As inflation continues to soar above the Bank of England’s 2 per cent target, and the cost of living rises, how should financial planners position their clients' assets?
Speaking on the FTAdviser podcast, Justin King, chartered financial planner at MFP Wealth Management, said the UK has seen much higher inflation rates in living memory, therefore advisers should always be planning for these eventualities.
“A proper planner will have already been thinking about this when they’re doing their cashflow modelling and their retirement planning, probably factoring in a much higher rate,” he said.
Philip Martin, managing director at Unique Financial Planning, agreed, adding it was still unclear how inflation would feed through to portfolios.
“In cashflow modelling it would be perfectly normal for financial advisers to be modelling a number of different scenarios in any event,” he said.
“We don't know how inflation is going to feed through into investment returns, what really matters is the net returns in accumulation rather than the absolute level of inflation.”
He added: “We could be in a position where the gap between the two, therefore the net real return, is broadly stable.”
Christian Tomaszewski, financial planner at Timothy James & Partners, said there was still an entire generation which has not experienced interest rates above 10 per cent.
“There is going to be a whole generation who are going to be shocked when suddenly their mortgage rates go to 3 or 4 per cent and they’ve committed to a plan of low interest rates and low inflation,” he said.
He added he did not think clients have truly felt the impact of rising inflation yet.
“I don't feel that clients have truly felt the effect of it, and it's just a narrative among the finance community, I don't think the real cost of living has hit the clients
Martin said the industry needed to think more long-term when it comes to inflation.
“We have got to stop reacting to short term moves in the markets that over the medium to long term all empirical evidence shows will eventually smooth themselves out.”