Federal Reserve Chairman Jerome Powell is considering more aggressive monetary policy by raising interest rates by half a percentage point at his policy meeting in two weeks, according to a sign discussion at the IMF on Thursday. He noted that many central bank officials already believed such a move was appropriate at the March meeting, when the Fed decided to raise the interest rate by a quarter point.
Fed rate hikes can disrupt the entire stock market and can cause uncertainty for average investors, which could create opportunities for financial advisors. Faced with this volatility, a growing number of people may need help managing their investments.
“So many people tend to get more involved in their finances when volatility increases,” said Tom Poltersdorf, owner and certified financial planner at Beyond Your Exit Wealth Management. “For many advisors, this is when we may be busiest talking to potential and current clients, as they are looking for help.”
Poltersdorf said when market volatility hits, many small business owners who were previously reluctant to work with a financial adviser contact him for mortgage and tax advice.
“We can help them invest in more asset classes, such as alternatives, real estate and commodities,” Poltersdorf said, “But more importantly, advisors can help them avoid making decisions emotional investing when the market goes crazy.”
Since the Fed cut interest rates to zero in March 2020, the S&P 500 has jumped over 100%, and it wasn’t impossible for retail investors to earn 15% to 20% a year by holding popular tech stocks, like Apple, or even stocks, like Gamestop and AMC. But after a large sell-off in the market last November as investors dumped risky meme names, those investors will find it harder to make easy money, said Vern Sumnicht, chief executive of Sumnicht & Associates.
“In the customer relationship business over the past 10 years, investors tend to be a bit lazy sometimes,” Sumnicht said. “Rate hikes remind people that it’s not always so easy, and that helps support the role of the advisor.”
High volatility reminds everyone that markets are not easily controlled, said Chris Dhanraj, chief investment officer at CLA.
“What you can control is your financial planning. You can seek professional advice for tax considerations, charitable strategies or estate planning,” Saccocia said.
However, financial advisors should be prepared for this year’s tough initial adjustment period, as the S&P 500 has fallen 27% year-to-date. With huge volatility in the stock market and higher interest rates, leaning more towards fixed income securities to reinvest at higher returns can be a good strategy, according to Daniil Shapiro, managing partner at Cerulli.
For retirees who are looking for a steady stream of income from Social Security benefits, pensions, annuities and Treasury bills, higher interest rates will boost their confidence that fixed income can help them achieve their retirement, according to Poltersdorf.
“You could make those coupons keep paying so they don’t have to worry about price volatility,” Poltersdorf said.
Investors with higher assets under management are also more willing to explore alternative investments, which tend to have higher liquidity and returns. Advisory assets placed in private credit funds that are less interest rate sensitive have increased from $11 billion to $45 billion in 2021, according to data provided by Cerulli.
“Last year advisors struggled to generate revenue and portfolios, and they were scared of rising rates. Now they have all these types of exposure, which is a big deal,” Shapiro said.