The current environment of high inflation, an aggressive Fed and cratering asset prices has created an unprecedented environment for financial advisors. Many are dealing with circumstances that haven’t needed to be dealt with in decades. Vance Barse, the Founder of Your Dedicated Fiduciary, which manages a number of family portfolios, is one of those folks and joins the ETF Think Tank to offer his insights into how advisors can navigate these waters.
Barse said that his firm is not experiencing any panicked calls from clients, but there is very much a sense of “what should I do now”. He sees fear levels that are incredibly high and isn’t sure when current issues, such as when are Chinese ports going to open and when will oil supply start balancing out demand, are going to be solved. In many cases, it’s going to take time and none of us knows the outcome.
He does see some clients willing to dabble in alternatives for the first time. The biggest key in implementing this within client portfolios is due diligence. Performance chasing can be incredibly dangerous and some of that is already happening within commodities. Barse notes that when clients try to roll money into past winning strategies, it usually doesn’t work out. It’s important to assess with clients if their overall objectives are still the same or if some type of life event or risk tolerance change is affecting how they invest. The conversations he’s having have not necessarily been uncomfortable, but he has had to lay out various scenarios and actions to take for some.
Some of Barse’s conversations have specifically had to do with bonds. With the 60/40 portfolio performance now looking similar to 2008, it’s important to answer the key questions first. For example, does the client have enough cash to survive the near-term. From there, he can move the conversation towards goals and risk tolerance. He tries to paint the bigger picture. If there are issues, the conversation pivots to risk management and hedging and how that can help protect against downside volatility. Again, he tries to lay out scenarios and potential actions for clients.
Other key takeaways:
- Why aren’t more financial advisors embracing ETFs as a structural solution? Barse believes that some simply don’t understand how they work and how they can be better than mutual funds. Some are overwhelmed by the sheer number of ETFs out there. Policy statements may not allow for it. Barse says there is some advantage to using mutual funds in how advisors can tax loss harvest and potentially save clients a lot of money. The ability of mutual funds to distribute capital gains during down markets may be a challenge this year.
- Many are trying to figure out where inflation will be next month, but the level of tea leaf reading can lead to unhealthy speculation. It’s impossible to figure out what OPEC might do to impact oil supply. With respect to clients, Barse says that if he has a client in a proper asset allocation, they should be willing to ride out some of the short-term volatility. If there is a material change in their life or a change in risk tolerance, then it’s time to make adjustments.
- Barse sees a real paradigm shift on inflation. The Fed is trying to cool demand to solve a supply side problem. So far, we haven’t seen volatility hit a level that would be consistent with past bear market bottoms. He sees continued volatility ahead.
- Changing demographics could affect how the economy changes in coming years. We have an aging population. It looks like population growth has plateaued and is coming back down. That means fewer people to work. Barse thinks we could see elevated inflation relative to regimes over the past two decades. This is coming up in a lot of his client conversations.
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