Fed Rate Hike An Opening For Advisors To Mentor Clients

By Andrew Lord

The Federal Reserve is increasing interest rates by 0.25 percent, equaling a hike in late September.

The move comes amid sharp criticism from President Donald J. Trump and lift the federal funds rate, which controls the cost of mortgages, credit cards and other borrowing, to a range of 2.25 and 2.5 percent.

So what does the rate increase mean for advisors and clients? The answer is opportunity.

Although the increases were featured prominently in national news, the average consumer may not fully understand the implications of interest rate hikes.

Each consumer is affected differently by interest rates based on what assets they hold or plan to purchase after the increase. Consumers can benefit from the guidance of financial advisors to improve their understanding of the specific impacts interest rates may have on their short-term and long-term financial plans.

Advisors can leverage the news of interest rate hikes as a touchpoint for client communications and an opportunity to promote financial literacy.

A recent study conducted by the Million Dollar Round Table suggests that many Americans are overconfident in their financial skills. Eighty-five percent said they are somewhat or very confident in their financial skills, but only 55 percent of Americans without an advisor feel at least moderately comfortable explaining the implications of higher interest rates compared with 76 percent of Americans who have a financial advisor.

This may indicate that consumers underestimate the value of an advisor as it relates to their financial literacy. It’s interesting that some consumers believe they don’t need professional guidance in this aspect of their life.

They trust professionals in the medical field to provide expertise in applicable situations, yet they seem to view financial planning as an area of independence. Just like the added value of a nutritionist or personal trainer, guidance from a financial advisor has inherent value to help consumers understand financial events such as interest rate hikes.

Communication Opportunities

Onboarding and retainment processes constantly present opportunities for client education. Strive to increase the number of times you communicate with clients to improve their overall financial literacy. Mention current financial news through your standard communication methods such as email blasts, newsletters and personal planning meetings.

These opportunities let our clients know that we are aware of the news and that we will keep a close eye on the impact an event such as interest rate hikes will have on their individual plans.

Invite clients in as a group for semiannual market updates. Record the session for those who are unable to attend. This is a valuable chance to touch base on the current state of the economy and help clients understand how it translates to their plans. At these meetings, spend about 10 minutes to highlight select topics as a sort of “Economics 101” educational opportunity.

A financial advisor can also take on the role of a community educator to promote financial literacy. Explore what you can offer beyond your standard client relationships. For instance, we hold a series of classes, both in person and online, to inform the public and teach basic financial education.

My clients and other learners can explore financial themes such as cybersecurity, Social Security and more to increase their financial confidence.

To improve confidence among your clients, emphasize that the portfolios you set up are built to withstand the effects of interest rate fluctuations, something 53 percent of the MDRT survey respondents indicated their advisor had done.

Although balanced portfolio structures and frequent client communication are used to decrease the volume of calls and emails triggered by a financial news event, client concerns cannot be eliminated entirely. We must remind our clients to stick to their plans and avoid rash decisions that will have long-term consequences.

Interest rate hikes are telling moments that reveal my clients’ underlying characteristics. I learn which of my clients are nervous investors and most likely to contact me after they hear news that concerns them.

If you observe clients who display nervous tendencies, get ahead of misinformed actions and reevaluate their risk tolerance. Use the media coverage as an opportunity to continue these conversations and discuss how interest rates affect your clients’ plans.

Understand Your Clients, Think Long-Term

Depending on your clients’ characteristics, you may receive different responses and concerns when interest rates increase. For example, my semi-affluent clients who live below their means may recognize only the positive short-term benefits of an interest rate hike.

When interest rates go up, they don’t see a disadvantage, because they can go out and buy certificates of deposit, treasuries or tax-free bonds and receive a reasonable rate of return.

Our challenge is to educate these clients on how the increase in interest rates seems to be positive in this moment, but will negatively impact the overall economy. Identify the aspects of their financial plans that will be negatively affected in the long run to encourage clients to see the long-term perspective.

It is also important to consider how clients in different age groups will respond to increased interest rates. According to the MDRT study, Americans ages 18-29 are more likely (42 percent) to state that higher interest rates will negatively affect their finances compared with Americans ages 29 and older.

In fact, Americans ages 18-29 without a financial advisor are more likely (80 percent) than members of other generations to believe working with a financial advisor would increase their understanding of interest rate implications.

Since topics such as student loans and mortgages are top of mind for members of that age group, media coverage of interest rate hikes may spur further action and cause them to seek out an advisor.

If you serve clients in this demographic, be prepared for questions and get ahead of any concerns through proactive communication and tailored guidance. My practice established a debt management team to serve the needs of younger clients.

These services can help you prospect with this age group, who also expressed in the MDRT study that they are more likely to work with an advisor the next time interest rates are increased.

Leverage Financial News

When the next interest rate increase occurs, advisors will have another opportunity to contact their clients and ensure they feel confident with their current financial state.

In fact, when all respondents were asked about actions they would take if the Federal Reserve raises interest rates again in the near future, 26 percent said they plan to talk with a financial advisor.

Current financial events can also serve as a prospecting opportunity for those who may not have a financial advisor, but realize the need to have one when an interest rate hike occurs. Leverage current events to improve client education and promote financial literacy among consumers.

Andrew Lord, CLU, ChFC, is the founding and managing partner of Essential Planning, a registered advisory firm in Portsmouth, N.H. He may be contacted at [email protected].