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Inflation anxiety: Three ways advisors can curb client fears

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This year we emerged at the other end of the tunnel after two years of uncertainty due to the pandemic, just to be thrown straight back into another kind of uncertainty.

This time our villain has a different name: Inflation.

With UK inflation rising to a 40 year-high, we have all been feeling the financial pinch as food, energy, gas, home and rent prices seem to keep skyrocketing. The news has been alight with stories of how UK families will have to choose between keeping warm and eating this coming winter. Adults over the age of 40 are now asking whether they will ever be able to retire. And small businesses are questioning whether they will survive the next year.

Basically, although we have been given our freedom of movement back, we are being squeezed by the ongoing cost of living crisis and soaring inflation rates.

This has led to huge spikes in financial anxiety across the UK, Europe and the US. People are worried about what will happen to their money, their investments, their retirement funds and with inflation rates still rising, this anxiety is set to stay for a while.

During this time of financial uncertainty, it is important for those in the wealth and investment industry to keep their clients calm and ensure that they help curb as much of their financial anxieties as possible.

Identify and fill any data gaps

With many investors accustomed to more than a decade of low inflation rates, they may be unfamiliar with the effect the current soaring inflation will have. Therefore, it is important to ensure that clients understand the effect inflation is currently have on their investments, the future effects it will have if inflation continues to skyrocket as well as what they can do to best mitigate their risk.

Understanding can tame inflation anxiety.

One of the main ways to ensure your client clearly understands the effects of inflation on their investments is to identify and fill in any data gaps they may have. The data will be able to give you an idea of the cost inflation, supply chain interruptions and other risks the client will have to face in the coming years/ months.

By identifying and filling this data gap, clients will be able to identify which assets are underperforming, how they can improve the returns on idle assets and how they can optimise their short-term cash management. They will additionally have an increased awareness on the potential risks, which will allow them to make more calculated and educated decisions on their steps to mitigate the effect of inflation.

Calculate your clients’ personal inflation rate

The question that a lot of clients will have with the current soaring inflation rates is 'how will this affect my plan?'. The continuing increase in inflation will most likely see clients having to consider whether they want to maintain their current lifestyle, and therefore increase their spending. Or whether they would rather keep their spending levels the same and therefore, make changes to their current way of life. This is particularly relevant for clients that are nearing retirement or are already retired.

Most clients will be unaware that while the media reports inflation rates, these may not accurately reflect the inflation they are personally experiencing. Therefore, it is useful to explain to clients that while the Consumer Price Index (CPI) measures how the prices of goods have increased, it does not accurately describe the impact inflation is having on the client or their household due to the fact that everyone spends money in different ways.

Therefore, to give clients a more personal overview of how they are affected by inflation, help them compare their spending from a year ago to their spending now. Their spending should be divided into the same categories used by the government to track inflation.

Emphasise the track record of stocks and explore diversification

While clients are justified in their feelings of anxiety with the soaring inflation rate, it is important for them to be made aware of the track records of certain assets. It is therefore worth emphasising that for long-term investors to maintain their purchasing power through retirement, stocks have historically been a great wealth building asset.

Diversification of portfolios has also historically proved to outpace inflation in most periods. Therefore, investing rather than cashing out or holding onto money during these uncertain periods is one of the best ways to combat the effect of inflation.

By sharing this historical data with clients, they are more likely to feel more at ease with leaving their money in stocks and investments. However, it is important to remember that clients’ needs differ and therefore, this will not be applicable to clients with shorter-term needs.

During these inflationary periods, wealth and asset managers have an opportunity to deep their relationship with clients and help to reduce their financial anxiety. By taking the time to explain to clients in a way they understand, detailing how they are personally affected by the inflation rates and exploring options, or reassuring that their current plans have a good track record, you will be able to give you clients peace of mind.

Find out more about Impower Incorporating FundForum 2023 here >>

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