Not Much Concern Yet But Inflation Worries Begin To Stir Among US Advisors

Tom Burroughes

24 May 2017

After years when inflation appeared to be relegated to the very bottom of investors’ concerns, it appears that some concerns about the phenomenon are taking root.

The quarterly Fidelity® Advisor Investment Pulse survey has in recent years found that topics such as the government and economy, portfolio management, market volatility, and interest rates consistently ranked at the top of advisors’ list of concerns.

On a list of 14 potential topics, inflation ranked joint last with alternative investments, but opinion is starting to stir. In the first quarter of this year, just over 3 per cent of advisors cited inflation as an area of focus. While still very low, the absolutely level is the highest since the start of 2014.

“Against this backdrop, inflation fears continue to be pushed into the background, especially with US inflation slowing structurally since the early 1980s,” Robert Litle, head of intermediary sales, Fidelity Institutional Asset Management, said. “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 advisors off-guard,” he said.

As with the previous two quarters, the findings showed that regulatory and political developments continued to be the top concern for advisors. Some 24 per cent 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.

Keep it low
Although sustained low inflation is a reasonable scenario, Fidelity said, two factors could contribute to ending the long-standing disinflationary trend in the US: A rowback on globalization and moves towards protectionism, which will raise import prices, and falling productivity from an ageing population and fall in domestic production and supply.

After a decade and more of subdued price rises, the return of inflation may seem a phantom menace, but worth guarding against, the report said.

“Inflation risks matter for everyone, but some may be more exposed to it than others, so it’s important for advisors to consider their clients’ unique circumstances,” Litle said.

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. In addition, older investors tend to have shorter time horizons to recoup losses in purchasing power and greater expenses in health care, an area with rapidly rising costs.”

Business models up in the air
As the DoL Fiduciary rule looms, advisors are taking the opportunity to examine business models. In that environment, 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.

For advisors, juggling wealth planning, running their practices, and investment management responsibilities such as managing inflation risk can be challenging. To focus on areas where they can add value to their clients and their businesses, advisors should consider ways to become more efficient at investment management, including by leveraging the power of a process, considering model portfolios, reviewing their manager selection process, and documenting and communicating investment decisions to goals.