After the BoC and ECB made interest rate announcements, we ask leading advisors about the impact on their business
It’s been an interesting week of interest rate announcements. On Wednesday, we told you how the Bank of Canada chose to freeze its interest rate at 0.5 per cent and yesterday the European Central Bank made its move by cutting its own rate to zero per cent while slashing its bank deposit rate from -0.3 per cent to -0.4 per cent.
However, in the grand scheme of things, what does it actually mean for you? Will it make any difference to the way financial advisors go about their business? Wealth Professional spoke to several leading advisors to find out.
Firstly we asked them if the interest rate decisions fell in line with their expectations – and the answers were an overwhelming “yes”. John De Goey, portfolio manager at Burgeonvest-Bick went as far as to describe the Bank of Canada’s lack of movement as a “non-decision”.
“I expected them to hold rates flat,” added Brent Vandermeer, portfolio manager and director at Vandermeer Wealth Management. “Current deflationary forces and softer economic data meant that was the most likely scenario.
“I didn’t expect a rate drop yet even though they’ve hinted at lower rates and even the possibility of negative rates... because I think they want to keep more arrows in their quiver and not paint themselves into a corner like many other CB’s have done.”
Declan Ramsaran, managing director at PANGEA Private Family Offices, believes that decisions do have an impact on business, however.
“Interest rate increases impact our business on two levels: first on the client level and second on the corporate level,” he said. “One example on a client level, we see lower usage of leverage for investments. One example on a corporate level, we finance less of our business operations.”
So will this have an impact on the advice that is offered to clients?
“Research from Russell Investments generally reflects our view where their analysis shows that the equity markets have performed better when interest rates are either rising slowly or falling rapidly (rather than rising rapidly or falling slowly),” continues Ramsaran. “This may be due to the impact of economic conditions: economic distress can lead to both fast-rising interest rates and weak equity markets; strong economic growth can lead to fast-falling rates and strong equity markets; and periods of slower-changing interest rates are more likely to see negative correlations between stock and bond markets.
“We apply the thinking found in this pearl of wisdom from, James Montier: ‘One of the most important things I’ve learnt over the years is to remember that if you don’t know what is going to happen, don’t structure your portfolio as though you do’.”
Vandermeer agrees that interest rate decisions can affect advice but points out that the low rate environment is “nothing new” and portfolios have been positioned accordingly.
“Decisions impact mortgage and other debt strategies,” he said. “Staying variable is always the best for a client as long as they can handle the fluctuation and variation on rate cost themselves.
“It will also affect fixed income strategies. We’ve kept durations in the mid-range to benefit from lower rates. Rising to rates will be hard on bonds but we’re not there now and so staying too short-term means you give up a lot of interest rate benefits for the client. Ensuring high quality bonds are in the portfolio is very important.”
For Randy Cass, founder and portfolio manager at Nest Wealth, the current economic climate simply makes the need for having a professional advisor all that more important.
“We’re in uncharted waters globally,” he said. “These are the times when having a professional who has the ability to act as a buffer between an investor and their emotional response is most important. We have plans for our clients that extend more than 20 years into the future and our most important job is to eliminate the day-to-day noise on their behalf and stick to what matters for their goals over a couple decades not a couple months.”
Meanwhile, John De Goey believes that some advisors may be going a little too far with their expectations.
“The interest rate decisions don’t change the advice I offer,” he said. “However, I continue to hold that most advisors are still assuming unreasonably high future returns for income investments.”
What are your thoughts on the latest interest rate decisions? Will they affect the way you go about your business? Leave a comment below with your thoughts.
However, in the grand scheme of things, what does it actually mean for you? Will it make any difference to the way financial advisors go about their business? Wealth Professional spoke to several leading advisors to find out.
Firstly we asked them if the interest rate decisions fell in line with their expectations – and the answers were an overwhelming “yes”. John De Goey, portfolio manager at Burgeonvest-Bick went as far as to describe the Bank of Canada’s lack of movement as a “non-decision”.
“I expected them to hold rates flat,” added Brent Vandermeer, portfolio manager and director at Vandermeer Wealth Management. “Current deflationary forces and softer economic data meant that was the most likely scenario.
“I didn’t expect a rate drop yet even though they’ve hinted at lower rates and even the possibility of negative rates... because I think they want to keep more arrows in their quiver and not paint themselves into a corner like many other CB’s have done.”
Declan Ramsaran, managing director at PANGEA Private Family Offices, believes that decisions do have an impact on business, however.
“Interest rate increases impact our business on two levels: first on the client level and second on the corporate level,” he said. “One example on a client level, we see lower usage of leverage for investments. One example on a corporate level, we finance less of our business operations.”
So will this have an impact on the advice that is offered to clients?
“Research from Russell Investments generally reflects our view where their analysis shows that the equity markets have performed better when interest rates are either rising slowly or falling rapidly (rather than rising rapidly or falling slowly),” continues Ramsaran. “This may be due to the impact of economic conditions: economic distress can lead to both fast-rising interest rates and weak equity markets; strong economic growth can lead to fast-falling rates and strong equity markets; and periods of slower-changing interest rates are more likely to see negative correlations between stock and bond markets.
“We apply the thinking found in this pearl of wisdom from, James Montier: ‘One of the most important things I’ve learnt over the years is to remember that if you don’t know what is going to happen, don’t structure your portfolio as though you do’.”
Vandermeer agrees that interest rate decisions can affect advice but points out that the low rate environment is “nothing new” and portfolios have been positioned accordingly.
“Decisions impact mortgage and other debt strategies,” he said. “Staying variable is always the best for a client as long as they can handle the fluctuation and variation on rate cost themselves.
“It will also affect fixed income strategies. We’ve kept durations in the mid-range to benefit from lower rates. Rising to rates will be hard on bonds but we’re not there now and so staying too short-term means you give up a lot of interest rate benefits for the client. Ensuring high quality bonds are in the portfolio is very important.”
For Randy Cass, founder and portfolio manager at Nest Wealth, the current economic climate simply makes the need for having a professional advisor all that more important.
“We’re in uncharted waters globally,” he said. “These are the times when having a professional who has the ability to act as a buffer between an investor and their emotional response is most important. We have plans for our clients that extend more than 20 years into the future and our most important job is to eliminate the day-to-day noise on their behalf and stick to what matters for their goals over a couple decades not a couple months.”
Meanwhile, John De Goey believes that some advisors may be going a little too far with their expectations.
“The interest rate decisions don’t change the advice I offer,” he said. “However, I continue to hold that most advisors are still assuming unreasonably high future returns for income investments.”
What are your thoughts on the latest interest rate decisions? Will they affect the way you go about your business? Leave a comment below with your thoughts.
