As markets slide, more advisers are sending clients to I bonds

With equities moving closer to bear market territory, inflation gaining momentum, and the Federal Reserve and the White House scrambling for answers, financial advisers are finding some solace in the suddenly popular I bonds.

“I’m getting a ton of client interest; it’s a fantastic hedge in this environment,” said Eric Beiley, executive managing director at Steward Partners Global Advisory.

I bonds, a variety of U.S. savings bond designed for inflationary periods, have their limits and come with a few caveats, but right now most investors and advisers are focused on the 9.62% yield.

“We’re not actively saying you should own it, but our clients are certainly bringing it up,” said Virag Shah, portfolio strategist at Van Leeuwen & Co.

One reason most financial advisers have typically overlooked I bonds, which were created in 1998, is that they don’t generally fit well into a typical wealthy client’s portfolio.

For starters, they have to be purchased directly by the individual investor through TreasuryDirect.gov, where the maximum annual investment per person is $10,000, which is small potatoes for most clients.

The purchase process, directly from an individual bank account to the U.S. Treasury, also makes it difficult for an adviser to capture any kind of fee.

Then there’s the restrictions that any I bond purchase is locked up for 12 months and that selling the bond between the second and sixth years of ownership triggers a small penalty equal to three months’ worth of interest.

But even considering the limitations, Beiley said I bonds stand out as something positive to discuss with clients.

“They are very popular, and I love them for kids’ accounts,” he said. “You can lock in almost double-digit rates, so if clients are comfortable doing it, I recommend it.”

One other wrinkle is that even though I bonds have a 30-year maturity, the yields adjust every six months, which is actually a good thing during an inflationary period. For example, the annualized yield of 9.62% set in May is up a full percentage point from the November yield of 8.6%.

“For the first time in my 25 years as a financial planner, clients are asking about I bonds," said Kristi Sullivan, owner of Sullivan Financial Planning.

“Clients have extra cash to invest and aren’t feeling comfortable with stock market volatility,” Sullivan said. “These are a nice alternative to CDs as far as the current rates offered.”

Even if inflation is somehow abated, it would be difficult to imagine a trend that could make I bonds less attractive than any other fixed-income instrument with the security of the backing of the U.S. Treasury.

“We have been actively encouraging and helping clients purchase I bonds,” said Thomas Blackburn, senior financial partner at Mason & Associates.

“For many, using their emergency funds or cash on hand to buy them makes the most sense and is the usual route,” Blackburn said. “However, for some, we will send a distribution from what we are managing for them to buy them.”

I bonds can't be purchased from inside a qualified retirement account, and the minimum investment is just $25.

There's also a way to purchase an additional $5,000 worth of I bonds each year by using a tax refund, but that requires overpaying taxes to ensure a refund of at least that amount.

Brittany Mollica, a financial adviser at Hilltop Wealth Advisors, describes herself as a “big fan of I bonds right now.”

“It's definitely the silver lining to the high inflation that we've been seeing,” she said. “For someone who has sizable cash reserves and is fine with locking up a portion of their cash, I bonds can be a great opportunity and I have recommended to clients in this situation that they look into it.”

Patrick Beagle, principal at WealthCrest Financial Services, emailed his clients in May when the latest six-month yield came out and suggested “everyone put the max in.”

Beagle said he's been pleasantly surprised to find his advice on I bonds has even led to a few client referrals.

“Clients are telling their friends that their guy recommended I bonds,” he said. “So while I have lost AUM to I bonds, I am more than making up for it by doing what I think is the right thing.”