Federal Reserve Chair Jerome Powell is considering a more aggressive monetary policy by raising interest rates half a percentage point at its policy meeting in two weeks, according to a
Fed rate hikes may be disruptive to the overall stock market and can bring about uncertainties for the average investors, which could create opportunities for financial advisors. In the face of that volatility, increasing numbers of people may need help navigating their investments.
“So many people tend to get more engaged with 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 can be at our busiest with talking to prospective and current clients because they are looking for help.”
Poltersdorf said when market volatility is coming, a lot of small business owners who were previously reluctant to work with a financial advisor are reaching out to him for mortgage and tax advice.
“We can help them with investing in more asset classes, such as alternatives, real estate and commodities,” Poltersdorf said, “But more importantly, advisors can help them avoid making emotional investment decisions when the market goes crazy.”
Since the Fed cut interest rates to zero in March 2020, the S&P 500 surged more than 100%, and it wasn’t impossible for retail investors to make 15% to 20% per year by holding popular tech stocks, like Apple, or meme stocks, like Gamestop and AMC. But after a broad market sell-off last November as investors dumped risky meme names, those investors will have a harder time making easy money, said Vern Sumnicht, chief executive officer of Sumnicht & Associates.
“In the client relationship thing over the last 10 years, investors tend to get a little lazy sometimes,” Sumnicht said. “The rate hikes remind folks that it's not always that easy, and it helps support the role of the advisor.”
High volatility reminds everyone that the markets aren’t easily controlled, said Chris Dhanraj, managing principal of investments 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 the tough initial adjustment period this year as the S&P 500 dropped 27% year to date. With huge volatility in the equity market and higher interest rates, tilting further toward fixed income to reinvest at higher yields may be a good strategy, according to Daniil Shapiro, associate director at Cerulli.
For retirees who seek a steady stream of income from Social Security benefits, pensions, annuities and Treasury bonds, higher interest rates will boost their confidence that fixed income can help them reach their retirement, according to Poltersdorf.
“You could have those coupons continue to pay out so that they don’t need to worry about price volatility,” Poltersdorf said.
Investors with higher AUMs are also more willing to explore alternative investments, which tend to have higher liquidity and returns. Advisory assets placed into less interest rate-sensitive private credit funds rose from $11 billion to $45 billion in 2021, according to data provided by Cerulli.
“Advisors last year had trouble generating income and portfolios, and they were afraid of rising rates. Now they have all those types of exposure, which is a big deal,” Shapiro said.
