Advisors Should Remain Vigilant as Investor Confidence Falls for the Second Straight Quarter

Investor confidence, even for those that work with an advisor, has declined once again, as inflation woes continue to affect even the mass affluent.

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Despite a decline in the inflation rate at the end of 2022 — December marked the smallest 12-month increase in the Consumer Price Index since October of 2021 — inflation concerns continue to impact investor confidence, according to a new report by J.D. Power.

The report, which surveyed more than 1,900 U.S. consumers aged 18 and older with at least $100,000 in investable assets, found that overall investor confidence fell for the second consecutive quarter. But although seemingly contradictory, only about 6 percent of respondents said that they planned to decrease their investments, with 91 percent stating that they planned to maintain or increase their investments.

“What we’re measuring is their level of confidence in managing their overall financial life,” said Mike Foy, senior director of the wealth management practice at J.D. Power and author of the report. “Many feel a lack of confidence in their ability to keep up with inflation, or prepare for current or future health care expenses, but that doesn’t mean they’re abandoning the markets.”

Between Q2, when the survey was first conducted, and Q3 of 2022, investor confidence fell 36 points. However, this rate slowed in Q4 2022, with investor confidence falling 15 points, from 596 to 581 on a 1,000-point scale. Notably, those who worked with advisors had a higher overall confidence level than the non-advised and those with robo-advisors.

J.D. Power looked at eight “key drivers” of investor confidence, including current and future healthcare expenses, financial readiness for retirement, the need to keep pace with inflation, and the desire to leave money to heirs.

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According to the report, inflation was the biggest single factor contributing to the quarterly decline in investor confidence, with the lowest confidence score among all segments, regardless of age, affluence, gender, or whether or not they worked with an advisor. Just 24 percent said they were highly confident in their ability to keep up with inflation.

Investors who worked with an advisor also had a higher confidence level across all eight categories when compared to the non-advised, particularly in those areas with more uncertainty, such as inflation.

Keeping up with inflation had the largest gap in confidence between human-advised and non-advised respondents, followed by current or future healthcare expenses and leaving money for heirs. Alternately, planning for a major purchase and planning for education expenses had the smallest gap in confidence levels.

“People probably feel like they have a pretty good handle on what their major purchases are,” said Foy. “There’s just a lot less uncertainty there than when we look at something like inflation, where people feel like it’s really unpredictable and not in their control.”

However, even with an advisor, investor confidence in their ability to keep pace with inflation remains low, with the average score for the non-advised at 4.73 on a 10-point scale, and 5.43 for investors with advisors.

“Even even though some of the numbers on inflation have been looking directionally better in recent months, this data suggests that [advisor] clients are still very much concerned about their ability to keep up with inflation. So it’s probably not a good time to stop having those conversations,” Foy said.

Inflation was the top-ranked barrier that advisors needed to overcome when working with potential clients eager for professional financial help, according to a December survey by Edelman Financial Engines, one of the largest RIAs.

Of note, women had significantly lower investor confidence scores than men (547 versus 605), and Gen Z and Millennial investors had much higher levels of confidence when compared to Gen X and Boomer investors.

This is something that advisors should take into consideration when conversing with their clients, because it’s well known that women investors and the Gen Z and Millennials are three groups with whom advisors have historically struggled to connect and who continue to be underserved in the advisory space.

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