Client Frugality, Risk Aversion Is the New Normal

Registered investment advisors report that their clients are closing their wallets and watching their dimes and quarters. A survey commissioned by Charles Schwab says that 32 percent of advisors cite “frugal spending habits” as the new behavior that’s taking hold in consumers’ lives, followed by a “focus on saving money” at 26 percent. Fifty-nine percent of advisors expect consumer savings to increase in the next six months.

“I think there’s been a tremendous shift in the last year and a half at all levels of the spectrum for high net worth individuals to really re-evaluate how they are spending their money,” Lorinda J. Laub, principal and portfolio manager at Legg Mason Investment Counsel, said during a panel discussion today in Manhattan. “It really has crossed all age groups, whether it’s 30- and 40-year olds or 60- and 70-year-olds.”

“There’s almost an embarrassment around ownership of material goods that makes you look like you’re not being frugal,” added Cheryl Holland, president of Abacus Planning Group in Columbia, S.C.

Charles Schwab sponsored the panel discussion in conjunction with the release of its semi-annual Independent Advisor Outlook Study. More than 1,100 RIAs with $252 billion in AUM responded to survey from Jan. 19 through Jan. 29. The survey has a margin of error of plus/minus 2.96 percent.

Calling increased frugality “the new normal,” the study reports that 62 percent of advisors say their clients are more focused on paying off debt in the current market. It dovetails with a report last week by America Saves and the American Savings Education Council that says 71 percent of Americans are still concerned about the effect of the recession on their personal finances, with the share of Americans expressing “great concern” at 43 percent.

Andrew Clinton, president and portfolio manager at Clinton Investment Management, said investors of all levels of sophistication were looking to match their assets and liabilities more closely, with an eye on cash flow and monthly expenses. There also is a reluctance to take on more investment risk. At the panel discussion, Clinton described the sentiment among clients as, “Maybe I don’t want the highest return. Maybe what I want to do is just stay wealthy or keep the asset pool, the money that I’ve created.”

That attitude has implications for financial advisors who are looking to protect their clients’ wealth over the long term. Liz Ann Sonders, Schwab’s chief investment strategist, cited a poll by the American Association of Independent Investors that found that 45 percent of investors’ assets were in cash in March of 2009 (the number was down to 18 percent last month.) People may have preferred the security, but with the sharp run-up in equities that followed later that year, it was exactly the wrong time to be liquid, Sonders said. The aversion to risk could keep clients away from assets that are important for achieving their goals, she said. “I think advisors will have an interesting task before them to manage expectations,” she said.

Laub said that advisors need to show clients who are comfortable with cash and fixed income that fortune may be found with modest risk, such as with large cap, blue-chip U.S. companies that pay dividends. “There’s an increasing opportunity, we think, for taking some of that cash and taking some of the fixed income, and going into an asset class that hasn’t performed perhaps as well,” she says.

The Schwab survey suggests less pessimism among advisors about their clients’ prospects for achieving financial goals. Fifty-seven percent of advisors say that meeting those goals will be “very or somewhat difficult,” compared with 84 percent who felt that way in a survey taken a year earlier. Just 10 percent of advisors feel that meeting the goals would be “easy.” But the share of advisors whose clients need reassurance about their financial situation has fallen, the survey says, from 49 percent a year ago to 31 percent now.

“This is going to be a choppier year. It’s already a choppier year,” Sonders said. But there’s cause for optimism, she adds. American industrial production is picking up, inflation is low, and consumers in emerging markets are stepping into the breach left by tight-fisted U.S. consumers. And household net worth is rising in the United States, Sonders added, partly a function of investors socking away more cash.