For one advisor, managing the reality and the fear of inflation comes back to the plan

Peter Kollias explains how inflation has been factored into asset allocation and client communication strategies

For one advisor, managing the reality and the fear of inflation comes back to the plan

Inflation comes with psychological implications. Even a macroeconomist would tell you that inflation expectations, measured in consumer and business surveys, can play as much of a role in financial decision making as the reality of inflation. Coming off a relatively recent experience of historic inflation and with the risk of tariffs sparking additional inflation increases, the fear of inflation can be as much of an issue for advisors and their clients as the reality of price increases are.

Peter Kollias manages both the fear and the reality of inflation by grounding his clients in their plans. Kollias is a Senior Wealth Advisor and Portfolio Manager at Cresco Wealth Management of Wellington-Altus Private Wealth. He explained how his team builds plans that account for inflation in their asset allocation. He outlined, too, what he does to ground his clients in the facts of their plans and of inflation, so that their expectations and fears don’t lead them to bad decisions.

“The media does a wonderful job of saying, ‘let's take this headline, let's use it to our advantage and let's get people a little bit fearful,’ Because that's what gets the clicks at the end of the day,” Kollias says. “And what we have to do as wealth advisors for our clients is make sure we see what the true narrative is and what the data actually tells us.”

Kollias acknowledges how hard inflation can be on some clients’ concept of their plans. The simple fact of paying almost twice as much for a litre of milk as you did four years ago can wreak havoc on someone’s confidence in their financial future. That feeling is at its most acute among retirees who know they have a certain amount of savings that might have to sustain them for decades.

The response that Kollias espouses is rooted in education. Through the construction of financial plans that explicitly model out inflation and hold assets meant to protect against inflation, he can demonstrate facts that will help take clients out of a more fearful state. He can put inflationary spikes in a historical context, too, showing how those periods of rapid growth have tended to average out over time. He also drives home the idea that inflation does not exist in a vacuum. In the pre-COVID days of near-zero inflation, many important low-risk yield assets like GICs offered miniscule yields. Today, those yields are significantly higher than the rate of inflation, offering lower-risk means of offsetting inflation for clients.

While inflation can take up a lot of mental space, simply because we encounter price increases every day no matter who or where we are, Kollias also stresses that it can’t become the overriding concern. For many retirees, for example, taxes are the greatest risk to overall wealth preservation. As much as the plan has to protect against inflation, it has to be tax efficient and optimized.

Underpinning all these protections and optimizations is an asset allocation strategy meant to protect against various ways the portfolio can be impacted. That includes maintaining allocations to equities leading up to and during retirement. Despite the risk associated with an equity allocation in a conventional view of retirement portfolios, Kollias argues that maintaining some equity exposure is essential to keep the portfolio growing during clients’ decumulation periods. The Cresco team also frequently advocates for using covered call strategies to both generate additional income and to take advantage of volatility spikes, given the relationship between options premiums and volatility.

The collective recent experience of high inflation can actually help to make the case for some of these somewhat less-traditional asset allocation decisions. Talking abstractly about how equities can hedge against fixed income or covered calls can monetize volatility is far more challenging than pointing at the real experience of price increases and showing how certain assets can offset that. Kollias says his goal is to anchor his clients in the reality of today’s prices, and show them that their plan can operate at those prices and can manage future increases.

“The goal is to anchor them in a new price, make sure they understand what it’s going to be, and prepare their expectations for the future,” Kollias says. “That helps them readjust more quickly and be more calm in the situation. We need to establish that anchor where it is and talk about it in the context of the plan. The plan will show that they’re absolutely fine with these prices because we’ve already taken inflation into account in your portfolio.”

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