Helping clients navigate the next normal of rising interest rates

Back in December, I noted that parts of the market had already entered a disorderly decline and counseled advisors to consider that before markets bottom, traditional assets often enter a state of disorderly decline. 

 Then came March and the tanking of Silicon Valley Bank — the second-biggest bank failure in U.S. history. While people are used to unicorn tech companies failing, the words "bank run" sets everyone on edge. Unfortunately, the worst is likely not yet behind us. Signature and First Republic will likely not be the last banks to go down. Although the U.S. economy has demonstrated a level of resilience in the face of various economic challenges, the Fed now predicts a "mild recession starting later this year, with a recovery over the subsequent two years."

The recent bank failures evoke the 2008-09 financial crisis, but they also mark the beginning of a new paradigm in financial advice. In late 2007, Fed Chair Ben Bernanke saw the crisis at hand and started lowering interest rates to stimulate the economy through the "wealth effect." The idea was that if people had the same amount of fixed expenses and income but their interest-rate-sensitive assets, like equities and houses, grew in value, they would feel wealthier and spend more. 

Now we will see how long rising rates impacting assets will take to create the "poverty effect," where we feel poorer and begin slow spending in an attempt to get inflation under control. 

That global crisis 15 years ago serves as a reminder that advisors cannot rely on what once was the status quo for financial advice. Rather, we must reimagine what advice means in today's high-rate environment. 

The new role of advisors 
In the participation trophy stock market we enjoyed before rates started to rise showing up in a low-cost 60/40 portfolio was enough. The everything bubble was great, but now a different approach will be necessary to protect those historically outsized gains. Now is not the time to speculate on the future or offer market forecasts with clients. Rather, advisors should prioritize strategic communication with the goal of bolstering confidence and trust in the advisor-client relationships.

It's particularly crucial for advisors to help clients understand the current framework in place for asset protection — the "why" of the allocation, the history of markets and the feelings that are naturally ignited in rocky markets. With that bedrock in place, advisors can present an alternative vision — an action plan that solves for the risks in the new economy and reinforces plans already in place to accommodate different market scenarios. Every market is an opportunity to be taken advantage of. When the conversation is structured this way, clients can better grasp how their portfolios fit into long-term financial goals and feel more secure about their investments. 

Creating a sense of community and connection with clients is particularly important in this new paradigm of financial advice. During COVID-19, many advisors stopped doing in-person client events and have been slow to start them up again. Such gatherings can demonstrate to clients that in addition to the core client-advisor relationship, they have a team working for them and that they are part of a community. By emphasizing a team-oriented approach, advisors provide their clients with a sense of support and reassurance that helps them feel less alone when navigating strained markets.  

The objective of the poverty effect is to make people feel afraid to spend money. It will take time for it to impact businesses, markets and emotions. If advisors fail to adopt a new approach, they run the risk of their client's fear leading them into bad decisions that ultimately could impact their ability to take advantage of the strong rebounds that have historically followed bear markets. We are not done with this yet, so keep your clients close to the future they have imagined and planned for.