U.S. financial advisers warn bond clients to brace for losses

Tue Jul 16, 2013 2:47pm EDT
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By Ashley Lau and Jennifer Hoyt Cummings

NEW YORK, July 15 (Reuters) - Last month, Houston-based financial adviser Gene Theobald picked up the phone and began making calls to clients, telling them to expect a reality check in their June account statement.

Theobald, who was the No. 2 bond salesman at Morgan Stanley before moving to RBC Wealth Management last year, estimates roughly 98 percent of his clients are invested in fixed-income, with average portfolio allocations of 90 to 100 percent.

"Your next month's statement is going to look ugly," Theobald told many of more than 200 clients.

The downward spiral in the bond market, which for the past few decades had long been considered a safer, more conservative place to invest, has led to tough conversations with clients, according to more than a dozen veteran financial advisers interviewed by Reuters.

Customers who favor bonds tend to be on the conservative end of the investing spectrum, so they are especially sensitive to price declines. Advisers, on the other hand, find it disconcerting that some of these investors are asking to increase their equity holdings as a hedge against bonds.

"I'd hate to see clients hopping out of the frying pan into the fire," said Michael Kitces, a financial adviser and publisher of the popular financial planning industry blog Nerd's Eye View.

Some advisers say they are reaching out to customers who are heavily invested in bonds, reminding them that such fixed-income assets remain less volatile than stocks, and if they are in shorter-duration bonds, their portfolio may not even take a hit. Duration measures a bond's sensitivity to interest-rate moves.

Other advisers who didn't contact clients before June statements hit the mail are now hearing from anxious clients worried about the impact of declining bond prices.   Continued...