Advisor confidence accurately predicts economic conditions, research finds

Research also shows the value of “a well-informed human” advisor

All that time you spend researching and explaining market conditions is worth it, finds new research.

Research looking at financial advisor confidence as an economic indicator by Western University and the Financial Advisors Association of Canada (a.k.a. Advocis) has shown that the Advocis Financial Advisors Index (FAI) is a “solid statistical indicator for the Canadian economy,” the organizations have announced.

“The results exceeded our expectations,” Matt Davison, dean of science at Western University, says in a statement.

Chuck Grace, a member of the Finance faculty at Western’s Ivey Business School and co-principal investigator on the FAI, tells Advisor’s Edge that the results show the value of a knowledgable advisor who keeps tabs on the economy.

Launched in 2013, the FAI is a monthly survey of 1,000 Canadian financial advisors that measures advisor confidence, “defined as the degree of optimism about the state of the economy expressed by advisors and their clients through their savings, investing and risk protection activities.”

A historical analysis assessing the data against 20 general economic indicators over the same period found more than 190 data points with strong correlations to those indicators.

In 2016, Davison, Grace and another colleague co-authored an article on the FAI in Advisor’s Edge, which discussed five things the index had shown to date:

  1. Advisor confidence is a strong indicator of general economic conditions.
  2. Advisor confidence is vulnerable to surprises.
  3. Advisor confidence can be used to anticipate asset and product mix.
  4. Advisors may perform a critical role in mitigating investor behaviour.
  5. Advisors provide a unique lens into the challenges threatening their client’s financial well-being.

Grace notes that this time around, “we were surprised of the strength of the statistics. So the conclusions that we drew three years ago are just stronger today.”

Further, “We’ve proven that advisors are a very strong indicator, a lens, into what’s happening in the economy,” Grace says. “What we’re trying to figure out now is what that leads to.”

For example, advisors are highly sensitive to rising interest rates—but what’s not clear is how they act on that. “Do [they advise] clients [to] start to pay down their debt? Do they change from a big house to a little house? Do they stop using their credit cards? There are so many variables there,” Grace says. Teasing out those effects is where the research team is currently focused.

The research further shows that when people in the industry advise anxious clients to talk to an advisor, this is sound advice, he says.

“The stats here have proven so robust that it’s quite clear advisors are on top of things, and are highly tuned to what’s happening in the marketplace,” Grace says. “So that might be an opportunity for a shoutout, to say ‘Hey, well done. You’re doing a great job.’”

So even if robo-advisors are grabbing headlines and public attention, “sometimes there really is a place for a well-informed human being to be a part of the conversation.”