When it comes to strategic balance sheet management, here's a financial question you should consider now: What does 1 percent mean for you?
In June 2017, the Federal Reserve raised its benchmark rate by a quarter percentage point for the third time in six months. And Fed watchers at Wells Fargo and elsewhere see a possibility of additional rate increases in 2017.
Increases in this key benchmark rate in turn are expected to push up other rates — including rates that could potentially affect your personal bottom line.
"We're encouraging clients to have conversations with their teams now and be proactive about it," says Brian Singsank, Senior Private Banker at Wells Fargo Private Bank.
It's important to talk to your Well Fargo Private Bank relationship manager, CPA, and perhaps even an estate planning specialist, because rising rates may create both financial opportunities and challenges that could impact your balance sheet management strategies.
Positives and negatives
On the positive side, rising rates could lead to higher returns on "cash-alternative" investments and savings, such as certificates of deposit and money market funds.
"If rates do continue to increase, that will be good for savers at some point," says Parrish Peddrick, Senior Wealth Planning Strategist at Wells Fargo Private Bank.
But the negatives of rising rates, such as potentially higher borrowing costs, should also be considered as you fine-tune your balance sheet management approach, taking into account your risk tolerance and long-term financial goals.
Fed watchers at Wells Fargo see a possibility of additional rate increases in 2017.
If you have a variable rate loan, such as an adjustable rate mortgage or line of credit, that rate could go up, resulting in higher interest costs.
"If it's still a long-term funding need, now would be an opportune time to at least evaluate that," Singsank says. One possibility could be to refinance an adjustable rate loan into a longer-term fixed rate loan while fixed rates are still at these attractive levels.
Fixed rates, Singsank notes, "have not moved quite as quickly as variable rates."
Weighing your alternatives
And it's not just your current adjustable rate credit you should consider.
Thinking about buying a vacation home, commercial real estate, or another big-ticket item? Amidst rising interest rates, timing is critical. Your financial team can help you consider whether to wait on financing such a purchase, or if moving sooner might save you some money.
Peddrick cited one client who had the assets to easily pay a large one-time expense, but doing so would have required him to sell securities with a low-cost basis, creating a significant capital gains tax liability. It made more sense, she says, for him to borrow the money.
"We see clients use leverage opportunistically when they don't necessarily need to borrow but find the rates attractive," Singsank says. "They have the comfort they can pay it off should rates rise to levels that are no longer attractive."
Estate planning strategies
As rates start to rise, this is also a good time to consider certain estate planning and wealth transfer strategies, both of which can play an important role in your balance sheet management. Some strategies, especially so-called "estate freeze techniques," work well in low interest rate environments, Peddrick says, but won't be as efficient as rates go up.
One example is a grantor retained annuity trust (GRAT). Assets are contributed to the GRAT and the assets' owner receives annuity payments based on the value of the assets when the trust is formed, plus interest. The IRS sets the required interest rate when the trust is created, based on market rates.
At the end of the trust's life, any return on the assets beyond the interest paid to the owner is given to the trust beneficiary tax-free. Lower rates at the GRAT's formation mean more money can be transferred without the recipient owing gift tax.
As part of your balance sheet management strategy, it's critical to remember that rising rates can have wide-ranging financial effects. But Peddrick and Singsank point out that by historical standards, we've enjoyed low rates for a long time and will likely continue to do so, making the use of well thought out leverage still a compelling choice for clients.
Even with a 1 percentage point increase, "We're still at historically very attractive rates," Singsank says, "so review your alternatives with your advisors."