Should Inflation Be a Bigger Client Concern?

As the Federal Reserve nears its dual mandate of maximum employment and price stability, there are increasing concerns about inflation, even though they are still muted, according to a Fidelity analysis. 

For the past three years, Fidelity has explored issues that are top-of-mind for advisors through its quarterly Fidelity Advisor Investment Pulse survey.

This quarter, the survey explored the topic that has consistently ranked last: inflation. According to Fidelity’s data, “inflation” was identified as the least concerning topic out of 14.

In fact during the first quarter of 2017, a little over 3% of advisers cited inflation as an area of focus. While this is a small percentage, it is the highest since the start of 2014, Fidelity reports.  

“As with the previous two quarters, the findings showed that regulatory and political developments continued to be the top concern for advisors in Q1,” Fidelity says. “In fact, 24% of the advisers surveyed cited topics relating to government and the economy, with many focused on developments with the Department of Labor’s (DOL) fiduciary investment advice rule and statements from the new administration on its potential fiscal policy direction.”

“Against this backdrop, inflation fears continue to be pushed into the background, especially with U.S. inflation slowing structurally since the early 1980s,” observes Robert Litle, head of Intermediary Sales, Fidelity Institutional Asset Management. “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 advisers off-guard.”

Fidelity goes on to argue that two factors could contribute to ending the longstanding disinflationary trend in the U.S., including “peak globalization” and “aging demographics.”

NEXT: Managing inflation risk 

“Inflation risks matter for everyone, but some may be more exposed to it than others, so it’s important for advisers to consider their clients’ unique circumstances,” Litle suggests. “Managing inflation risk is especially important for investors who have retired or are approaching retirement. Unlike younger investors, many of them have portfolios that are more conservatively positioned and income-oriented.”

Fidelity pushes advisers to act today to revisit clients’ objectives and risk profiles, “and make inflation a part of the client conversation.” Some key topics of conversation include an investor’s time horizon, relevant inflation rate, starting allocation, and the nature of the required income stream.

“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,” Fidelity urges. “While no single asset class has consistently outperformed in every inflationary environment, advisers should be prepared 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.”

Additional survey findings show, as the Department of Labor (DOL) rule continues to dominate headlines, advisers are taking the opportunity presented by regulatory change to examine their business models. As such, practice management continues to be a hot topic for advisors.

“In addition to growing their business, advisors are spending more time on value-added activities such as wealth planning, and they are looking to better articulate their value to potential and existing clients,” Fidelity concludes.

The full survey results are available here