It’s time for advisors to dust off a topic they haven’t needed to discuss with clients for quite some time: the impact of rising interest rates on investment strategy.
Nearly all of the 302 advisors surveyed, 93 percent, by Janus Capital Group agreed that was the most important thing that needed to be addressed for 2014. The advisors were quizzed as the new year dawned and the effect the Federal Reserve’s winding down of the stimulus program had yet to take hold.
Other topics that advisors identified as key were the high equity markets and the need to rebalance portfolios (84 percent), and methods of generating income (83 percent).
While advisors were able to identify the key factors, clients didn’t see things the same way. For instance, Janus found that advisors were about twice as likely as clients to be concerned about the impact of interest rates on portfolios.
And because just 7 percent of advisors said their clients had asked about rising interest rates, Janus said it’s up to them to broach the subject in a way that would elicit information from investors while educating them.
One way to do that, the report said, is for advisors to have conversations solely for the purpose of discovering the thoughts of clients. Asking open-ended questions is often effective for this purpose. Doing this before sharing expertise can help an advisor build trust with a client.
“Clients are not only seeking financial advice from their advisors, but also looking to engage with them on a more personal level,” said Kathleen Burns Kingsbury, a wealth psychology expert, in a statement accompanying the report. “By understanding how to approach the year’s most pressing themes from a technical and conversation perspective, advisors have the opportunity to better address their clients’ true financial concerns in 2014.”
If that sounds like financial advisors are being asked to offer more than financial guidance, it shouldn't be news to them: 69 percent said they spend part of their time playing psychologist to clients.
Still, the need for nuts-and-bolts discussions about rebalancing portfolios is high on the minds of advisors.
“The need to rebalance client portfolios coming out of 2013’s equity market highs should be the starting point for advisers, because the most important thing an adviser can do for a client is to set a properly diversified portfolio based on risk tolerance,” said Enrique Chang, Janus’ CIO of equities and asset allocation.
While 47 percent said their clients were well-informed and open to advice, just 8 percent said they understood how their investments generate income.
That sounds like another conversation.