial planning concerns.”

63% reported discussing politics with their clients in the context of investment choices
17% raised the topic in almost all of their client conversations
16% used political side conversations to better connect with clients

Clients drive responsible investing

More than 80% of advisors said they are familiar with responsible investing, although many use different names to describe specific investment practices, such as environmental, social and governance investing (ESG), socially responsible investing (SRI), impact investing and sustainable investing.

70% of advisors reported their clients requested responsible investing strategies, yet only 21% of advisors said responsible investing is important to their practices
44% said responsible investing provides a way to connect with clients and 45% expect responsible investing to grow in their practice over the next year
Only 11% of advisors said responsible investing has led to lower or worse performance than other mutual funds

“Responsible investing, often called ESG investing, is an area that increasingly interests clients and also has the potential to deliver differentiated results,” said Mr. Moninger. “Many clients want to express their values and core beliefs through their investment decisions. Advisors can strengthen client relationships by empowering them to affect change through responsible investing choices.”

Positive outlook for taxes

Advisors are optimistic President Trump’s tax policies will have a positive effect on the market, with 25% saying corporate tax reform will be the top catalyst and 23% saying it will be reducing taxes for individuals.

Advisors do not anticipate changing their strategies for tax management, with many considering the same strategies they implemented last year. The top choices to help clients reduce tax bills are tax loss harvesting (31%), followed by tax-managed equity funds (21%) and municipal bond funds (21%).

When asked specifically about their attitudes about municipal bonds, advisors said the asset class is the preferred method for reducing overall tax exposure. Advisors also view municipal bonds favorably in a rising interest-rate environment, with 31% reporting they have recently increased allocations to municipal bond funds to help hedge against future rate hikes.

“Given the muni market’s historical resilience, we believe the short-term reaction after the U.S. election provides tax-sensitive investors a chance to scale into munis at higher yields and cheaper valuations,” said Craig Brandon, co-director of municipal investments for Eaton Vance. “This opportunity must be somewhat tempered by the backdrop of heightened uncertainty, particularly around President Trump’s agenda and proposals. However, increased infrastructure spending would generally be a credit positive for the municipal market.”