How to talk 'interest rate hike' with clients

How to talk 'interest rate hike' with clients
With the Fed likely to begin boosting its rate next week, advisers are preparing to answer a lot of questions — and preemptively communicating the move's impact.
JAN 07, 2016
Advisers should be ready to put next week's expected Federal Reserve interest rate boost into context for clients, making sure it's clear to them that this long-awaited move is only the first step. As the Fed has labored over this decision during the past year, most financial advisers have discussed the implications of a bump in the short-term overnight banking rate with clients in meetings and through emails and newsletters. Advisers also have prepared client portfolios for the shift, moving fixed-income allocations mostly to short-term bond investments. But assuming the Fed makes a small increase during its two-day meeting that begins next Tuesday, advisers should promptly remind clients of the actions they have taken, and reiterate that this boost doesn't automatically advance the rates for mortgage and car loans — a common misperception of investors, advisers said. They also should interpret the governors' guidance on how fast further increases will follow, so clients feel prepared. "The first increase isn't as important as the pace of increases in the future," said Barry Glassman, founder of Glassman Wealth Services. Federal Reserve Chairwoman Janet Yellen most recently said she expects over the next year or so a gradual lifting of the benchmark rate, which has been at near zero since the 2008 financial crisis. (More: Gundlach says time is not right for Federal Reserve to raise rates) Advisers also may want to make clear to clients at what point additional increases will portend further investment changes. Beth Blecker, chief executive of Eastern Planning Inc., said she'll be communicating in writing with clients shortly after the board's decision, having messages prepared for both an increase and no move. "We will communicate what has happened and remind them that the trend will be rising rates, which will make their existing bond returns lower," she said. The firm will continue to keep more of their clients' portfolios in cash, looking for an opportunity to invest in bonds for their returns if rates are increased at least 2%, Ms. Blecker said. Chris Graff, director of asset management for advisory firm RMB Capital Management, said the message their advisers are sending to clients is to expect volatility in the markets following any such rate hike. The reaction could be exaggerated because it's the end of the year — a time when normal liquidity isn't particularly strong, he said.
Have your clients expressed concern about the impact of a rate hike on their portfolio?
Source: InvestmentNews Research
"We'll be looking for opportunities to take advantage of the volatility," focusing on different corners of the fixed-income market, and some leveraged trades that could begin to unwind, he said. (More: Fear, greed and how to invest regardless of the direction of interest rates) Guy LeBas, fixed-income strategist for Janney Montgomery, said the firm's advisers have been telling clients about the impact of rising interest rates since 2013. The firm has prepared a series of documents and a video set to be released for clients if the Fed indeed pulls the trigger next week on a rate increase. "The upshot is the Fed controls a very small portion of where interest rates are on a given day, so clients shouldn't assume that all rates will go higher," Mr. LeBas said. The amount of publicity surrounding the potential increase in interest rates has been so immense that everyone knows about it, he said. "It's the most heralded change in Fed policy in history," Mr. LeBas said. "Yet the level of concern is not as great as it was in 2004 — the last time the Fed started on a rate-hike cycle."

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