How RBC Wealth Management is handling inflation

Howard Kabot focuses on the long-term. That’s his job as VP of financial planning specialists at RBC Wealth Management. He leads a team of planners working directly with high net worth clients to develop strategies that can work for years, decades, even generations. As much as his team thinks and works long-term, when clients come with a short-term issue they have to address it. For much of the past 18 months, they’ve been having conversations around one topic: inflation.

Inflation, and the subsequent central bank hiking cycle, has sent many clients for a spate of worry. While Kabot’s team has faced concerns around portfolio performance through bear markets and bond sell-offs their clients aren’t immune from the budgetary impacts of inflation either. Kabot’s view, through this period, is to contextualize any economic blips within a long-term plan.

“We’re seeing more immediate attention being paid to the inflation assumptions we use in our plans. That’s interesting because prior to this period that assumed 2-3% inflation figure didn’t get much attention,” Kabot says. “We would put that percentage in for the lifetime of the plan and people didn’t give it a second thought…In the last 18 months it has become a focus point for clients who want to understand how we’re using inflation in the plan, how we’re building in expectations long-term, and what the long-term impact will be of what really is a short-term phenomenon.”

Kabot believes that though inflation has spiked and remains somewhat persistently above 2% target levels, it should come down in the near future and when mapped out over a 30-40 year financial plan the average inflation level won’t change much. The plans his teams build account for those long-term rates of inflation. Moreover, they build alternative scenarios including the possibility of long-term inflation. Clients are made aware of those scenarios as they set up their plans.

Given the time horizon of the plans Kabot’s team builds, the most extreme long-term inflation rate they calculate for is 3%, which he notes would represent a marked elevation away from most recorded economic history.

When clients come to his team worried about an elevated inflation rate, RBC’s planners can take them through how their plans are set up and what choices they can make to deal with any long-term consequences. He notes that in terms of asset allocation, his team’s plans have managed to deliver solid rates of return. When clients raise issues around monthly budgets or cashflows, sometimes a short-term tweak is needed but usually the time-horizon is enough to smooth out any temporary concerns.

As advisors face similar questions and concerns from their clients, Kabot believes the strongest foundation you can speak from is a long-term plan. If a plan doesn’t exist that can put a client’s goals in the context of long-term inflation projections and the possibility of different return profiles, it’s time to build one.

“Our philosophy is ‘let’s put a plan together,’ Kabot says. “Let’s understand what your short-term needs are, what your mid-term goals are, and what your long-term goals are. Let’s put those on paper, let’s run the numbers, let’s do the cash flows, let’s see all the inputs and look at the outputs. If we can put that on paper it brings the anxiety level way way down.”