Since there was a large increase in the number of new clients advisors acquired during the 2020 and 2021 calendar years, education assessments, one of the basics of investor planning, may need to return to the top of the list.
A report from Goldman Sachs released in January of 2023 showed that the possibility of recession was kind of, well dubious. "This year our outlook is called 'caution, heavy fog,'" said Sharmin Mossavar-Rahmani of Goldman at a briefing about the 110-page report. "We're trying to give a sense of uncertainty...and we should be cautious about how we proceed."[1] Some advisors are uncertain about the uncertainty. The economy is, as your favorite Nonna would say, “meso-meso,” or in-between for those who don’t speak Italian grandma. Returning to Nonna’s kitchen and her wisdom is valuable for more than mere nostalgia, though we’d give an appendage for another cup of that woman’s coffee. Returning to basics when things are uncertain is both familiar and smart, just like Nonna.
Investors may be weary of any generic advice about the market and investing right now. From their perspective, they listened to months of information about a pandemic ending shortly, only for it to linger on a year longer than expected. They were told that a return to normal would happen, only to have disease variants and supply chain interruptions continue to impact not only their portfolios but their everyday lives. Then came inflation, which may have been the most predictable of the various outcomes that occurred, but not in the manner it was predicted. Instead of a slow rise in prices and wages, like a commuter train moving along its predicted path, inflation took off like a bullet train.
Investors may have forestalled plans until “after the pandemic.” But now that we’ve moved into the phase that is after the “after the pandemic,” clients may be wondering what to do with those plans, and what remains of those savings. According to the Wall Street Journal, “Americans have spent down about 35% of the extra savings they accumulated during the pandemic as of mid-January.”[2]
In mid-2021, the personal saving rate was 14.6%. By the end of 2022, it was down to 3.4% up a smidgeon since June of 2022 where it was 27%.[3] Prior to the pandemic, the consumer saving rate was 9.1%. By way of reference, at the start of the Great Recession, December 2007, the consumer savings rate was 3.2%, nearly identical to the rates mid-2022 to present. Whatever may be said about savings rates, they aren’t great right now. And that may lead to similar problems for clients during the Great Recession: increased debt and decreased retirement savings.
These inflation and savings ups and downs point in a straight line to the basics: Portfolio Review, Rebalancing, Education, Life Insurance. Financial advisors may want to check in with their clients reviewing their portfolios in light of changes to investing laws, like the SECURE Act 2.0, but also because of changes in future costs, like college education and bumps in when reduced funding from social security benefits may occur. In October of 2022, the Social Security Administration (SSA) reported that unless changes were made by 2034, retirees will start receiving a reduced benefit. In 2010, the SSA said that wouldn’t occur until 2037.[4] These ups and downs in when the fund will run out track the economy. “Social Security's old-age trust fund was projected in 2022 to run out of reserves in 2034, a year later than predicted the prior year, after economic growth in 2021 proved stronger than expected.”[5]
Rebalancing regularly, though not emotionally, is almost always a topic clients should consider. As we’ve stated in the past “[i]n fact, most investors don’t rebalance (or readjust) their investments as much as they should. Nearly 90% of investors who don’t work with an advisor fail rebalance their accounts regularly.” Given that investors now often have 24/7 access to portfolio tools and can use online aps to consider the impact of changes to portfolio mixes, discussing rebalancing may slip from top of mind for advisors. Even a simple review of the tools and programs available through your portal may be essential to client strategy in an uncertain market.
New studies show that Americans feel more knowledgeable than ever about retirement planning, thanks in part to greater workplace education efforts. However, those education programs are often tailored towards the basics of 401(k) retirement accounts. In short, clients may not know what they don’t know. Since there was a large increase in the number of new clients advisors acquired during the 2020 and 2021 calendar years, education assessments, one of the basics of investor planning, may need to return to the top of the list.
Many advisors may not need to bring up life insurance coverage with clients: the interest is already there. According to CNBC, “U.S life insurance application activity increased by 3.4% in 2021, following a record-breaking year-over-year growth of 3.9% in 2020, according to the MIB Life Index’s 2021 annual report.”[6] Unfortunately, payouts also increased during the pandemic. “U.S. life insurers paid more than $90 billion to beneficiaries in 2020, a 15.4% increase in payments compared to 2019 — the largest year-over-year jump since the 1918 influenza epidemic….” These payouts may change how life insurance applications and policies work going forward. Clients may also have new or changed health concerns that may warrant a change in life insurance coverage that may impact their retirement planning.
Portfolio review, rebalancing, education and life insurance make up four legs of a comfortable chair. For some advisors returning to the basics may feel too simple. But simply because these steps are familiar doesn’t mean they aren’t also smart. Just ask Nonna.
[1] https://www.axios.com/2023/01/13/goldman-outlook-for-2023-is-foggy
[2] https://www.wsj.com/articles/once-flush-savings-accounts-are-starting-to-run-dry-11675691637
[3] https://fred.stlouisfed.org/series/PSAVERT
[4] https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html
[5] https://www.investopedia.com/the-pandemic-impact-of-social-security-and-medicare-5186940
[6] https://www.cnbc.com/2022/12/01/how-covid-has-changed-life-insurance-underwriting.html
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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