5 things top advisors are warning their wealthy clients

ByCharlie Wells, Misyrlena Egkolfopoulou

May 5, 2021 2:00 PM

It’s not all about crypto. Wealth managers at some of the largest U.S. firms say they’ve been advising their clients about broader investing concerns, such as inflation and interest rates, as the U.S. economy reopens and the Biden administration pushes for dramatic changes in the tax code.

They discussed these and other issues at the Bloomberg Wealth Summit on Tuesday.

Here’s a roundup of their most notable thoughts on what to think about markets and the economy in the months ahead.

Inflation

Greg Fleming, chief executive officer of Rockefeller Capital Management, speaks during a Bloomberg Television interview in New York, U.S., on Tuesday, Dec. 19, 2017.

“I have for years thought that inflation was being kept suppressed by the incredible pace of productivity through technology," says Rockefeller Capital CEO Greg Fleming.

Bloomberg News

Inflation has become one of the most hotly debated topics in financial circles of late, with concerns that government stimulus and a possible post-pandemic consumer spending spree may drive up prices.

“I have for years thought that inflation was being kept suppressed by the incredible pace of productivity through technology,” said Greg Fleming, president and CEO of Rockefeller Capital Management.

Investors always need to be concerned about inflation, said Catherine Keating, chief executive officer of BNY Mellon Wealth Management.

“If you think about the business cycle and what often ends a business cycle, it’s an increase in inflation which causes the Fed to increase interest rates, which can in extraordinary circumstances lead to a recession and a bear market,” she said.

Just on Tuesday, financial markets were roiled when Janet Yellen said interest rates may have to rise moderately to keep the economy from overheating. The Treasury secretary’s comments crashed into a stock market already showing signs of jitters over rising prices.

Still, Keating expects inflationary trends to be transitory, given a number of longer-term deflationary factors. These include an aging economy, technological disruption and a potential increase in the cost of debt.

Stock market

Citi Private Bank Managing Director Ida Liu Interview-Bloomberg_050521

Ida Liu, the global head of private banking at Citigroup, is asking clients to move beyond their “home bias” in favor of geographic diversity for their portfolios.

Bloomberg News

The onset of the COVID-19 pandemic set off an extraordinary year for the market, with new individual investors piling into stocks, volatility rising and, recently, tech shares selling off after months of breakneck increases.

If anything, the advisers pushed investors to think beyond the day-to-day narrative.

“Don’t invest via the headlines,” said Penny Pennington, managing partner at Edward Jones.

Gina Martin Adams, Bloomberg Intelligence’s chief equity strategist, questioned whether markets are in bubble territory. Despite the headlines, there is little evidence that there has been a dramatic upturn in prices detached from fundamentals that causes irrational exuberance; those would be bubble conditions, she said.

In the context of prior bubbles such as those in the 1920s or 1990s, the current stock surge is “nowhere near” those levels, she said.

“Our view is while there are some symptoms of a bubble potentially emerging in the equity market, we may only be at the very beginning,” she said.

Ida Liu, the global head of private banking at Citigroup, is asking clients to move beyond their “home bias” in favor of geographic diversity for their portfolios. She especially sees opportunities in China.

Interest rates

Commonfund Chief Executive Officer Catherine Keating Interview-Bloomberg-050521

Catherine Keating, CEO of wealth management for the BNY Mellon suggests there will be a "rise in interest rates at some point.”

Bloomberg News

Where to from this low base? There could be a hike on the horizon.

“Interest rates are at extraordinarily low levels, really the lowest of our professional careers,” Keating of BNY Mellon said. “So we do think that you will see a rise in interest rates at some point.”

Citigroup’s Liu said sitting on cash in such a low-interest rate environment is a mistake. “With rates where they are, your cash isn’t working for you. So might as well as get invested,” she said.

Taxes

Advisors said negotiation and compromise will result in changes to the final version of President Biden’s proposal to raise taxes on the wealthy and target capital gains.

The slim Democratic majority in the Senate means that the proposal will be pared back in some ways and lawmakers will emerge with a less ambitious plan, BNY Mellon’s Keating said. The next question is timing — when the plan would pass and whether it would be retroactive, she said.

Given the uncertainties, it’s hard to advise clients on specific actions. But there are still certain steps they could take, Keating said.

If possible, one option is to accelerate some income to this year, so that it falls under the current tax plan. For example, converting a traditional IRA that requires taxes to be paid now to a Roth IRA would reduce future tax liability, she said.

Another option is for clients to further diversify their portfolios, away from the largest tech stocks in the market.

“We’re talking to them about a whole range of strategies and including some that don’t really have to do with the market at all,” Keating said. “They have to do with interest rates and locking in the very low interest rates that we have right now.”

Bitcoin

“I’d like us to find a way to responsibly offer crypto," says Betterment CEO Sarah Levy.

Ben Hider

There are three main concerns surrounding cryptocurrencies that advisors are trying to address, Keating said. One is security, and making sure private keys are secure. The second is liquidity and ensuring that investors who spend money in this asset class also have flexibility, and the third is volatility, with some assets like Bitcoin experiencing wild swings over the past year.

“We’re looking for ways to address those concerns,” Keating said.

Betterment — the robo-advisor that has about $30 billion in assets under management — says it’s still doing its research.

“We’re believers that if we can provide the right kind of context and advice, that it’s OK to participate in some of these newer asset classes,” CEO Sarah Levy said. “I’d like us to find a way to responsibly offer crypto, but I can’t say that we’re there yet. I think we’re still in kind of a watch-and-learn mode.”

Citigroup’s Liu said that while there is significant interest in crypto, she doesn’t consider them a “core” opportunity, but rather a latent one that some clients can invest in.

— Additional reporting by Caroline Salas Gage, Caroline Hyde, Erik Schatzker, Suzanne Woolley and Taylor Riggs