With rising bank rates and CPI, it’s time to up client communication, say advisors

Say: 'turn off the news, temper emotions, and stick to your long-term investment plan'

With rising bank rates and CPI, it’s time to up client communication, say advisors

The best thing advisors can do as the Bank of Canada keeps aggressively increasing its rates and the U.S. consumer price index continues to climb is to keep communicating with their clients and holding steady until things eventually settle down again, say two experienced wealth advisors.

“The one thing that advisors can do in this environment is to be really communicative in terms of how portfolios are structured and what’s under the hood,” Jordan Damiani, senior wealth advisor at Meridian in the Niagara region of Ontario told Wealth Professional. “In most cases, the planning is very conservative, and you need to communicate that.

“One of the questions is: how long will markets take to recover? So, use a lot of good visuals. Even using 2020 as an example, you can say ‘here was the bottom of the market, and here’s how the market downtown recovered’ because markets always find the bottom at some point, and it’s important to note that some of the absolute best days in the market always follow the worst days.”

The Bank of Canada increased its rate by 100 basis points, rather than the anticipated 75 basis points, yesterday – raising its target for its overnight and deposit rates to 2.5% and the bank rate to 2.75%. It noted that inflation is higher and more persistent than expected, and will likely remain around 8% for the next few months, but its Governing Council is committed to continuing to take the action needed to achieve its 2% inflation target. The bank’s July outlook anticipates inflation will drop to about 3% by the end of 2023 and its 2% target by the end of 2024.

Yesterday, it was announced that the U.S. consumer price index (CPI) also rose  to 9.1% in June, 1.3% higher than May. Energy, food, and shelter costs created the most pressure as the energy index rose 7.5.% over the month, contributing almost half the increase.

Damiani said managing the behavioural part of this environment is the most important thing that advisors can do right now because it’s very psychological for clients to watch their investment values fluctuate on paper as inflation climbs and the central banks try to wrestle it down.

“The bank expects that, in the latter half of the year, we’ll see inflation start to come down,” said Damiani. “So, part of the explanation I give people is the Bank of Canada is limited in terms of the levers it has to control inflation and it’s targeting demand. It’s cranking up interest rates really quickly to intentionally cool the economy.”

Damiani said this is impacting retirees because, even while they may be getting a higher interest rate on their savings, inflation is outpacing it even while the markets are down. The companies doing well are the ones with pricing power, so it’s important to keep clients’ portfolios balanced with cash, savings, and diversified, conservative, long-term investments, though it’s a good time to pick up some companies “on sale”.

As far as housing goes, he said the market is slowing and prices are declining, just as the bank intended. Those with five-year fixed mortgages won’t feel the short-term impact, but those with variable rate mortgages or home equity lines of credits will their rates go up.

Zach Davidson, wealth advisor and portfolio manager at National Bank Financial, noted that the 100-basis point hike was a bit of a surprise, but the bank is trying to impact housing demand.

Given that neither stocks nor bonds have done well this year for balancing portfolios, he said he has been continuing to communicate with clients, reminding them to turn off the news, temper their emotions, and stick to their long-term investment plans.

“Markets go through great periods and bad periods, and, on the whole, they become faster, so corrections happen faster,” he said. “We know that markets will recover long before the news get better, and they will price in whether it’s a mild recession or other factors ahead of time.

“Stock prices eventually will be higher. So, we’re trying to remind clients that it’s been difficult this year for the majority of investors. There’s really been no place to hide, other than cash, so that’s been the challenge.”

Even though there’s now more talk of recession, he expects this challenging environment to pass, but also offer some great new opportunities and advisors should focus on those.

Overall, though, he said the unemployment rate is low, wages have increased, and consumer balance sheets are in better shape from pandemic saving. There’s a healthy reset going on for housing prices, and lower prices should eventually help new buyers, even though their mortgage rates will have increased, so their borrowing may be challenged.

Older clients can also use dividend reinvestment plans to reinvest in shares at lower prices.

“There are always new opportunities,” said Davidson. “I remind clients they’re investing in businesses, and those want to grow over time. It doesn’t mean they’ll do well every quarter, but the banks and pipelines will be resilient, and technology and software companies are still going to do well.

“So, we know the markets will recover. We just don’t know how long that will take.”