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How Advisors Are Approaching Inflation in 2023


Consumers and investors aren’t the only ones worried about inflation. Rising prices remain top of mind for financial advisors, who continue to field questions from clients about inflation’s impact on their financial plans.

The good news is that inflation appears to be slowing. Since peaking at 9.1% in June 2022, inflation has fallen modestly each month, clocking in at 6.5% in December. Of course, that doesn’t mean prices of goods and services are going down – only that they’re increasing more slowly than in the previous month.

As the Federal Reserve continues to raise interest rates to quell red-hot inflation, financial advisors appear most concerned with how these countermeasures will impact their clients. If 2021 and 2022 were both about helping their clients cope with higher spending and falling portfolio values, 2023 may be about responding to falling inflation. Here’s what advisors should know about how their colleagues are approaching this topic in the new year.

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Focus on Inflation Remains, But Other Risks Loom

Despite recent Consumer Price Index (CPI) data that show inflation slowing, Americans remain on edge. A recent Allianz Life survey found that Americans see rising inflation as the greatest threat to retirement in 2023.

“The number one risk for my clients is outliving their assets in retirement. Inflation goes hand and hand with that risk,” says Kevin Lao, founder of Imagine Financial Security in Jacksonville, Florida. “If costs of goods are rising at a higher pace than expected, will their assets and income keep up? Also, what if they live longer than expected? How does inflation impact their quality of life as they get older?”

To allay his clients’ fears, Lao stress tests portfolios to determine the maximum inflation rate his clients can sustain while maintaining their lifestyles. He aims to build portfolios that can withstand long-term inflation of 3% to 4%.

Inflation continues to come up in every client meeting, says Stephanie C. McElheny, president of financial planning at Aspen Wealth Strategies in Boulder, Colorado.

“The severity of inflation concerns varies client by client based on their income, expenses, etc.,” says McElheny, a certified financial planner. “But it’s definitely something everyone is talking about.”

Communication and Education

While inflation affects all clients to some degree, some advisors remain more focused on the Federal Reserve’s response, rather than rising prices themselves. They say it’s key to educate and communicate with clients on how interest rates affect markets, as well as the looming threat of recession

“I like to remind them, however, that one of the key elements for a crisis to occur is that nobody can see it coming,” says Mark Hayes, founder of Infinitive Wealth Advisory in Fishers, Indiana. “With the constant talk of potential recession, many companies have already started to prepare and have undertaken steps such as tightening lending standards and trimming payrolls, and in doing so, may help actually prevent the recession we fear.”

What Advisors Are Doing as Inflation Abates

How Advisors Are Approaching Inflation

Advisors say many clients have had to revise their financial plans in the face of persistent inflation. But as inflation falls, firms will make certain tactical changes to respond to the changing environment.

Portfolio diversification remained a key strategy as inflation has spiked in the last two years, says Hao Dang, an accredited investment fiduciary and investment strategist for Consilio Wealth Advisors in Bellevue, Washington.

While the firm maintained its exposure to growth stocks and bonds in 2022, Consilio allocated a heavier portion of its portfolio to value assets than it typically would.

“The data so far is showing that inflation has peaked in the summer of 2022, and our response has been to reduce some of the value weightings and shift back more toward neutral,” Dang says.

Glen Goland, a senior wealth strategist at Arnerich Massena in Portland, Oregon, says his firm is eying small-cap U.S. stocks as inflation abates. These assets have traditionally outperformed mid- and large-cap equities when inflation is 5% but falling, he says.

Advisors Say It’ll Take a Year or Longer to See Inflation Taper

While the Federal Reserve is working to tame inflation, advisors are hesitant to predict exactly when it will return to the Fed’s target of 2%. Of the advisors SmartAsset asked, most believe it’s going to take more than a year for the rate hikes to achieve that goal.

“Inflation will ultimately taper, however, I don’t possess a crystal ball nor predicate my clients’ advice on predicting, but I do expect that inflation will be tamed in time over the next year or two,” says Ralph G. Adamo, CEO of Integrity Wealth Management in Newport Beach, California.

Hayes, on the other hand, thinks inflation could reach target levels by the early fourth quarter of 2023. Just don’t count out the possibility that it could take longer.

“At the same time, with shelter occupying such a large part of the CPI figure and the potential for its continued constraints, I am also trying to accommodate the possibility of a longer glide path to the Fed’s goal,” Hayes says.

McElheny is less bullish, saying it’s more likely that it will take at least two years for inflation to return to normal levels.

“We don’t want to be reactive, we want to be proactive,” she says. “We’re still assuming higher pricing levels in people’s plans so that we’re prepared for that and hopefully we can provide ‘happy surprises’ down the road if/when prices return to a sense of normalcy.”

Impact on Advisors’ Business

How Advisors Are Approaching Inflation in 2023

Despite persistent inflation and double-digit stock market declines that marred 2022, many financial advisors reported their businesses actually grew. Client referrals were a key component of that growth.

Hayes, who predominantly collects asset-based fees, says he added more clients from referrals in 2022 than in any of the previous 10 years.

“While the headwind of the market pullback hindered top-line revenue, its tail wind spurred a significant uptick in people looking for an expanded explanation of what was happening and what they should be doing about it,” he said.

Lao added that the cost of running his business – especially technology expenses – has risen with inflation. But his business also grew by 50% in 2022, thanks in large part to high-net-worth clients seeking better service, he said.

While recent market volatility and stock selloffs may generate new business leads for some advisors, McElheny says fostering strong relationships with existing clients remains paramount.

“At the end of the day, I don’t believe market conditions matter nearly as much as the relationships you forge with your clients,” she says. “We have people referred to us regardless of market or economic conditions – when things are ‘good’ or ‘bad.’”

Bottom Line

Inflation appears to be slowly cooling, but financial advisors say there are other challenges facing their clients in 2023. Rising interest rates and the threat of recession are all viable threats, highlighting the importance of properly educating clients and planning for a changing economic environment.

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