BOSTON — Financial advisors were most concerned about regulatory and political developments in Q3 2016, according to the latest Fidelity® Advisor Investment Pulse study. More than 28 percent of the advisors surveyed said topics such as the Department of Labor’s (DOL) rule on investment advice and the upcoming general election were top-of-mind, a steady increase from nearly 21 percent in Q2 and 16 percent in Q1. The latest results of the quarterly survey were released today by Fidelity Institutional Asset Management, a distribution and client service organization dedicated to meeting the investment needs of financial advisors, institutions and consultants.
"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. On top of that, they’ve had to work hard to help investors manage through a backdrop of political uncertainty," said Scott E. Couto, president, Fidelity Institutional Asset Management."Although these developments can be a source of anxiety, it’s 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."
Alongside regulatory and political developments, advisors have also increasingly focused their attention on interest rates through the first nine months of the year. While interest rates had historically been one of the top five topics for advisors every quarter for more than two years, it dropped to No. 7 in Q1, when a mere 7 percent of respondents cited it as a concern. However, more and more advisors are keeping their eyes on the Fed — the number of respondents who cited rising rates as a worry rose to 11 percent in Q2 and nearly 14 percent in Q3, when it was ranked No. 4.
Advisors' greater focus on interest rates aligns with trends seen in the implied probability of a Fed rate hike in December, which has increased from less than 10 percent at the end of Q2 to more than 72 percent as of October 25.
"However, as history has shown, trying to guess when the Fed will raise interest rates is not always the most productive exercise," added Couto." 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."
Despite increasing focus on a potential rate hike, advisors should help clients prepare for an environment in which interest rates may stay low for a long period of time, especially if economic growth slows or inflation pressures remain muted. In this scenario, advisors may need to help clients navigate a low-yield environment.
Role of Fixed Income in a Diversified Portfolio
Advisors play a critical role in helping clients stay focused on long-term goals, regardless of the potential and pace of interest rate hikes. Many investors hold a traditional view of fixed income: when interest rates rise, bond prices fall. As more eyes turn to the Fed, advisors can support their clients by helping them consider not only interest rate risk, but also credit risk, and they can educate investors on the impact potential rising rates may have on the total return for bond funds. Advisors can help clients answer the following questions as they review their fixed income allocations:
- How can I reduce interest rate sensitivity? – Seeking income, many investors have turned to longer-term bonds. However, longer-term bonds have typically shown greater sensitivity to rising interest rates. Shorter-term bonds generally hold their value better as rates rise, but advisors should also keep an eye on yields and the potential for a "low for long" interest rate environment.
- How can fixed income strategies help reduce volatility? – Advisors should remind clients that bonds play a role in providing income and offsetting equity volatility. Historically, high-quality bonds have performed well when stocks have declined, and they have typically provided steady income.
- What are some ways to increase income potential? – For clients who can tolerate more risk, advisors should help them explore non-core-income options. These may offer higher income potential and diversification benefits such as lower sensitivity to rising rates. Some 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.
- Can fixed income help generate tax-efficient income? – Municipal bond funds may play a role in generating tax-efficient federal income. They may add total return and attractive diversification benefits due to their low correlation to stocks and other fixed income investments.
Other Findings this Quarter
While regulatory and political developments and interest rates took the No. 1 and No. 4 spots respectively, there were other top-of-mind themes for advisors in Q3 2016:
- No. 2: Portfolio management (25 percent of respondents citing it as an area of focus, vs. 27 percent in Q2)
- No. 3: Market volatility (18 percent vs. 23 percent in Q2)
- No. 5: Finding yield and income (8 percent vs. 13 percent in Q2).
Resources for Advisors
In light of the DOL rule on investment advice, Fidelity Institutional Asset Management's relationship managers and specialists are working closely with advisors to help them understand the implications on their business, as well as make decisions in their clients' best interests. To address their top concerns, Fidelity also offers advisors original insights to support client discussions. The resources cover topics such capturing opportunities created by the DOL rule and fixed income strategies in a potential rising rate environment. To access these insights, visit: institutional.fidelity.com/investmentpulse (for financial advisors only). Resources include:
- The Evolution of Portfolio Construction: Rethinking Time – Differentiate, protect, and grow your practice with Fidelity's portfolio construction program, aimed at helping evolve your discussions with clients and prospects.
- Understanding the DOL Investment Advice Rule – Advisors can leverage Fidelity's insights to position their business to capture opportunities created by the DOL Investment Advice Rule.
- Fixed Income Strategies for a Rising Rate Environment – Depending on investors' goals and risk tolerance, investing in a broad range of fixed income assets may help weather a rising rate environment.
The Fidelity Advisor Investment Pulse is a survey that captures the investment topics on the minds of around 250 advisors in order to identify common concerns and deliver resources to help them navigate changing market conditions. Fidelity has been tracking advisor sentiment about investing concerns and opportunities since April 2012. This proprietary research enables Fidelity to provide advisors with timely perspectives from their peers, and offer tools to take advantage of the investment opportunities that exist today.
About the Fidelity Advisor Investment Pulse
The Advisor Investment Pulse is an ongoing primary research effort that captures the views of more than 1,000 Fidelity Institutional Asset Management advisor clients annually. All Fidelity Institutional Asset Management advisor clients in the broker-dealer and registered investment advisor communities are asked to participate in the online survey. These advisors serve a range of clients, including individual investors, businesses, plan sponsors and institutions. Respondents are asked an open-ended question: "Thinking about the investing environment and outlook, and the potential impact on your client portfolios, what investment challenge or opportunity would you say is top-of-mind for you right now?"
The survey reports top-of-mind themes of most concern to financial advisors in both their practices and in the financial markets. These themes are distilled from individual financial advisor comments. The chart reflects the most current five themes that represent the most widely held views. Given the variability of the number of responses over time, and the ongoing nature of this effort, confidence levels will also be variable.
About Fidelity Institutional Asset ManagementSM
Fidelity Institutional Asset ManagementSM (FIAMSM) is one of the largest organizations serving the U.S. institutional marketplace. It works with financial advisors and advisory firms, offering them resources to help investors plan and achieve their goals; it also works with institutions and consultants to meet their varying and custom investment needs. Fidelity Institutional Asset
Management provides actionable strategies, enabling its clients to stand out in the marketplace, and is a gateway to Fidelity's original insight and diverse investment capabilities across equity, fixed income, high-income and global asset allocation.
Fidelity Institutional Asset Management is a division of Fidelity Investments.
About Fidelity Investments
Fidelity's goal is to make financial expertise broadly accessible and effective in helping people live the lives they want. With assets under administration of $5.6 trillion, including managed assets of $2.1 trillion as of September 30, 2016, we focus on meeting the unique needs of a diverse set of customers: helping more than 25 million people invest their own life savings, nearly 20,000 businesses manage employee benefit programs, as well as providing nearly 10,000 advisory firms with investment and technology solutions to invest their own clients' money. Privately held for 70 years, Fidelity employs 45,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit https://www.fidelity.com/about.