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Avaloq: Wealth managers can help millennials avoid ‘rate hike rashness’

Avaloq: Wealth managers can help millennials avoid ‘rate hike rashness’ | Fintech Finance

Andreas Diener, Head Product Manager for Wealth at Avaloq, discusses the techniques wealth managers can deploy to help millennial investors through an unfamiliar rising interest rate environment.

The Bank of England hiked interest rates by half a percentage point on Thursday, the biggest increase in 27 years. It is the sixth rate rise since December last year, before which rates were at a record low of 0.1%. The pace is likely to be unsettling to millennial investors, the majority of whom have never experienced a sustained rising interest rate environment.

While the BoE may see this action as necessary to prevent spiralling inflation from becoming embedded, interest rates haven’t increased at this rate since the period from July 2003 to July 2007, when the base rate rose from 3.5% to 5.75%. Most millennial investors entered the market following the 2008 financial crisis, an era marked by rock-bottom interest rates. The impact of rising rates on millennials’ portfolios will be unfamiliar and could prompt rash reactions focused on negating short-term pain.

Don’t just tell them: show them

Wealth managers need to convince their millennial clients to keep a level head and either stay the course for the long term or sensibly adapt their strategy to the new environment of high inflation and rising rates. But how should advisers go about these conversations? The fact is that wealth managers don’t just compete on ideas: they also have to convey these ideas to investors in a way that is clear and convincing.

Millennial investors are generally comfortable with digital technologies and are likely to engage with and understand portfolio visualizations and animations better than other communication tools. If clients see strategies and recommendations in a visual model, with different rising interest rate and inflationary scenarios, they can more quickly appreciate the wealth manager’s rationale. That will make it easier for them to trust the proposed strategy.

However, this also invites more speculation. Investors may ask about how their portfolio will perform under more challenging conditions and wealth managers must be prepared to answer ‘what-ifs’ on the fly. Those who can proactively show clients, in real-time, how different scenarios affect performance will have a much better chance of building confidence in the strategies they present.

Advanced data visualization tools

Real-time communication requires modern analytical tools to process, collate and present data in a visually appealing format. Data modelling can create tailored projections of how an individual’s portfolio may react to rising rates and rampant inflation, as well as more extreme market environments including recession, even on mobile and tablet devices. At the same time, wealth managers can leverage artificial intelligence to power hyperpersonalized portfolio recommendations based on investor preferences, behaviour and lifecycle analysis.

Ultimately, data-driven models can be the greatest aid in helping millennial investors see beyond the headlines and encouraging healthier investing behaviour that delivers on individual financial objectives. For wealth managers, this new environment is also an opportunity to build stronger relationships with millennial clients and introduce them to new asset classes and investment opportunities that are better suited to rising interest rates.

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