In this Wealth Planning Update:
2017 is likely to be a year filled with many changes in the United States and abroad. In the U.S., with a Republican president and a Republican-controlled Congress, we may see significant shifts in policy and adjustments to the legislative agenda from the prior administration. Outside the U.S., we are likely to see continued geopolitical challenges, such as the fallout from Brexit and weakness and disruption in the Eurozone.
Over the last eight years, we have seen historically low interest rates in the U.S., but post-election and for 2017, all signs point toward potentially rising interest rates and changing fiscal policy. The Federal Reserve (Fed) raised rates on December 14, 2016, for only the second time since it cut borrowing costs to near zero in 2008. While we believe that the normalization of interest rates may be a slow and gradual process that will likely take years, and not months, the Fed has signaled that it may increase interest rates three times in 2017.1 Given these potential upcoming changes, now may be an opportune time to have a discussion with your wealth team around expectations for rising rates and fiscal policy changes and the impact these changes may have on your personal wealth plan.
The potential impact of a rising-interest-rate environment
Rising interest rates can have a direct impact on three important financial areas: investment portfolios, credit portfolios, and liquidity needs. In a rising-interest-rate environment, investment portfolios should be reevaluated and you should factor in potential associated portfolio risks, including growth in inflation and changes in market volatility. We recommend speaking with your investment professional to help ensure that your strategic asset allocation is aligned with your investment objectives and risk profile.
Likewise, it is important to consider the potential impact of rising interest rates on your existing credit portfolios and future borrowing needs. Many clients utilize leverage as a tool to help address and manage financial goals, such as optimizing cash flow, maximizing tax efficiencies, financing purchases, managing investment allocations, and realizing wealth planning goals. Clearly, the outlook for interest rates may impact how you use credit to address these goals. Also, it is important to consider your liquidity position to help you navigate the potential impacts of interest rate changes and take advantage of opportunities changing rates may present.
We encourage clients to proactively review their wealth plan and related credit needs now while rates remain low. There are a number of important themes to consider in a rising-interest-rate environment:
Credit and liquidity strategies to consider in a rising-rate environment
An effective credit and liquidity strategy should be aligned with your financial goals and broader wealth plan, and the first step in evaluating this strategy is to review your personal balance sheet. Consider these three simple questions to begin a conversation with your wealth team:
Once you have answered these questions, you should have a better understanding of whether you need to make changes to your wealth plan and current borrowing strategies to be positioned to help achieve your short- and long-term goals. In taking a fresh look at the liabilities portion of your balance sheet, there are a number of strategies that you may want to consider.
Review/refinance existing borrowings:
Evaluate/plan for future liquidity and borrowing needs:
Reconfirm your risk tolerance and exposure
Now—while rates remain at low levels—is a great time to discuss these topics with your wealth team in partnership with your outside tax professional and private banking advisor. A leverage and liquidity assessment is an important component of your holistic wealth plan, particularly in a rising-interest-rate environment.
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