Financial advisers think clients will increasingly switch their savings into investments as inflation eat away at their cash, but Chelsea’s Darius McDermott said there is no easy alternative.
According to a study of 100 advisers by Investec Wealth & Investment, 70 per cent think an increasing number of clients will consider moving capital out of cash and into other asset classes over coming months.
This comes as figures from HM Revenue & Customs published yesterday (3 May) showed investors were continuing to favour cash Isas over their stock and shares equivalents, even though many were suffering losses after inflation.
Of the 108 financial advisers questioned by Investec, almost two thirds think the continuation of low rates on cash deposits during a time of rising inflation will alter clients perceptions of cash as a ‘safe haven’.
This comes as CPI inflation was shown to have jumped sharply over the past year, reaching 2.3 per cent in February 2017 from 0.3 per cent at the same time last year.
Mark Stevens, head of intermediary services at Investec Wealth & Investment, said: “Whilst interest rates had remained at historic lows for eight consecutive years alongside negligible rates of inflation, cash has retained its reputation as a safe if rather unexciting asset class."
But he said rising inflation means patience with cash will start to wear thin as they see their deposits shrinking in real terms, meaning clients will move higher up the risk ladder to try to scoop up a decent return.
Mr Stevens said the increasing role that inflation will play in determining returns, means advisers will have to carefully manage client expectations.
Since June last year, average Cash Isa rates have halved to 0.43 per cent from 0.87 per cent.
Darius McDermott, managing director of Chelsea Financial Services, said: “Cash has been so poor for so long and now we have this spike in inflation which means you’re losing money in real terms.
“While there is a maturing rate cycle in the US, there is still no indication of a rate rise in the UK,” he said, pointing out that growth in the British economy is beginning to stall.
While he said Brexit has not yet hit the UK economy, he said the divorce from the EU is likely to cause further delays to a rate rise, meaning cash returns – which are currently at record lows – are not going to get better any time soon.
But Mr McDermott said people still need cash for their short-term requirements, adding: “From a financial adviser’s point of view, it’s important to keep some liquid assets.”
Yet he described the low rates and mounting inflation as a “double slap” for people with cash savings.
“The challenge for advisers now is what they should invest clients’ cash in,” he said, adding gilts and government bonds used to be the go-to safe haven asset, but yields are currently very low with few bond funds now offering a decent yield.
He said multi-asset funds might be another option for investors which a lower risk tolerance, pointing to names such as Premier, Schroders and Jupiter, which all have multi-asset “one-stop shop” offerings.
“If you can face higher risk then your next option is equities, but they don’t look cheap either on their relative history either.”
“There are no easy answers,” he said, adding some advisers might have to have a conversation with clients about reassessing their risk tolerance.
katherine.denham@ft.com
