Floating rate deposit products are new to the financial advice industry and their appeal is gradually becoming more apparent. Financial planners have traditionally chosen short-term fixed rate deposits for their clients, usually within the 90- to 180-day investment period. In the institutional market, most investors have preferred bonds or floating rate deposits when allocating their fixed interest investments, and they often invest with a much longer horizon.
Determining which type of deposit to select – and when – largely depends on how you see interest rates behaving over the investment term. It’s similar to the way you might consider a home loan or other debt – but in reverse. If you or your clients agree that rates are rising and have decided to fix home loans or other debts to protect against rate rises, a floating rate deposit will enable your clients to automatically take advantage of interest rate rises, and you don’t have to roll your client base every 90 days to create the same effect.
Similarly, if you and your clients agree that it’s time to let their home loans float at a variable rate to take advantage of falling interest rates, locking in a fixed rate deposit – or a floating rate deposit with a minimum rate option – could protect the client’s income stream. Other considerations include the client’s preferred investment term and their anticipated need to access some or even all of their funds prior to the deposit reaching maturity (which should be less of an issue in the accumulation phase).
Join Steve James on the No More Practice Money Masters course to learn more about the change in investment thinking around fixed and floating rate products and earn CPD points.
Long-term investments need long-term solutions
If your client’s asset allocation strategy is completed, and there is at least a two-year investment horizon – for example a self-managed super fund investor in the accumulation phase, or a retiree who depends on the interest income – then choosing to set the deposit for a longer term will usually ensure a higher interest rate margin on the deposit, and will provide certainty for your client.
Where possible, taking a longer-term view can help you provide better returns for clients, and can also bring deposits back into the strategy conversation. This can add real value to clients, while reducing the administration time spent on continuously rolling over client deposits every 90 days.
What’s your view on the best balance between fixed and floating rate deposits? We’d love to hear your thoughts – email Steve James, Head of Adviser Distribution Investor Sales for more information at S.James@cba.com.au
Learn more about the CBA Floating Rate Deposit Product by taking the Money Masters Course.
