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Advisers urged to think differently about inflation

Advisers urged to think differently about inflation

Financial advisers need to take a different approach to protecting clients from higher inflation, according to Tilney's head of financial planning.

Andy Cowan said advisers will typically prepare a portfolio for inflation, with the assumptions made based on the official published headline inflation rate, usually the consumer price index.

But Mr Cowan said the goals many investors have, and the spending habits they pursue, tend to be in areas where inflation is much higher than the national rate.

He said the inflation rate experienced by the better off is far higher than that experienced by poorer people due to their consumption habits.

Mr Cowan said the wealthiest 10 per cent of households have seen overall inflation of 64 per cent since 1997, compared to 50.7 per cent for typical households and 53.8 per cent for lowest income families since 1997.

He cited the example of school fees, which have risen by much more than inflation in recent years, while food and other day-to-day items that are a more substantial part of the budgets of lower income households have not increased to the same extent.

Tilney said the annual rate of inflation is 4 per cent, while rate for the typical household using the state education system is one per cent.

Mr Cowan said the impact of higher inflation on higher income households means advisers, whose clients more typically come from better-off households, need to prepare portfolios for a higher rate of inflation than the Consumer Price Index.

He said: “To give an example, take someone in the top 10 per cent of UK households by income, investing £100,000 over a 20-year period, with the aim of generating a return of 3 per cent (net of inflation).

"If this household was to plan for the UK average inflation rate of 2 per cent, rather than the 2.5 per cent experienced by the top 10 per cent, they would miss their saving target by £16,749.48.”

Tilney’s data is based on analysis of official data releases from the Office of National Statistics (ONS). The 20 year time period was chosen to mirror the period since the Bank of England was made independent and became responsible for inflation.

Jonathan Davis, who runs Jonathan Davis Wealth Management in Hertford, said he has been gradually increasing client exposure to assets that perform well when inflation is rising.

He said this is largely because inflation has been rising.

In order to prepare clients for higher inflation he has reduced exposure to government bonds and assets with exposure to the US dollar, and instead invested emerging market equities, energy company shares and general global equities.

david.thorpe@ft.com