Interest rates, trade wars and bear markets, oh my!
The good times continued to roll for most advisers in 2018, but the end of the year brought new challenges. Political uncertainty following the midterm elections in November, and volatility not seen for years in the U.S. stock markets, have advisers feeling nervous about what 2019 will bring. Looking across the industry, here are some of advisers’ biggest concerns looking ahead to the new year.
The interest rate yield curve, which graphs interest rates on government bonds, inverted on Dec. 3, meaning short-term interest rates are higher than longer-term rates. This can signal that investors are pessimistic about the economy, and advisers like Brian Jones, a financial planner with Nextgen Financial Advice, worry it’s a sign a recession is coming. If the curve remains inverted in 2019, Mr. Jones worries it’s going to drive a lot more volatility in the market and make investors feel more
If markets continue the volatility of recent months, advisers worry clients will deviate from their financial plans.
“When that happens, they can miss good opportunities to make progress on non-investment-related financial planning goals,” said Jennifer Harper, director of Bridge Financial Planning.
Consistency is important for reaching goals, so Ms. Harper hopes her clients will stay focused “while the market does its thing.”
Advisers like Jon Ulin, founder and managing principal at Ulin & Co. Wealth Management, worry about clients getting so nervous about a market crash that they start divesting their portfolios. Investors will seek out information that confirms or validates their biggest fears, and some will make hasty decisions.
“Just remember that noone has a working crystal ball,” Mr. Lewis said. “Those that make predictions may end up eating ground glass in this ‘most hated’ bull market in U.S. history.”
The Trump administration’s new tax bill eliminating many personal exemptions, and some clients could be in for a nasty surprise when filing in 2019, said David Silversmith, a senior tax accountant with Fulvio and Associates.
“They are going to be surprised and angry about how much they owe.”
About half of the outstanding issues within the investment grade corporate bond market have the lowest possible credit rating by Standard & Poor’s, said Grant Glenn, the managing partner of Noble Wealth Partners. Investors are lending money to risky companies at a record pace and not protecting their investment.
“Normally, these lenders require covenants to ensure these companies do not engage in activities that would increase the chance of them defaulting on their debt obligations,” Mr. Glenn said. Today, 80% of new leverage loans don’t have these protections, up from 35% in 2009, and Mr. Glenn is worried what it will happen as interest rates rise in the New Year.
The number of single-adviser RIAs continues to grow and regulators are taking notice, said Ron Strobel, founder of Retire Sensibly. He’s concerned about what sort of changes that regulators will make in response to some of the non-traditional fee structures employed by these firms. Washington state, for example, has sent out deficiency letters to RIAs offering financial planning for an open-ended retainer fee, arguing that such fees are excessive in the long-term, Mr. Strobel said. He’s worried more states will follow suit in 2019.
William Worth, managing member of Prime Point Investment Advisors, is both fascinated and frightened by global monetary policies in the age of zero and negative interest rates, quantitative easing and ballooning global debt. World economic growth has been subpar despite unprecedented monetary actions since 2008, Mr. Worth said, and growth in the U.S. may be “simply the result of the corporate tax cuts that have ballooned the budget deficit.”
“It certainly makes one wonder if global central banks have been ‘tilting at windmills’ since 2008. And, if so, what happens next and what will we really learn?” he asked.
The biggest fear of Mr. Ulin is that next year Mr. Trump doubles down on China tariffs and increases taxes on car manufacturers.
“This could be a big ‘punch in the gut’ to jobs, global growth and the economy, which is already in the fourth quarter of the longest bull market in U.S. history,” Mr. Ulin said.