Making Sense: June Q&A

Amy: Hi. I'm Amy Thomas, a strategist here at First Citizens Bank. On Tuesday, June 11, 2024, our director of market and economic research, Phil Neuhart, sat down with executive director of trust and fiduciary services, Phillip Strickland, to talk about some of the concerns our individual and corporate investors are facing across our footprint.

By the way, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only.

Phil: Phillip, thank you so much for taking time out of your busy schedule to be with us today.

You essentially run our trust company. Could you tell us a little bit what that means? What does your organization look like?

Phillip: Yeah, thanks. First, thanks for having me. Glad to be here. You know, our organization really specializes in working with corporate and individual clients. It really runs across the financial footprint from family, large families, small families, nonprofits, universities and other corporate clients. And really, I think our secret sauce, we believe, is working with clients to understand—whether it's a corporate client or an individual client—to understand their specific needs and how we can lead with planning to meet their goals and objectives.

Phil: So among these clients, it might vary, but if you speak generally, what is sentiment like among these clients?

Phillip: Yeah. You know, it's a great question. It's a unique time, I think we would all agree, what we are seeing is reflective across the country and with our client base is a mixed bag. Clients certainly are experiencing—continue to experience for the most part—good financial earnings on the corporate side. Individuals' net worths continue to grow. Markets continue to rally. But there's concern. There's anxiety around, it's an election year. Where are things headed with inflation? How does that impact discretionary spending? And so it's a very unique time in a sense where the financial picture looks really strong for most of our clients, but there is a lot of anxiety around what the next 12, 18 and 24 months has as well.

Phil: Something I keep hearing is, look, my revenue is growing, but my costs are growing as well. And there's some concern around margins, especially around mid to smaller businesses. Unlike the mega caps in the S&P 500 that continue to expand margin, you're seeing some pressure.

Phillip: It's a great callout when we think about how this economic cycle is affecting our client base. Not everyone is being impacted the same, and so it’s why planning is so important. It allows us to tailor-make solutions and conversations around how this market is impacting them individually, because it is unique.

Phil: Right. So in terms of those clients that do have excess liquidity, obviously the rate environment has changed. How are clients thinking about that? Obviously, there's different tranches of liquidity, you know, short term, long term, et cetera. How are clients approaching that?

Phillip: Again, I think a lot of it is dependent upon the organization or the family, but it has provided an opportunity for our clients to make some decisions that that did not exist pre this rate hike.

There's yield to be had, which is certainly good. It's allowing organizations to think through, should I refinance debt even at a higher interest rate because of what I can do and how I can deploy the cash?

So I think it continues to be very client-specific, but it's allowed us to have more conversations around consulting to maximize their accumulated operating capital, both for families as well as for organizations.

Phil: So in that same vein, what about philanthropic clients? What are you hearing from them? How has that landscape changed in in recent years?

Phillip: Yeah. I think it's very dependent upon the type of not-for-profit that we're working with. One callout specifically would be in the university or secondary education space—under a lot of pressure, primarily driven by demographics that have put fewer students entering colleges, as well as a resurgence of trade schools. So the conversations we're having with them is vastly different than some of the other organizations.

But another kind of thematic thing that we have seen across the landscape is really the ability to reevaluate asset allocation. For years, we had seen more aggressive posturing in equity allocations to achieve the spending rates you spoke about earlier. And over the last 12 months with the return of yield, we've been able to have some conversations with clients around what does it mean for their risk profile and their spending rates and how do we maximize, still manage risk, but maximizing their yield? And for many of our clients, it's allowed a slight pullback. Not all, depending on what their individual circumstances are, but it's certainly a conversation that we had not been able to have for a considerable time.

Phil: Yeah. It's true in philanthropic space and even outside of that, just the increase in yields has really been a game changer from an allocation perspective.

Phillip: No. Yeah. There's no doubt about it. It's allowing for—I mean, certainly inflation continues to create pressure—but it's allowing for families and organizations to maximize as we talked about earlier, their liquidity and have some yield.

Phil: So, sort of to change gears a little bit, another business you have within your space is defined contribution, or 401(k)s is what we often think of them as sort of just as retail investors. Are things changing there? What's happening in the 401(k) space?

Phillip: You know, I think there has been with the Secure Act 2.0 coming through COVID and past COVID. Obviously, a lot of legislative changes. Some of the most substantive legislative changes we've seen since ERISA.

And I think a lot of it is being driven about trying to recognize that in our country, we have a need for our employees to achieve retirement. And with the transition over the last 30, 40 years from defined benefit plans to defined contribution plans, there's some pressure on our employees to be able to sustainably retire.

And so, you know, we're working with our plan sponsors to make sure they're aware of some of the legislative changes. One of the most unique changes, I think, is the ability to defer employer contributions or matching contributions in a defined contribution plan on a Roth basis. It's a pretty substantive change that will go into effect. So there's a lot of those types of legislative changes, but our objective is to make sure that we are helping the plan sponsors mitigate their fiduciary responsibility, but at the same time help their employee base achieve retirement. That's why we call them retirement plans and not investing plans.

Phil: Yeah. I mean, when we're on the road, one of the main concerns we hear is just the concept of how are Americans going to retire, right? Now that pensions are such a smaller portion of retirement benefits.

Well, thank you so much for joining us. Really appreciate your time. Thank you for being here.

Phillip: Yeah. Thank you. Always glad to be here.

Making Sense Outro Slide

Brent Ciliano

CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

brent.ciliano@firstcitizens.com | 919-716-2650

Phillip Neuhart SVP, Director of Market and Economic Research

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

phillip.neuhart@firstcitizens.com | 919-716-2403

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