Somewhat like the cliché that the answer to most questions in an introductory economics class is usually “supply” and “demand,” it appears that the answer to almost all investment related questions currently has to do with interest rates. From wealth management firms to institutional investment managers, market professionals seem consumed with the question of “when, and by how much, rates will rise, and what should they be doing to prepare?”
The general consensus of market prognosticators is that the Fed will raise rates sometime next year, but forecasts of the timing ranges from March to the second or third quarter. Predictions of what will happen afterwards are similarly vague and depend largely on who you ask.
In the meantime, preparations include the introduction of new potentially “all weather” investment products, the implementation of a variety of hedging strategies, a general flight to low volatility, higher-quality options, and tactical use of cash as the ultimate defensive asset class.
Amidst all of this activity, many firms, however, are forgetting perhaps the most important action they could and should be taking, communicating with their clients. If organizations learned anything from the financial crisis of 2008-2009, hopefully it was that not communicating in times of market uncertainty and volatility is unacceptable to clients. In fact, this is exactly the time when clients most want to hear from their advisors. They need to understand what actions are being taken to protect them and why. If an advisor can demonstrate a logical justification for a proactive strategy, that’s half the battle.
Most investors at the high net worth and institutional level are sophisticated enough to know that there is no magic bullet. They just want assurance that their advisors are watching the market and responding intelligently. So while your firm is busy addressing the potential increase in rates, don’t forget to keep your clients in the loop.