Interest Rate Worries Driving Advisor Portfolio Changes, Study Says

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Worries about rising interest rates is the biggest factors driving advisors to make changes to their clients’ retirement income portfolios in 2014, a new study finds.

"It is a huge driver in the industry now," says advisor Dean Harman, founder of Harman Wealth Management in suburban Houston. The prospect of higher rates “has pushed a lot more money into equities.” Harman says that in response to anticipated Fed policy changes, he has been pushing clients more into equal-weight funds, negative-duration bonds and senior floating rate bonds.

Nearly eight in 10 advisors (79%) indicated that the chance of a jump in interest rates this year is the biggest reason for their expected portfolio adjustments, according to a report released Jan. 2 by GDC Research and Practical Perspectives, two consulting firms serving the financial services sector. The 155-page report -- "Retirement Income Insights 2014: Using Products and Providers" -- was based on an online survey conducted in November 2013 with more than 600 financial advisors and representatives.

More than eight in 10 of the advisers polled (81%) said they were at least somewhat interested in new solutions to manage the impact of rising interest rates. Interest varied across advisor channels, though: only one in 10 RIAs said they were "strongly" interested, compared with 40% for advisors in other channels. Participants in the survey included wirehouse and regional brokers, independent brokers, financial planners, RIAs and bank/insurance representatives.


Lee Rosenberg, founder of American Investment Planners in Jericho, N.Y., says he has been reducing his clients' exposure to bonds in preparation for higher interest rates. He has also been utilizing more convertible bonds that have equity-like features, along with floating-rate and short-duration funds.

"We’re adjusting our portfolio because of the bond market," says Rosenberg. "The average financial planner is reducing bond exposure."

Overall, the vast majority of advisors in the study (82%) reported optimism that the retirement income portfolios they manage are prepared for a higher interest rate environment. RIAs said they were the most prepared, with 43% saying they "strongly agree" that they were ready for policy changes from Washington.

While most advisors surveyed were open to trying new retirement platforms in 2014, a lack of understanding on these offerings may be a strong obstacle to overcome. Two-thirds of advisors indicated that complexity of products (67%) was the biggest challenge when it comes to utilizing new retirement income solutions, with nearly half (49%) saying more education and training is needed. RIAs are less challenged by complexity of new products than other types of advisors polled.

Other highlights from the GDC report include:

  • More than 70% of advisors reported an increase over the past year in the number of retirement-income clients they serve.
  • Advisors using an income-floor approach have the greatest confidence in achieving their clients’ investment-related goals.
  • Advisors indicate that use of variable annuities will continue to increase in 2014 but at more muted growth rates than in previous years.

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Practice management Financial planning Retirement planning Fixed income