Rising Rates Are an Opportunity for Financial Advisors

You’ve heard the news. Interest rates are up. When financial advisors’ clients hear that, they think about mortgages and certificates of deposit. Advisors’ minds quickly drift to what a mess their bond portfolios are turning into.

At least, that’s where their minds should be going.

Because whether you use bond funds, bond SMAs, 60/40 or 40/60 allocations, or other types of balanced investment strategies for your clients, they have one thing in common: They may not be as good as they were for at least a decade.

You can rehash the same justifications about “asset allocation” and “diversification” that make different types of bonds part of the club, but this is not the past 40 years. It’s an environment where rates are not just rising, but they are doing so from some of the lowest levels in history.

That math is a problem, but it doesn’t have to be.

Alternatively, it can be the very best time of your career to gather assets. Because we are in an era where, if you like peanut butter and jelly, you’re going to have to live without the peanut butter for a while. Stocks will do what stocks do: Go up and down a lot, and ultimately outperform bonds. But unless your clients want the potential risk that comes with today’s nosebleed valuations and unstable political and economic climate, you’re going to need more than just a “long” stock portfolio.

Fortunately, there are a few ways to not only fight back, but win more assets in the process. If there were ever a time to feature the uniqueness of your asset management approach, this is it, if you can avoid standing still like many of your competitors. Here are a few ideas to consider:

— Slow it down.

— Speed it up.

— Diversify like you mean it.

— An opportunity to stand out.

[SUBSCRIBE: Get the weekly U.S. News newsletter for financial advisors. ]

Slow It Down

Financial advisors and their clients look all over to find ways to reduce the impact of stock pullbacks like we had earlier this year. They look at gold, bonds, cash and even cryptocurrency. They pile into energy, utility or consumer staples stocks, hoping that those sectors will provide refuge from the broad market decline. Rather than travel down those well-worn paths, how about doing something more straightforward: Invest in things that, by their design, should go up when the market goes down.

Many advisors know what inverse ETFs are. But in addition to those, there are many gradients or levels of “defensive” ETFs. Some combine equity upside with tail risk protection, and others are more directional. Either way, it makes sense to research them and consider if and where they belong in your portfolios.

Speed It Up

Today’s markets just don’t reward patience like they used to. It seems easier to make, say 7% to 10% in a month or two investing in a market segment, than make 30% over 18 months. It didn’t used to be that way. But it is, thanks to algorithmic trading, retail investors flooding the market with activity, and those low interest rates forcing many to try something different. Tactical investing, as it is called, is as much art as science. And this is a great time to take some art lessons. You don’t have to learn how to be a swing trader. More and more alternative investment managers are coming onto the scene, without having to resort to illiquid hedge funds or private placement funds.

Diversify Like You Mean It

How many investment segments do you consider owning, if they are at an attractive price? If your answer is three — stocks, bonds and cash — you may be leaving a lot of opportunity on the table. Frankly, you also risk having your clients determine after the fact that you should have developed, or accessed someone else’s, deeper research process. Even though the stock market often moves as if it is one big wave, dragging everything in its path along for the ride, there are periods in which sector and industry selection can add a lot of value.

In a period of rising rates, speeding up your investment process through tactical management will not replace that stability role of bonds on its own. You need to combine it with a more diverse set of market areas to tap at times when they are in position to reward you, even temporarily.

As an example, its not just about owning tech stocks. Within tech is software, fintech, cybersecurity, robotics, semiconductors and other sub-sectors. That’s just one example of literally hundreds. Those include commodities, currencies and even bonds. Yes, bonds, the very asset class whose bashing is the central theme of this article. “Owning bonds” is no longer a productive part of a modern portfolio. But today’s markets allow you to rent just about anything, even investments that are sensitive to interest rates. As an example, the price of long-term U.S. Treasury bonds may be in a period of secular decline. But along the way, there will likely be 10% to 20% counter-trend rallies that fit the description of a tactical position, as described above.

An Opportunity to Stand Out

No matter which avenue or path you choose, the key is that you confront the problem. Pretending that we are in an interest rate environment that is normal for today’s investors and financial advisors is to deny reality. Your clients will thank you for being on the leading edge of what may be a multi-year problem — low and rising interest rates.

Hopefully, they will go beyond the accolades, and tell their friends and family that their financial advisor is different, and is truly in tune with today’s complex and challenging markets.

More from U.S. News

How to Find a Financial Advisor for Estate Planning

Advisors’ Guide to Capital Gains Taxes and Tax-Loss Harvesting

Tax Advice for Independent Financial Advisors

Rising Rates Are an Opportunity for Financial Advisors originally appeared on usnews.com

Related Categories:

Latest News

More from WTOP

Log in to your WTOP account for notifications and alerts customized for you.

Sign up