Embark Investor Confidence Barometer

The cost of living and inflation

Advisers and investors expect rises in the cost of living to have a material impact
Advisers are concerned about the impact it could have on clients’ savings
This is a time for advisers to proactively reach out to clients to help them stay on track

Advisers are worried about the impact on savings

Advisers are pessimistic about the impact that the higher cost of living could have on their clients’ savings. Asked what percentage of clients they are confident will not be forced to adjust contributions or sell investments, most advisers chose the 26-49% range. In fact, over half chose a minority of clients, with only 25% believing that a majority of their clients would be unaffected.
The reasons are clear. Since our last survey, the pressures on households have ratcheted up steadily.

The combined impacts of QE, fiscal spending, and commodity supply-chain disruptions due to the war in Ukraine created a perfect storm for inflation. And, as the rises in energy and food prices have proven to be sticky, the Bank of England has had to raise interest rates several times. That, in turn, has not only hit investors’ portfolios, but also increased mortgage payments and reduced disposable incomes.

Will the higher cost of living encourage people to seek advice? Our survey suggests it will. A 53% majority of advisers believe it has increased the amount of people seeking advice as they recognise their savings must do more. Only 33% of advisers believe it has reduced the number of consumers seeking advice due to pressures on their finances.

Our survey also suggests advisers are reacting to a regime change from sustained low inflation to stickier inflation and higher interest rates. That’s evidenced by the 66% of advisers who report they have introduced inflation modelling into their advice process within the last two years.

Investors are concerned too – some are already cutting back on savings

A clear majority of investors are worried about the impact of inflation on their ability to save and maintain their standard of living. Only 29% of advised clients and 21% of non-advised investors believe that it will have no effect on their savings at all.

The benefits of advice are evident in the finding that twice as many advised as non-advised consumers (28% v 13%) have changed their strategy to target a higher inflation-adjusted return. Since the pandemic, around 1 in 3 advised clients have discussed inflation protection via inflation-linked bonds and commodities with their adviser, while 1 in 4 have discussed infrastructure, REITs and cryptocurrencies. These strategy-focused conversations are encouraging, but the absolute numbers suggest there are opportunities for advisers to have more inflation-focused adviser-client reviews.

Our survey reveals some investors have already made the decision to sell investments or cut back contributions. 29% of advised and 28% of non-advised consumers have reduced or will reduce the amount they save into GIAs and ISAs due to the higher cost of living. While it is reassuring to see that fewer investors are prepared to reduce their pension contributions, the fact that 14% of advised and 10% of non-advised investors have reduced or will reduce this critical part of their tax-free savings is a concern.

“This is a challenging time for investors looking to strike a balance between protecting long-term savings and investments whilst maintaining living standards, at a time when household costs are rising steeply. Each household will have different circumstances and therefore may need an individual solution and clients will be looking to their advisers to guide them through the options available.

Advisers can work with clients to make the right compromises by, for example, supplying the illustrations that show the impact that reduced pension contributions would have on their retirement pots. Equally, advisers are sympathetic to the heightened pressures on household finances and the need for certain clients to provide for the ‘here and now.’ The critical thing is to have conversations early to discuss the options and agree a plan. By reviewing the full financial picture, advisers can help clients maximise the most tax-efficient options and consider the timing of any essential sell downs.”

Jackie Leiper
Chief Executive Officer, Embark Group