Recessions can be tricky periods with more than their fair share of challenges to overcome. They can tighten the collective belt as households seek savings and a reduction in outgoings.
The UK narrowly avoided entering recession in late 2022, but a recession is still expected to occur in 2023 as the economy contracts after a difficult period of high inflation and rising interest rates.
Your clients are likely to have already experienced two previous recessions this century and there is no reason to expect this one to be any different. However, if your clients are worried about their short-term futures, then seeking the right advice could help assuage those concerns.
Read on to discover five shrewd ways your clients can protect their wealth and navigate the looming UK recession.
1. Your clients should consider reducing their outgoings
Excessive or expensive outgoings can very quickly cause issues when the affects of a recession begin to be felt. As much as your clients might not want to make cuts, it could be a smart move during uncertain times.
However, there are alternative ways to save, such as pursuing the benefits of fixed-fee advice.
Typically, financial advisers charge on a percentage-based charging structure, which could see your clients lose out over time. For example, if your clients invest £250,000 with a traditional financial adviser charging them 1% of that amount each year, over a period of 10 years they might see their investment grow to £500,000.
In that time your clients’ fees have doubled, even though their advisers are doing the same amount of work. Fixed fees look to correct this issue by offering a fee structure that is based on the actual work done (adjusted for inflation), so even if your clients’ investments double, their fees won’t have changed in real terms.
The savings made by this switch could help your clients avoid making regrettable budget cuts to essentials like pension contributions or insurance premiums.
Financial advice can offer long-term benefits. The International Longevity Centre discovered that individuals who work with a financial planner are, on average, £47,000 better off than those who don’t.
2. Your clients should consider the safety net of an emergency fund
Recessions can be unstable periods that typically see rises in unemployment and surges in redundancy.
An emergency savings fund can provide your clients with reassurance and a valuable safety net should the worst occur, and their income is disrupted.
They would typically want at least three to six months’ worth of cash set aside in an easy access savings account, ideally with the best possible interest rates, to provide for emergencies.
Their contingency fund should cover essential bills such as:
- Rent or mortgage payments
- Utilities
- Healthcare emergencies
- Regular household outgoings such as groceries.
Once their fund is set up, it might be worth your clients investing any surplus cash to potentially protect them against the negative effects of high inflation.
3. Your clients could protect their income with insurance
As mentioned, a recession is likely to mean rising unemployment and job losses. It is particularly concerning as This is Money reports that more than 25% of UK households would struggle to cover their household bills within one month of losing their main source of income.
Protection could provide emotional and financial relief should your clients find themselves without work or facing the possibility of redundancy.
The cost of any cover is dependent on your clients’ health and lifestyle, as well as the desired length of coverage for any protection.
The most expensive income protection policies can cover your clients’ annual income through to retirement.
A policy might be an additional expense, but the added peace of mind and financial protection shouldn’t be underestimated.
4. Your clients should review their debt obligations and get ahead of any potential issues
Rising inflation typically prompts a move to increase interest rates as a response to encourage saving. The rising rates can be beneficial for savers as interest on tax-efficient savings accounts like ISAs are likely to increase.
However, rising interest can be detrimental to anyone exposed to variable-rate debts.
If your clients have a loan, credit card, or mortgage, they could see their monthly instalments rise sharply as interest rates increase.
Consolidating loans and credit cards under a fixed-interest agreement could help protect your clients against the risks posed by increasing debt repayments.
Similarly for mortgages, it may be beneficial for them to consider a fixed-rate mortgage instead of a variable rate.
5. Your clients should make any investing choices in a calm manner
Investing in the stock market is typically a riskier venture than leaving funds in savings, but investments could offer returns that are potentially better equipped to help your clients mitigate the negative effects of high inflation.
Recessions and market instability can be scary terms for investors. They can elicit emotional, knee-jerk reactions as investors seek to reduce potential losses.
It is a psychological bias known as “loss aversion”, which states that the pains of losses are felt by people twice as hard as the joys of gains.
The words “sell, sell, sell” might reverberate around your clients’ minds as they refresh stock market indices on their computers.
But it is vital that they remember that a recession isn’t the same as a market crash. Stock prices are unlikely to nosedive in the short term and are more likely to ebb and flow.
Recessions can prompt the market to become increasingly volatile, but in doing so they can also be very lucrative. Many typically high-value stocks could see their prices go down, allowing your clients to buy more shares or fund units for a smaller investment.
Over periods of 5, 10, or 20 years, this strategy could reap your clients’ significant returns when the markets eventually bounce back.
If your clients have any worries about their portfolios, they should consult a financial planner to discuss the best steps to protect their investments.
Get in touch
Recessions can be stressful periods as finances are put under added pressure. If your clients are worried about their short-term futures, they should seek advice by contacting us at info@grey-parrot.co.uk or calling us at 02039 871782.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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