As the debate goes on about which inflation index Social
Security cost-of-living adjustments should be based on, the increased prices
U.S. consumers are seeing at the gas pump, Home Depot and the grocery store
have at least some advisors’ clients concerned.
Here are the top 10 things that Jamie Hopkins, managing
partner of wealth solutions at Carson Group, and advisors told ThinkAdvisor
their firms are telling their clients now about inflation and COLAs, and what
other advisors should be telling their clients if they haven’t already done so.
1. Put the inflation we’re seeing in context.
When talking to clients, Carson Group advisors try to keep
the “higher inflation numbers that we’re seeing right now in context with
everything that’s going on in the world,” Hopkins said.
For instance, despite the rising consumer price index and
inflation data, it’s important for advisors to point out that the prices of
many products and services were down last year as a result of the COVID-19
pandemic, he said. With travel down last year, so were airline, hotel and other
travel-related service prices, but the prices of used cars and rental cars have
“spiked tremendously” this year, he noted.
Meanwhile, prices of many construction-related products are
up significantly, and a lot of that is related to “supply-demand pressures” and
supply chains getting disrupted, he added.
2. Tell your clients to keep their eyes on the Fed.
“Continue to watch what the Fed is doing” and point out to
clients that the Federal Reserve is “not very concerned about inflation right
now,” Hopkins advised.
The 3%-4% inflation we’ve seen lately, “while higher than
we’ve experienced for a while, is actually pretty much in line with historical
healthy inflation in the U.S.,” he said, adding: “We just went through a really
long period of low inflation.”
3. Tell clients it’s important to make sure their income
and assets are inflation-protected.
Talk with retired clients in particular about making sure
their income and assets are inflation-protected, Hopkins said.
Social Security, “while it might not be perfect, has a very
good cost-of-living adjustment measured in it,” he said. While the last Social
Security COLA was just over 1%, the 2022 COLA might be 5% or 6%, he said. So
tell clients that.
4. Explain that you have stress-tested clients’ financial
plans and they’re on track.
It is important to stress test clients’ financial plans for
various percentages of inflation, according to Hopkins. While a single year of
5%-6% inflation is “not the biggest issue in the world,” five to 10 years of
over 3% inflation “when you are banking on 2% inflation is a really big deal,”
he said. Again, explain all of this to clients.
Melissa Joy, a financial planning-focued wealth advisor and
president of Pearl Planning in Dexter, Michigan, told ThinkAdvisor: “I’m
discussing the inflation assumptions that I’ve been using for my clients in
their financial planning analysis, so that can be comforting to clients — to
understand that we have considered inflation in our financial plans.”
5. Discuss
clients’ liquidity options.
For the clients of Douglas Boneparth, a financial advisor
and president of Bone Fide Wealth in New York, “losing income is the single
greatest threat to their financial lives, which is why we” talk to them and
“make sure they have access to plenty of liquidity should they need to
supplement or replace income for a certain period of time,” he said.
Zachary Bachner, an investment advisor representative at
Summit Financial Consulting in Sterling Heights, Michigan, says benefits will
not keep pace with the current rate of inflation, and “this causes the need to
have assets or sources of income elsewhere that can appreciate more than the
standard COL increase,” he told ThinkAdvisor.
Many retirees live on fixed income sources, so advisors
should explain to them they “either may need to make additional withdrawals
right now or they need to reassess their budget and find ways to lower
expenses,” Bachner said.
6. Tell clients they need to “weather the storm” and make
new investments.
For Luis Strohmeier, a wealth advisor and partner at Cincinnati-based
independent RIA Octavia Wealth Advisors, “what we tell clients to do is, number
one: You’ve got to weather the storm,” he said. After all, “nobody goes and
fixes their boat while it’s floating in the middle of the storm; you can’t do
that.”
And one key way to help weather the storm is to convince
clients that now is a good time to make new investments, he said.
7. Explain the impact of inflation on different types of
investments.
It is important to explain to clients that “one of the
riskier things you could do in a high-inflation time period is to kind of pull
assets, perhaps maybe out of a market [or] out of something with some upside
and put it into CDs that are paying less than a percent today,” Hopkins warned.
“Bond yields and CDs, which some people do as their safe investments, might
actually be costing them money” now, he noted.
Joy, meanwhile, is “working to inform clients about the
impact of inflation on different types of investments,” she said. For example,
she explained: “Inflation can have a different impact on stocks vs. bonds,
especially depending on the level of inflation.”
To weather a storm like this, “you want to be in investments
that are more inflationary-proof,” Strohmeier said he tells clients. Utilities,
health care, communications, oil, commodities, precious metals — “those are
things that are going to do traditionally better during an inflationary process
than say more cyclical things,” he said, adding: “I like regional banks [and]
companies with consistent dividends,” as well as communications, big oil
companies and cloud services companies.
8. Discuss wages and compensation, including potential
raises, with working clients.
When it comes to inflation and COLAs, it is definitely a
factor for not only retirees on a fixed income, but also working clients, Joy
noted. In a perfect world, their wages would keep up with the more inflationary
environment. But advisors should explain to clients that “just a 2 or 3% raise
may or may not keep up with inflation this year, so advocating on your behalf
[at work] would be an important conversation to have with clients on wages and
compensation,” she said.
9. Discuss clients’ travel, remodeling and other plans
that could be especially costly now.
“Everybody’s looking to make up for lost time when it comes
to travel and you’re going to pay the price in a year like this,” Joy warned.
Many people are also shopping for real estate or to make home improvements, and
those sectors are “under inflationary pressure” now, she said.
“So it’s really important for clients to be specific about
what their goals are in the short and mid-term so that adjustments can be made based
on costs,” she explained. Tell clients if they were going to do a $50,000
remodeling project this year or next year, they may need to adjust those
numbers significantly higher based on the ability to access labor and materials
now, she said, adding that some clients are postponing or being patient with
their decisions.
10. Tell clients to focus on what they can control or
change.
“People like to talk about things that they think they may
be able to affect or control or change and there’s less of that feeling” with
COVID-19, one of the other big concerns that many clients have this year, Joy
said.
On the other hand, you can adjust a portfolio to deal with
inflation, she noted. “I always like to say focus on what you can control, and
the things you can control with inflation are to make sure that your goals
don’t need to be adjusted,” she said.
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