Advisors are not much concerned about inflation these days, but perhaps they should be.
The latest Fidelity Advisor Investment Pulse survey found that on a list of 14 potential concerns, inflation ranked dead last, along with alternative investments, cited by only about 3% of advisors.
The findings showed that regulatory and political developments continued to be the top concern for advisors in the first quarter, as they had been in the previous two.
Twenty-four percent of the advisors surveyed cited topics relating to government and the economy. Many focused on the Trump administration’s potential fiscal policy direction and on developments with the Labor Department’s fiduciary investment advice rule.
The second and third top-of-mind concerns were portfolio management, cited by 18% of respondents, and interest rates, cited by 16%.
“Against this backdrop, inflation fears continue to be pushed into the background, especially with U.S. inflation slowing structurally since the early 1980s,” Robert Litle, head of intermediary sales at Fidelity Institutional Asset Management, said in a statement.
“Looking at the survey findings, we wanted to draw attention to what advisors are not concerned about, but perhaps should be. Given current expectations, any increase in the pace of long-term inflation could catch advisors off-guard.”
Two factors could contribute to ending the disinflationary trend in the U.S., Fidelity said. One is any move toward protectionism, which could put upward pressure on import costs and goods prices.
The other is an aging population, which may mean decreased consumption. Citing the U.S. Census Bureau, Bureau of Labor Statistics, Haver Analytics and its own research as of Dec. 31, 2015, Fidelity said older people historically have spent less.
As well, an aging population could result in decreased productivity and a fall in domestic production, which could reduce supply. Coupled with the potential of higher import costs, the net effect could be a spike in inflation.
For the first-quarter Advisor Investment Impulse Survey, 210 Fidelity Institutional Asset Management advisor clients in the broker-dealer and registered investment advisor communities participated.
Managing Inflation Risk
Fidelity said even periods of modestly rising inflation can challenge advisors and investors. Historically, rising inflation has meant a drag on returns from equities and bonds.
“Inflation risks matter for everyone, but some may be more exposed to it than others, so it’s important for advisors to consider their clients’ unique circumstances,” Litle said. “Managing inflation risk is especially important for investors who have retired or are approaching retirement.”
He pointed out that many older investors’ portfolios are more conservatively positioned and income oriented. And these investors tend to have shorter time horizons to recoup losses in purchasing power and greater expenses in health care.
Fidelity said that before long-term inflation risks materialize, advisors should do the following:
Reassess their point of view on inflation
Examine their book of business to identify clients who may be more conservatively positioned
Revisit these clients’ objectives and risk profiles, and make inflation a part of the client conversation
Make a plan for these clients’ portfolios in the event of an increase in the long-term pace of inflation and an erosion of purchasing power
Advisors, Fidelity said, should be prepared to help their clients diversify beyond mainstream asset classes to manage inflation risk, including by considering a mix of inflation-resistant asset classes as part of a strategic allocation.
One investment executive says advisors should boil down the questions they ask clients to two main ones.
Among the findings in the first-quarter survey, Fidelity found that practice management continued to be a key topic for advisors. Cited by 13% of respondents, it two spots from the previous survey to No. 5, as advisors took the opportunity presented by regulatory change to examine their business models.
Besides growing their business, Fidelity found, advisors were spending more time on value-added activities such as wealth planning, and were striving to better articulate their value to potential and existing clients.
Juggling wealth planning, running their practices and investment management responsibilities can be challenging for advisors. Fidelity said advisors should consider ways to become more efficient at investment management in order to focus on areas where they can add value to their clients and their businesses.
These include leveraging the power of a process, considering model portfolios, reviewing their manager selection process, and documenting and communicating investment decisions.
This will allow them more time for planning-oriented activities, such as comprehensive goals-based planning, getting to know their clients and broadening their offerings to include planning for social security, health care and retirement income.
These tactics could help them distinguish their services from lower-cost options and build deeper relationships with clients, Fidelity said.
— Check out Rich Retirees Are Hoarding Cash Out of Fear on ThinkAdvisor.