When a financial adviser wants to learn about managing money amid rising interest rates, she turns to a veteran colleague who calls himself the “Old Man and the Sea.”

Raymond James Adviser Learns Ropes About Higher Rates From Old Hand

CORRIE DRIEBUSCH

Jan. 20, 2014 5:43 p.m. ET

When Rachel McNeil, a financial adviser with Raymond James Financial Inc., RJF -0.13%wants to learn from the past, she turns to “the Old Man and the Sea.” Not the Ernest Hemingway classic novel, but Joe Blanton, a 70-year-old colleague who has jokingly adopted the novel’s title as his moniker.Ms. McNeil relishes the hour she spends every Monday and Wednesday with the most experienced member on her team. These days, Mr. Blanton and Ms. McNeil’s “morning Joe” meetings are about one topic: how to navigate the risks of managing money when interest rates are rising.

“I haven’t seen this type of period, not as an adviser and also not as an investor,” said Ms. McNeil, 32, who has spent nearly a decade in the financial-services industry and has been a financial adviser in St. Petersburg, Fla., since 2011. “I ask Joe what things were happening last time rising interest rates were an issue, and how can I prepare.”

Many advisers have been through at least one big stock-market swoon. But many haven’t been practicing long enough to live through a sustained period of rising interest rates.

To compensate, these advisers are throwing themselves into research on the topic and reaching out to older advisers for guidance. The firms where many of them work are supporting those efforts with education and awareness campaigns aimed at the advisers and their clients.

Rates have risen for relatively brief periods in the past couple of decades, for instance in 1994. But financial professionals say that the conditions they are girding for now haven’t been seen since the early 1980s—significant rate increases likely to last for several years and affecting prices of bonds and bond-based mutual funds. That brings the risk that investors could be hit with negative returns.

“I’m one of the few who saw the entire move from 1965 to 1982, when interest rates basically went up in a relentless fashion,” Mr. Blanton said. “I think I have a lot of knowledge to impart.”

He is telling Ms. McNeil and other younger advisers who reach out that there is no way to eliminate all the risks that rising rates pose for bonds, but they can be reduced by carefully tending to the maturity of bond holdings, using some bonds with floating rates, using shorter-duration bonds and using some callable bonds, securities that can be redeemed before their stated maturity.

Even with his firsthand knowledge of the last sustained rate climb, Mr. Blanton remains wary of what the next several years could bring. “I feel like I’m swimming upstream like a salmon, but unlike the smaller salmon I have strong fins and gills,” he said. “My fins and gills are well-trained.”

Jim Moore, a 33-year industry veteran now with Wells Fargo Advisors in Clayton, Mo., said he has been approached by several younger colleagues seeking advice. “I do have a leg up,” he acknowledged. “I have a lot of gray hairs to show it.”

His advice is to “accept the fact that you may lose money on your bonds.” He also is suggesting products that can give clients bondlike returns with less interest-rate risk, such as bank-loan funds or floating-rate funds. “They’re certainly not without risks, but in theory the principal will remain stable,” he said.

Mr. Moore sees past increases in interest rates as relative “blips” compared with what we may see this time around when rates, now at near rock-bottom levels, start to rise again. “They were generally short-lived,” Mr. Moore said. One would assume, he added, that “today rates inevitably have got to go higher.”

In the last 30 years, advisers and investors have grown accustomed to consistently positive returns on fixed-income portfolios, sometimes reaching double-digit territory usually associated with more risky classes of investment such as stocks.

For most of the last decade, while stocks plunged and recovered, bonds provided steadier returns. That changed last year, when just the prospect of rate increases brought a drop in prices that hurt many bond investors, surprising even many expert portfolio managers.

Now, a fundamental change in view is needed, advisers believe. “They need to get out of the mind-set that fixed income will provide large returns,” says Brian Rehling, chief fixed income strategist at Wells Fargo Advisors.

“It absolutely concerns me,” says Adam Nugent, chief executive of Salt Lake City-based Foresight Wealth Management in Sandy, Utah. “Our clients are hearing about it, they’re asking us, and we need to have a good answer.”

About six months ago, Bank of America Corp.’s Merrill Lynch, which has about 13,800 advisers, launched a special education campaign. According to Ashvin Chhabra, the firm’s chief investment officer, it is “not a theoretical thing, where we’re publishing a white paper and hoping advisers read it.” Instead, he said it is a “fairly robust” blend of research, adviser-focused calls and meetings. Reaching out to clients with education materials is a key component.The campaign includes sending educational inserts in client statements. The firm also launched discussions with advisers and clients about the characteristics of certain fixed-income holdings and how they will perform in different scenarios.

Wells Fargo Advisors has been making presentations to its advisers on the topic since last year and plans to release a special report on interest rates later this month. The company wants investors to take a long-term view and not simply flee bonds out of fear.

Raymond James also launched a “major campaign,” according to Patrick O’Connor, senior vice president of Wealth, Retirement and Portfolio Solutions. When the company held an internal call last summer, when bond markets were in some tumult, more than 1,000 advisers tuned in. Mr. O’Connor said in his almost 13-year career at the firm he cannot remember a research call ever being so popular.

Older advisers aren’t taking their familiarity with the issue for granted. Thomas Keegan, a longtime adviser who is managing director with Merrill Lynch’s Private Banking and Investment Group, said he and colleagues are poring over research. But reading those reports doesn’t always make up for experience, and he thinks the next year or two will be a wake-up call for many younger advisers.

“I don’t think most people understand or have a decent enough memory to remember a rising-interest-rate environment,” he said. “Most people don’t know what to expect. Everyone who’s been in this business three years, five years, 10, even 33 like me—it’s hard to recall.”