Inflation debate divides wealth managers on advice to clients

March 19, 2021

An intense debate over whether inflation is poised to return has divided wealth managers into two camps: don’t sweat it, and time to worry.

Advisors are watching closely as economists argue whether the government’s unleashing of more than $5.3 trillion in pandemic aid over the last 12 months will turbocharge the economy and fuel a protracted rise in the price of everything from groceries to lumber. Inflation erodes the value of an investment portfolio by requiring more money to buy consumer goods and by further grinding down returns from bonds, a mainstay of most retirement portfolios.

Americans have hoarded, so far, an estimated $1.5 trillion of cash from the government’s first two stimulus checks and from savings amassed due to reduced spending and unemployment benefits. With a third, $1,400 check making its way to taxpayers, there’s plenty of pent-up consumer demand itching to flood into the economy once the pandemic lockdown lifts.

That makes “the inflation question top of mind for most advisors today,” says Stephen Lee, a partner and chief investment officer of JFS Wealth Advisors, an RIA in Hermitage, Pennsylvania.

Consumers are sitting on a mountain of cash, hoarded during the pandemic lockdown.

Consumers are sitting on a mountain of cash, hoarded during the pandemic lockdown.

Bloomberg News

And for markets and investors as well. A Deutsche Bank strategist, Jim Reid, told Barron’s on March 17 that investors were Googling ‘inflation’ at a rate not seen since search engine tracking began 13 years ago. “There is little doubt that concerns and interest around inflation are growing exponentially,” he told the magazine.

Former Treasury Secretary Lawrence Summers rang alarm bells when he predicted last month that the flood of pandemic relief, the largest emergency federal aid in decades, “will set off inflationary pressures of a kind we have not seen in a generation.”

So is it time for financial advisors to freak out?

Patrick McGinnis, a CFP and CFA at Moneta Group Investment Advisors, an RIA in St. Louis, Missouri, says no.We’ve been talking about inflation coming back for 20 years,” he says. The Federal Reserve, he adds, “has a lot of tools today that they didn’t have in the ‘70s when there was hyperinflation, so we’re not as concerned and not recommending anybody reallocate” assets in their portfolios.

Treasury Secretary Janet Yellen, a former Federal Reserve chair, said March 14 that the inflation risk was “small but manageable.” Currently around 1.3%, a historic low, it’s well below the Fed’s target through 2023 of around 2%.

In the worried camp is Jim Braun, president of Tri-State Retirement, an RIA in Florence, Kentucky. “We have been urging clients to get into safer funds until the dust settles.”

He says that in recent weeks, 70% of his high net worth clients have shifted money out of stock funds and into cash reserves or principal protected funds. He says he likes to see a minimum of 25% of a portfolio in those mutual funds, which protect investors against the loss of their original investment (but can also come with hefty fees).

A Bank of America survey this month of 220 fund managers who manage $630 billion in assets found that inflation was their number-one fear, with 37% citing it as the top threat to markets and 93% expecting higher inflation within the next 12 months. Their fear of inflation topped concerns that the Federal Reserve might dial back its monthly asset purchases and that the pandemic itself could further dent things.

Gold, along with real estate and some bonds, are seen as a traditional haven during times of inflation, but they may be less popular this time.

Gold, along with real estate and some bonds, are seen as a traditional haven during times of inflation, but they may be less popular this time.

Economists generally agree that inflation will pick up once the pandemic lifts. The question is by how much and for how long, with a lasting uptick potentially bad news for client portfolios.

The scary headlines are triggering for older investors who remember the inflation crisis of the 1970s and early 80s, when the price of consumer goods spiked nearly 15% and mortgage interest rates topped 18%. “A lot of clients” who are age 50-84 “ask, what’s the silver bullet to protect me against a rise in inflation,” says John Cummings, a partner at Williams Jones Wealth Management, an RIA in New York. “They remember.”

What they forget, according to a Feb. 11 note from InvestorPlace, an independent financial research firm, is that “rising inflation and rising stocks tend to go together because they are both frequently caused by economic growth.” Cummings says he advises clients to avoid TIPS (Treasury inflation-protected securities), which act like bonds -- themselves an asset class that Ray Dalio of Bridgewater Associates, the world’s largest hedge fund, calls “stupid’ for its “ridiculously low” returns.

Karen Altfest, a CFP and executive vice president at Altfest Personal Wealth Management, an RIA in New York, says that though she sees an inflationary threat, she’s not urging clients to shift assets into traditional inflation-protected havens like gold, dividend stocks or real estate.

While JFS’s Lee says that “we believe inflation is a risk,” it’s not “our pants on fire.” He adds that he’s advising retirement-age clients “not to overreact” but to reduce their exposure to bonds to perhaps 30% at most and increase their holdings in commodities, real estate and energy stocks.