The Top 3 Wildcards Advisors Must Consider in 2022

Make no mistake about it: This year may be one of the most pivotal ones of your career. Whether you are transitioning out of the business via a practice sale, you are a newcomer, or something in between, your business world has changed. And it has nothing to do with the pandemic — at least not directly.

A group of secular trends, from open access to information, speed of communication and falling transaction costs to an unprecedented level of retail investor confidence, have all matured at once. This leads to one uncomfortable conclusion: The value of financial advisors is being questioned.

As an advisor, how should you respond? Start by recognizing the key trends and developments that will be top-of-mind for clients, but do so before they do. Because when you look at it from their vantage point, they pay you a lot of money.

Thanks to a constant drumbeat of encouragement from trading firms, online advisors and social media platforms, they are questioning every cost, every move and every motivation of yours.

Here are three of the most critical issues to understand so that you can proactively stay a step ahead of 2022’s trends while continuing to both preserve and grow your practice.

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The Impact of Rate Hikes on Bonds

Your clients either follow this story in the media or at least see the impact of inflation at the grocery store, the gas pump and in the housing market. Inflation has finally forced the Federal Reserve’s hand, and it will raise rates perhaps three times this year.

That’s the headline, but headlines don’t impact your clients’ livelihood. Large losses in their portfolios do. And while they expect those losses from their stock portfolio from time to time, they probably don’t realize that their bond funds and bond ladders can move down in price rapidly, and vigorously.

Compounding the simple math of higher rates on bond prices is a massive bubble in so-called credit bonds. These are the ones rated below AAA, particularly those toward the lower end of the investment-grade level, such as BBB-rated bonds.

A decade ago, this was a minor issue. But for years, bond managers have been forced to “reach for yield” to produce competitive returns. That led them to pile into the highest-yielding bonds that they were permitted to own, and that’s the same thing as saying the lowest-quality bonds.

The result can be seen clearly in investment-grade corporate bond exchange-traded funds and mutual funds. For example, consider iShares iBoxx $ Investment Grade Corporate Bond ETF (ticker: LQD): About half of its $30 billion in assets are rated BBB. That implies a level of risk that may exceed any other time in modern history. Your clients may be exposed to it and probably don’t sufficiently understand it.

Compounding the problem is that those Fed rate hikes will be preceded by the reversal of massive purchases of bonds, including corporate and high-yield, aka “junk” bonds. It won’t take much of a run for the exits by investors to put a ton of selling pressure on bond prices.

Furthermore, there are so many “zombie” companies, which are alive only due to their capacity to borrow money, that it is inevitable that many such businesses will be downgraded to junk status. That not only spoils the value of those bonds for your clients, but it also forces bond managers to dump those bonds if their mandate does not permit them to own securities below a BBB rating.

This might just be the biggest wildcard of 2022. So, the sooner you identify risk areas in your clients’ portfolios, the better off your reputation with them will be when this ultimately comes to pass. In addition, if you identify client assets not under your advisory that carry these risks, they could be ripe to be converted to your management.

Bottom line: It pays to be a hero to your clients here.

[Read: 6 Best TV Shows for Financial Advisors.]

Investors Divorce Their FAANG Stocks

There is a page on Wikipedia that describes a period of high speculation, low interest rates, a massive appreciation of stock prices, a glut of new initial public offerings (many without earnings), unprecedented levels of personal investing, and stories of people quitting their jobs to trade stocks. That may sound like what’s happening today, but the page on Wikipedia is titled “Dot-com Bubble.” As 2021 progressed, the financial-market environment increasingly looked, walked and quacked like that 1999-to-2000-era duck.

Even if it’s a big false alarm, any sustained correction in 2022 will prompt your clients to start listening more carefully to comparisons to that era and related prognostications. So, it’s best that you are aware of those similarities yourself.

As such, portfolio risk management has never been more important to current and prospective retirees than it is right now. It is quite possible that in a market as crowded at the top as this one, with a small number of stocks accounting for a large percentage of the S&P 500 and Nasdaq, their index portfolios are much riskier than they realize.

Don’t let clients find this out the hard way. Discuss with them potential options to isolate their allocation to so-called FAANG stocks — Meta Platforms Inc. (FB), formerly known as Facebook; Inc. (AMZN); Apple Inc. (AAPL); Netflix Inc. (NFLX); and Alphabet Inc. (GOOG, GOOGL), formerly known as Google — as if they were a separate asset class, because they are truly acting like one. From there, you can continue to play offense, but supplement that with a rock-solid defense.

As noted earlier, that defense will not come from credit bonds. Treasuries do not yield much and carry interest rate risk like we have not seen in years. Consider other methods to protect portfolios against sudden, major loss, and get in sync with the market environment that greets us to start 2022. Specifically, one that tends to reward shorter-term rotation among market sectors and segments, and makes buy-and-hold investing much tougher to execute, at least for now.

[Read: What Is an Accredited Investment Fiduciary — and How to Become One.]

Investors Split from Advisors

How the stock market begins the new year is uncertain. Historically, January has ranged from kind to cruel and everything in between. Regardless of what you are doing in your practice right now, there is a somewhat invisible threat you did not have to deal with previously. It’s the whisper among retail investors of all types that financial advisors are either overpaid or not useful. There is enough survey evidence to support that threat.

It does not take much imagination to see why this is a growing concern for the traditional financial advisor. Retail investors are, at their core, consumers. Consumers look for the best value for their money and tend to gravitate toward major brands, due to their perceived safety.

If you run a boutique investment firm, you are the “mom and pop” retail equivalent of what hardware stores, drug stores and movie theaters used to be. The difference now is that folks are not debating over products they can pay for with the cash in their wallet. You are a big-ticket item and their phones are blowing up every day with your greatest enemy: temptation.

How do you prevent your clients from getting anxious about you and running to more immediate-gratification solutions, like the advisor whose clients had better performance than you provided in 2021? It includes addressing the items above, but it surely does not end there. Those issues are global, impacting many or even most advisor-client relationships in 2022. But at the personal level, between you and your clients, it has more to do with having frank, proactive, deep discussions about the moment in time we find ourselves in.

Get them to open up to you as the trusted advisor you are. When they are armed with this additional insight into some confusing investment issues that you’ve clarified, you can remind them why they hired you in the first place: because being a fiduciary goes beyond the obvious, and includes thinking about their personal situation as much or even more than they do.

Some may question your value amid this emotional, speculation-driven climate, but you are in the proverbial catbird seat here. You have a direct line of access to your clients to have these pivotal discussions. That’s better than any pop-up ad on their smartphone.

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The Top 3 Wildcards Advisors Must Consider in 2022 originally appeared on

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