Generating Income Tops Adviser Concerns

Advisers’ focus on generating income has reached a record level, according to Eaton Vance’s Advisor Top-of-Mind Index (ATOMIX) results for the second quarter of 2017. That figure rose 16% in importance compared to last quarter’s survey, reaching its highest income ranking of 125.8 to date.

The overwhelming majority of advisers (95%) believe the Federal Reserve will raise interest rates at least once more in 2017. More than half (56%) predict at least two additional rate hikes this year. And 52% of advisers report planning to be bearish on the U.S. bond market throughout 2017, while only 18% plan to be bullish. However, they are relatively more optimistic on municipal bonds, with 32% bullish and 23% bearish on the muni market.

The survey also dug into how advisers are adapting as political battles unfold. The majority of advisers believe that the administration of President Donald Trump will have a positive impact on the stock market (76%), the U.S. Dollar (62%), their own businesses (80%) and their personal income (79%). But the overall political environment in the nation is fueling concern, with nearly half or 49% of advisers believing it will be the main driver of market volatility this year.

One particular political arena advisers are keeping an eye on is, of course, tax reform. Although the survey finds tax concerns rated lowest on the ATOMIX at 86.4, it saw a 20% increase over Q1 2017.

Still, nearly two thirds (64%) believe the Trump administration will have a positive effect on taxes over the next four years. Nonetheless, 54% are likely to modify their clients’ investment strategies as a result of expected tax policy changes.  

“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 advisers to more closely examine client income opportunities,” says John Moninger, managing director of retail sales. “While current equity market sentiment is generally positive, advisers 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.”

To defend against the consequences of such outcomes, advisers are adjusting client portfolios. Fifty-five percent of advisers believe floating rate loan funds are the most attractive option in a rising rate environment and are incorporating them into client portfolios. Another 53% of advisers are looking to dividend-paying stocks to offset rising rates. High-yield-bond funds (38%) and multi-sector bond funds (29%) are also favored strategies in a rising rate environment, the survey found.

As for volatility as a concern, the figure marginally decreased to 111.5 on the index after reaching a peak of 129.7 in the third quarter of 2016. More than half (53%) of advisers reported being bullish on U.S. equities over the next year, while only 20% were bearish. When asked if clients were motivated by fear or greed, 55% of advisers reported fear as the top motivator. While seemingly high, it marks a significant decline from a high of 82% motivated by fear in August 2016.

And despite ongoing optimism in the equity markets, nearly two in five (39%) advisers believe markets are overvalued while only 7% believe the market is undervalued. 

The index also gathered some insight into growing investing trends. For example, the importance of socially responsible investing has increased dramatically quarter over quarter among both advisers and their clients. Two in five (40%) advisers reported it as an important part of their practice, signifying a 90% increase from Q1 2016 when only 21% believed the same.

“The rise in popularity of responsible investing is something we are watching closely,” says Moninger. “Advisers are telling us they are hearing more about it from their peers, their clients and in the media. We are developing educational materials and solutions to address these needs in ways that meet investor objectives.”