Gun-shy advisers tiptoe back into equities

NEW YORK Fri Feb 24, 2012 10:15am EST

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NEW YORK (Reuters) - Six months ago, Steve Johnson, like many financial advisers, was trying to convince his clients not to pull out of the stock market. Now, he's busy fielding calls from many clients asking if they should put more money into equities.

With the Standard & Poor's 500 Index up more than 7 percent so far this year, gun-shy advisers like Raymond James Financial Services' Johnson, are slowly moving their clients more into equities.

At the same time, they're reminding investors that just because things look good now, it doesn't mean the volatile markets of last year are a thing of the past.

"The 80-year average of growth in the S&P is 9 to 10 percent, and already this year we have seen 7 percent," Johnson said. "I am telling clients 'we may have made the entire year's return in the first six weeks.'"

In 2011, the Dow Jones industrial average gained 6.4 percent in the first quarter, only to end the year just 5.6 percent higher, after a series of unnerving 100-point swings.

The broader S&P 500 index performed similarly, finishing 2011 unchanged after rising as much as 9 percent, in late April.

Advisers are more optimistic about 2012, but they know that issues like the price of oil and the Greek debt crisis could cause markets to drop.

"All it takes is one geopolitical event for the market to drop 10 percent," said Rich Zito, a partner at financial planner Flynn Zito Capital Management LLC. "It seems like a low-volatile environment, but it doesn't take much to change."

So, advisers are cautiously moving their clients' portfolios more toward equities.

Flynn Zito has increased the equity allocation of a handful of its client portfolios by 5 percent over the past few months, but only after extensive discussions with clients.

Raymond James' Johnson has moved about 30 percent of his clients to a 60/40 equity-to-fixed income allocation from a 40/60 portfolio over the past three months. About half of those clients asked for the change, he said.

Johnson and other advisers have been receiving inquiries from clients eager to get more into equities because they are desperate for yield, which they can no longer find in fixed income products.

"We have been in this period of financial oppression where savings and short-term interest rates are below the rate of inflation and clients are frustrated," said Bill Hoyt Jr., also an adviser with Raymond James.

Hoyt has kept most of his clients' portfolios underweight in equities, but over the past three months, he has raised about half his clients' stock allocations by about 5 percent.

Many advisers are concerned about the flood of client inquiries about increased equity allocations because many of the same clients had rung in March 2009, at the bottom of the market, asking if they should sell.

"I just go through the tape of emotions and thoughts and remind them about last time," said Bob Weisse, director of investment services at Heritage Financial Services, a Norwood, Massachusetts-based registered investment adviser with $675 million of assets under management.

The job for advisers is to weed out the clients who are calling out of pure emotion from those who could potentially benefit from being weighted more heavily in equities.

Some advisers, however, are just sticking to their guns and waiting things out.

Malcolm Makin, an adviser with Professional Planning Group, gets phone calls from two kinds of clients: those who are observing the equity market rally and wondering if they should get back in, and those who are tired of the low-yielding fixed income environment.

For both types of clients, Makin has the same answer.

"There is a tendency of both investment advisers and investors to forget that it's really not safe out there yet," Makin said. "Things feel better. But feeling better is not justification for an investment decision."

(Editing by Bernadette Baum)

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