5 Client Concerns About Inflation

Inflation: A New Reality

From the gas pump to the grocery store, rising prices are hitting Canadians hard. In June, the national inflation rate reached 8.1%—the largest year-over-year increase since 1983.¹ Investors are understandably concerned. While most Advisors are used to talking about inflation, until recently, those discussions largely focused on it as a financial planning risk—a potentially complicating factor built into long-term strategies. Now, elevated prices are a reality, and conversations have shifted to its everyday impact, from monthly budgets to retirement plans. Consequently, some Advisors are fielding questions that they’ve never received in their career. Here are some tips for navigating those important conversations.

Client Question #1: How long will high inflation last?

There is always an element of macro- and global economic analysis in sound portfolio construction, and though most Advisors are not economists, that doesn’t mean you can’t help clients make sense of the big picture. When it comes to answering those questions, your best resource is to consult your in-house economist, if one is available to you, or third-party research, which can provide a valuable independent perspective. Being well-read—and not limiting your research to one source—is essential. Not only will it make it easier to tackle client questions, but it will also inform and improve your portfolio recommendations.

Client Question #2: Is it time to sell off and re-enter the market when inflation has cooled down and markets are less volatile?

One of the single greatest value-adds I admire in the Advisors I work with on a day-to-day basis is their ability to provide objective guidance. As you know, clients can be very emotionally connected to their portfolio—it’s their money, after all, earned through hard work or an inheritance from a loved one. As an investment professional, on the other hand, you’re able to see the whole picture without feelings getting in the way of rational decision making. First, being aware that clients may react passionately to fluctuations in the market is crucial. And second, as a tool in your arsenal, loss aversion theory can be an instructive concept. It centres around cognitive bias of gaining vs. losing, meaning clients will have twice the emotional response to losses as they do to gains; if they’re down 10%, they may feel like they’re down 20%. But on the upswing, there’s no such disproportionality—which is why Advisors so rarely get ‘thank you’ calls from clients when their portfolios do well!

One way to temper client emotions and keep people invested for the long term is to include vehicles that offer a steady stream of income. For example, a “get paid while you wait” approach utilizing dividend or covered call strategies may make it much easier to endure market downturns. And they’ll also be less likely to want to sell off if they’re receiving regular monthly or quarterly cash flow. Think of it like a rental property—if monthly payments are still coming in on time, an owner is unlikely to want to sell, even if the market value of the property has dipped.

Client Question #3: Central banks are hiking interest rates to fight inflation. How do I deal with that double whammy?

For clients with, for instance, a variable-rate mortgage, the combination of inflation and rapidly rising interest rates is particularly rough. No question, emotions can play a role here as well. The key message to get across is that this isn’t going to last forever—the cycle will level out, and we’ll return to a more normalized market environment just as we do when equities fall, bottom out, and then rise again.

Client Question #4: What kind of market rebound can I expect when this is all over?

In my experience, eternal optimism seems to be an inherent quality of investment professionals. But when it comes to providing hard data—and instilling confidence in historical market performance—a stalwart tool for a meaningful discussion is an Andex® Chart. Over the years, events cause markets to correct—but as the charts show, in the long run, recovery follows downturn, and ‘the line’ keeps going up. Another practical resource is BMO’s Big Picture app, which provides a historical perspective in an easy-to-use, on-the-go, interactive format. It’s a convenient way to see, for instance, how a balanced portfolio or GICs have done over the last 70 or 80 years.

Clients—and investors in general—need to be helped to understand that there will always be noise in markets; some reason not to invest. But sitting out only guarantees that an investor could effectively see zero return in the long run.

Client Question #5: Is there anything I can do to supplement my cash flow and avoid dipping too far into my savings?

The short answer is “yes.” When inflation is as high as 7% or 8%, it can be difficult to find investments that can match or beat it. But solutions with a built-in inflation hedge at least help to close the gap, which is why it’s a great time for dividend strategies. Income investing isn’t just for retired clients—it may also appeal to younger investors looking for tax-efficient cash flow² from their TFSA to help with mortgage or car payments. A product with, for instance, a yield of 3-5% and a chance to benefit from companies’ voluntary dividend hikes over time may offer a strong offset against rising prices. When you have an opportunity to receive income and grow capital, it just makes sense. Covered call overlays are also important tools to build more yield into client portfolios.

Equity income strategies that are receiving heightened interest from Advisors include:

Please contact your BMO Global Asset Management wholesaler for any support and guidance.

¹ “Consumer Price Index, June 2022.” Statistics Canada, July 20, 2022.

²As compared to an investment that generates an equivalent amount of interest income.