A new survey focuses on a topic that advisors don’t seem focused on – but perhaps should be.
For the past three years, Fidelity has explored issues that are top-of-mind for advisors through its quarterly Fidelity Advisor Investment Pulse survey. On a list of 14 potential topics, inflation ranked joint last with alternative investments, but with discussions about the Federal Reserve nearing its dual mandate of maximum employment and price stability, there are increasing, if still somewhat muted, concerns about inflation.
Fidelity notes that in the first quarter’s survey, just over 3% of advisors cited inflation as an area of focus – and if that seems small, Fidelity notes that it is the highest since the start of 2014.
The report cautions that long-term inflation risks may be on the rise, and that while investors expect inflation to remain subdued, but peak globalization and aging demographics are risks to that outlook (see below). Additionally, the report notes that inflation warrants prudent risk management, and may be particularly concerning for conservatively positioned, income-oriented retirees.
Factor Fears?
Although sustained low inflation is a reasonable scenario, Fidelity cites two factors that could contribute to ending the long-standing disinflationary trend in the U.S.:
- Peak globalization: Any move toward protectionism could put upward pressure on import costs and goods prices.
- Aging demographics: This may mean decreased consumption as older people have historically spent less. However, Fidelity notes that an aging population could also mean decreased productivity and a decline in domestic production, which could reduce supply. Coupled with the potential of higher import costs, the net effect could be an increase in inflation.
Inflation Risks
The report notes that even periods of modestly rising inflation can pose challenges for advisors and investors – and that, historically, rising inflation has meant a drag on returns from equities and bonds.
Before long-term inflation risks materialize, the report says that advisors should take advantage of the opportunity to:
- Reassess your point of view on inflation.
- Examine your book of business to identify clients who may be more conservatively positioned.
- Revisit those clients’ objectives and risk profiles, and make inflation a part of the client conversation. Some key considerations 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.
Other (Higher?) Concerns
As in the previous two quarters, the findings showed that regulatory and political developments continued to be the top concern for advisors. In the first quarter’s survey, nearly a quarter (24%) of the advisors surveyed cited topics relating to government and the economy, with many focused on developments with the Department of Labor’s fiduciary investment advice rule and statements from the new administration on its potential fiscal policy direction.
As the DOL rule continues to dominate headlines, advisors are taking the opportunity presented by regulatory change to examine their business models, so practice management continues to be a hot topic for advisors (rising two spots to No. 5). In addition to growing their business, Fidelity says that 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.
The other topics of focus are portfolio management (18%), interest rates (16%) and risk volatility (14%).
