The Challenge of a Rising Rate Environment

By Dan Greene | January 22, 2024

The Stall: How 5% CD Rates are Impacting Your Advisors

For more than 5 years Advisors have had a steady flow of leads from clients seeking higher yields on short-term cash. It was a simple conversation for all involved. For bank-based Advisors, clients came in with cash to invest or to roll over a CD and their immediate response was disbelief- “I can only get .5% on my money?” That question was quickly followed by, “What alternative do you have?” This has been the driver of referrals for some time.

The Dawn of a New Day

Inflationary pressures have clearly changed the game. One of the top challenges we are hearing from our mass affluent-focused clients across the country is how to address this issue. Advisors are struggling with clients feeling 5% is a decent return, especially since they have been living with historically low short-term rates for the past 5 years. And from the client perspective, this is sound logic. Let’s consider their perspective:

Short-term Cash Yields: “An increase on Short-term Cash yields from .5% to 5% is a huge win!”

Economic Uncertainty: “I am worried about the Economy.”

Political Instability: “The upcoming US elections, the war in Ukraine, conflict in the Middle East - maybe this is time to sit on the sidelines until there is more certainty in the world.”

These issues are all legitimate concerns. And they are compounded by an aging demographic that is generally becoming more risk averse regardless of their financial situation (let’s talk about the truisms of Behavioral Finance and “Loss Aversion”).

The Challenge: Controlling the Narrative

The challenge facing Advisors in this environment is how to change the narrative. While “Rate” is a factor in choosing an investment, it is most certainly not the only issue. We feel strongly that in the current environment Advisors have a significant opportunity to differentiate themselves if they can broaden the conversation beyond just “Rate.” 5% rates may feel good to clients but, is that what is truly important? Advisors must be equipped to pivot the Rate Conversation to a broader conversation focusing on the keys to making sound investment decisions. Advisors must be able to have a cogent, collaborative conversation that helps clients understand that on a relative basis the game has not changed… short-term rates of 5%+ (while historically attractive in recent memory) are still losing on a real return basis.

Exposing the Advice Gap

The key to success in this new environment is equipping Advisors to transition the conversation from “Rates” to “Outcomes”. Again, Behavioral Science tells us that humans are by nature risk-averse, 5% in “risk free” cash is highly compelling. The result of this GAP is Advisors capitulating to clients and letting them take the path of least resistance. Staying in cash may feel good today but history clearly shows it is not a sound long-term strategy for most investors. The result is lost opportunity for the client and declines in flows to Managed Money options.

Four Key Questions

To evaluate if your Advisors are equipped to thrive in this environment, ask yourself these questions:

Are our Advisors well-equipped to help clients make wise decisions and avoid the “Rate Trap”?
Do our Advisors have a clear conversation framework that enables them to help clients overcome their Behavioral Bias to seek conversative solutions that would prevent them from reaching their long-term goals?
Do our Advisors have 3-4 key questions that help them shift the conversation from “Rates” to what is truly important?
Can our Advisors effectively position the long-term value of our Managed Money solutions as an alternative to cash?

NEXT STEPS

If this topic resonates with you - you are not alone. It is an issue that we at Greene Consulting are hearing every day. Challenging times create inflection points - opportunities to break out from the crowd. We welcome the opportunity to share our point-of-view on how to address this issue and equip your Advisors to meet this challenge and deliver the right solutions to your clients.