With markets becoming increasingly volatile, Rick Eling, investment director at Quilter Financial Planning, says there are key steps advisers can take to help clients navigate the changes.
Eling says: “The market environment has been kind to us, Covid inspired dips aside, for several years. Most asset classes have gone up and some such as US growth equities, have gone up dramatically. We are seeing signs of change and markets are becoming increasingly volatile. Given the returns experienced over the last decade, many clients will become unsettled by this latest bout of volatility. Valuations were looking toppy and it remains to be seen if this is a bit of froth being taken out of the market or a full-on correction.
“As such there are some key themes advisers will want to pay attention to in order to help guide clients through the noise. Now is the time to help clients keep their heads and remember why they have invested in the first place.”
Eling says advisers should make sure clients have the right risk level and should ensure they understand what their typical asset allocation will be in terms of a basic bond/equity split; how much their portfolio should follow the equity markets up and down; what a ‘bad year’ for markets might be and what the plan to do if and when that bad year occurs.
Advisers should avoid trying to market time with risk, which Eling labels a “disastrous approach.”
He explains: “It can be tempting to think that given equities have performed exceptionally over the last six months and bonds less so, that the ‘smart’ thing to do right now is drive clients up the risk scale. This is a disastrous approach. Advisers must remember to always come back to the basic, fundamental characteristics of each asset class. Bonds are always lower risk than equities and we shouldn’t expect otherwise.
“The risk/reward ratio does not alter based on short-term returns. If a client is being moved from medium risk to high risk because of any reason related to perceptions of short-term opportunity, then that is just bad advice and could result in a lot of pain.”
According to Eling, the focus on equities can often distort a client’s perception, with the expectation that their portfolio will have gone up and up in line with equities.
Eling says: “This plainly isn’t the case for the vast majority but there is a perception gap that needs to be addressed. Client education remains key to ensure they start invested over the long-term.”
Eling believes advisers will also need to brace themselves for difficult conversation with clients.
“Those are periods when clients worry the most and advisers can add the greatest value. If markets do have a bad run, then advisers need to be on the front foot with clients having tough conversations about staying invested and sticking to their plans.”
Conversations with clients will also need to focus on real, concrete information and ignore the noise around daily market moves.
Eling comments: “Unfortunately for us, stock market movements are unpredictable and as such advisers need to focus on what is noise and what is real, concrete information that can be used to help with portfolio choices.
“Understanding the bias or slant a portfolio has will often go a long way to explain its performance, good or bad. Dig a little deeper and you can provide clients with solid evidence to help put them at ease.”
Finally, advisers should not allow clients to be tempted by cryptocurrency, despite the hype surrounding those.
Eling adds: “We need to call out the danger the crypto industry presents to investors who rely on money to grow sensibly and sustainably for their retirement.”
