The impact of inflation on managing client wealth

The inflation problem

As the economic recovery from the pandemic took hold in 2021–22, it soon became clear that it would have an inflationary sting in its tail. While this was initially dismissed as ‘transitory’, created by short-term supply chain problems, it has since proved deeper and more persistent than policymakers first hoped. The most recent figures for consumer price inflation in Australia show a rate of 5.1 per cent over the year to the March quarter, which is the highest level in over two decades and due largely to higher charges for electricity and gas, and increases in petrol and food prices.

Unfortunately, it looks like there is more pain to come, with the Reserve Bank of Australia (RBA) predicting that inflation will peak at around 7.0 per cent in the December quarter, although by early next year, it is expected to begin to decline. However, the RBA has conceded this outlook could change. Petrol prices in Australia are up by 37 per cent over the past year, adding one percentage point to the inflation rate, and could still go higher.

For some clients, the impact on their short-term finances and their standard of living will be an immediate worry, especially for those in retirement, who spend a greater share of their income on food and fuel. The Association of Superannuation Funds of Australia (ASFA) has said the increased costs of energy, food, clothing, and other household services has already caused the highest annual increase in retiree budgets since 2010.

The ASFA Retirement Standard September quarter 2021 figures indicate that couples aged around 65 now need about $63,799 per year to live a comfortable retirement and singles need $45,239, up by 0.9 per cent and 1.0 per cent respectively on the previous quarter.

Clients will also be concerned about the consequences for their long-term investments and how rising inflation could affect their future plans, especially with the possibility of further interest rate rises almost certain. High inflation has already forced the central bank into action, increasing its cash rate to 0.85 per cent in June with further rate increases forecast. RBA Governor, Philip Lowe, has said the bank is considering a 0.25 percentage point or a 0.5 percentage point rise in official interest rates at its 5 July meeting with further rate rises likely in coming months.

The power of cashflow modelling

Obviously, advisers are well used to dealing with the impact of inflation on a client's finances, but cashflow models also work as an excellent tool to provide reassurance that an individual’s plan remains on track. An adviser can incorporate a client’s assets, investments and income, and project it forwards using assumed rates of growth, inflation, and interest rates along with factors like the client's financial objectives and risk tolerance, to create and compare unlimited scenarios brought to life visually through charts and tables.

A robust cashflow model will clearly show the impact on the plan of changes in inflation, demonstrating how price rises can influence the cost of retirement and whether pre-retirement clients need to take any steps to adjust their long-term investment strategy to meet their lifestyle hopes, or adjust their expectations.

For those already in retirement, the right cashflow planning technology can visually demonstrate the impact of short-term inflation spikes and help uncover where clients are spending their money and any savings that could be made. Cashflow modelling can also show whether capital will be eroded faster in different economic situations, helping advisers and their clients mitigate the impact before it becomes a serious problem.

Driving engagement

We find that the financial advisers who get the most from cashflow modelling are those who use it live and interactively with their clients. Sharing screens and modelling scenarios during client meetings can be a powerful tool to help people feel more connected with their financial future.

Cashflow planning can provide reassurance that the plan is progressing as anticipated, or evidence the need for adjustments to the strategy, providing a visual illustration as you explain the difference changes will make to their financial position in the long or short-term. For those worried about the risks of stock market investment, it can very clearly illustrate the effect that holding excess cash at a time of rising prices can have on the purchasing power of their savings.

Research sponsored by Vanguard on the financial advice landscape in Australia has found that the largest group of Australians who use an adviser are in the 55- to 64-year-old age bracket followed by those aged 65 and over. There are around 120,000 people retiring annually in Australia, and this number is rising. Driving engagement with this demographic during this unique inflationary period will prove beneficial for both your clients and your business. Remember, baby boomers represent approximately 25 per cent of the Australian population and hold about 55 per cent of its total wealth.

Affordable advice key

With greater exposure to the benefits of superannuation than previous generations, younger consumers are displaying a renewed willingness to seek financial advice. As household finances become stretched, now may in fact be a golden opportunity to extend the reach of financial advice to a wider demographic. The pandemic has already forced many people to reassess their financial goals, and rising inflation may encourage even greater consideration of how these plans can be met through savings and investments.

Technology is key to enabling advice firms to serve these new customers efficiently and economically, including those with lower investible assets. It can help demonstrate the real value provided by personalised financial advice, driving the client's engagement with their finances.

Inflation may settle down towards the end of 2022, but the era of inflation being a non-issue is certainly over. Cash flow modelling makes it easy to adjust clients' expectations and, where necessary, their investment strategy. It also makes the conversation much easier.

Nick Eatock, CEO, and Stephen Wirth, head of operations, intelliflo

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.

Neil is also the host of the ifa show podcast.