Until now, most financial advisors have avoided discussing negative interest rates with clients.

The concept seems too complex and counter-intuitive to support principles of sound planning and investing.

However, as media coverage about negative interest rates grows, some of your clients will want to know how they could be affected and what they can do to prepare.

Read: Interest rates good, returns bad for retirement income

A negative interest rate policy (NIRP) is a step beyond the zero interest rate policy (ZIRP) the Federal Reserve pursued from 2008 through December of 2015. Under NIRP, central banks lower their target rates paid for deposits below zero.

The idea is that NIRP will force commercial banks to make more loans while savers will spend more rather than save. This will increase economic activity and spur inflation and stock markets higher.

NIRP became reality in mid-2014 when the European Central Bank cut its target deposit rate from 0% to -0.10%. That rate was reduced to -0.30% in December of 2015, and there is a good chance it will be cut further in March of 2016. The Swiss National Bank currently has a deposit rate of -0.75% and Sweden is at -0.35%. In late January, Japan surprised markets by cutting its deposit rate to -0.10%.

In December of 2015 the ZIRP concept crossed the Atlantic when the Bank of Canada (BOC) indicated: “Recent experience indicates that negative interest rates are indeed a viable policy tool.”

First, clients should understand that NIRP makes sense only in an economy where growth is stagnant and traditional monetary tools, including ZIRP, haven’t worked. Even then, NIRP is a radical experiment, unimagined a decade ago.

Second, NIRP is as much about altering consumer/saver/investor psychology as it is about monetary policy. To work, it depends on central banks’ ability to encourage consumers to buy and borrow more, savers to save less, and investors to take more risk.

The influence may seem subtle but can become powerful and contagious once NIRP is embedded in an economy and the media starts echoing central bank messaging.

Now is the best time to help your clients commit to savings goals and evaluate a comfortable risk tolerance. Since NIRP implies weak economic growth and central bank desperation, this is not a good time to increase personal borrowing.

Currencies of NIRP-leaning jurisdictions, including the euro, yen, and Canadian loonie, may continued to weaken vs. the dollar. However, if NIRP makes its way to Canada, it’s possible the Federal Reserve also might adopt it eventually.

If and when that appears likely, clients may want to increase allocations to hard assets that could help to protect purchasing power--e.g., real estate, commodities, and precious metals.

Finally, to make NIRP work, central banks recognize that they must prevent hoarding of currencies, perhaps by restricting access to it.

If clients like to go to the bank and withdraw cash from ATMs, it may not be a bad idea to have a small stock of currency handy.

Increasing liquid assets (banks accounts, money market funds and life insurance cash values) also may be prudent until the NIRP era ends, one way of another. Here’s the best online resource for increasing your NIRP IQ.

Instant Insights /

What to tell clients about negative interest rate policy

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