8 Inflation Conversations For Financial Advisors To Have With Clients

8 Inflation Conversations For Financial Advisors To Have With Clients

With inflation reaching its highest levels since the early 1980s, the topic of rising prices has been on the minds of many financial advisors and their clients. And though many hoped that the spike in inflation that began in autumn of 2021 would pass within a few months (once holiday season demand cooled and COVID-related supply chain issues worked themselves out), it has instead persisted for longer than many originally predicted.

In the early days of this inflationary spike, the most common (and perhaps the best) advice for clients may have been to simply “wait it out”, since a brief rise in prices – uncomfortable as it may have been – was unlikely to have enough of an impact on long-term planning to warrant any drastic changes. But even though we are still a long way from the kind of inflation that plagued the economy in the 1970s and 1980s (when inflation averaged over 9% for a 9-year stretch), the continued rise in prices may have many advisors (and their clients) wondering if there is more that they can do to better position themselves for a prolonged bout with inflation.

One place to start may be to better understand how inflation is personally affecting each client. The headline Consumer Price Index (CPI) number that we see constantly represents an average inflation rate for the entire U.S. economy, but in reality, different households experience inflation in different ways depending on their lifestyle and where they live. Advisors can help clients calculate their own ‘personal’ inflation rate (and a downloadable template is included to make it easier to do so).

Another immediate way that advisors can help ease the impact of inflation for clients is to create a cash management strategy (i.e., a system for knowing how much cash to keep on hand and where to keep it) to avoid them having more cash on hand than is necessary (since, with interest rates on bank accounts so low, the excess cash is almost guaranteed to lose value to inflation even if inflation does fall back to pre-2021 levels).

Advisors can also address different ways clients can protect their savings for retirement and other long-term goals against inflation. The conversation could start with the one asset that is likely already in most clients’ portfolios: U.S. stocks, which have a lengthy track record of outperforming inflation over long time horizons. Additionally, advisors can discuss the role of TIPS in a portfolio (and answer some common questions such as whether it is risky to buy TIPS when inflation is at a multi-decade high, and whether it is better to buy TIPS directly or within a mutual fund or ETF). And because clients may have questions about other types of assets that are often associated with hedging inflation risk – such as gold, commodities, REITS, and, most recently, cryptocurrencies – advisors can help by discussing the actual track records of these assets to help clients make a more informed choice about how to strengthen their portfolios against persistent inflation.

There are other practical areas to give useful advice, such as tax planning (where clients might experience “bracket creep”, and therefore higher taxes, due to their income rising faster than the inflation rate used by the IRS) and property insurance (where, with construction materials and labor costs among the fastest-rising prices across the country, homeowners may find their existing insurance coverage is no longer sufficient to ensure the replacement value of their property).

Finally, advisors can ‘zoom out’ to the long view of clients’ financial projections for retirement, and address clients’ concerns about whether the plan’s existing inflation assumptions (which may predate the current inflation spike) are still realistic – and discuss how, when looking at the market’s expectations for future inflation in the form of the TIPS breakeven rate, investors still seem to be betting on a return to ‘normal’ inflation numbers after a short-lived increase. (Which bodes even better for clients’ plans given that investors have historically overestimated their inflation predictions!)

Ultimately, even though the goal of many advisors at the moment may be to encourage clients to continue to stay the course and avoid making rash decisions, there are still concrete ways that advisors can help clients better position themselves to withstand the current spike of inflation and improve their situation for the long term without drastically altering their existing plans. And even if this inflationary environment proves to be short-lived, the work advisors with their clients now can help them be better prepared for future unexpected increases in inflation – which, though we can’t control when they may happen, we can plan to help ensure they don’t get in the way of our clients’ ability to reach their goals.

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