Mickey Morrissey, head of distribution, Smith & Williamson Investment Management
Market volatility this year has been evident for all to see. Investors have experienced the quickest falls across major equity markets on record as COVID-19 has swept across the globe. Since then we have seen a bounce in markets. But what can advisers do to reassure clients in the aftermath of such an event, and with so much uncertainty about the outlook?
This question doesn’t need to be difficult to answer as we believe returning to basic fundamental investing is key, namely diversification and time horizon. It then should be about communicating this effectively to clients.
Be diversified
Diversification across asset classes, geographical regions and investment products is important. It was evident from the recent market volatility that not all asset classes or geographical regions fell at the same speed or rate. A well-diversified investment portfolio will have helped ensure that conversations with clients started with a more reassuring tone than what they may had heard the night before on TV, regarding the FTSE 100, as opposed to what they had experienced in their own portfolios. While diversification does not make a portfolio immune to market movements, we know that its aim is to smooth volatility.
Diversification across investment products was also important with open-ended property funds once again gating under pressure. In our Managed Portfolio Service we have avoided open-ended property funds since inception, instead favouring investment trusts which trade on the stock exchange. With dividends under mounting pressure, we decided at the most recent rebalance of our portfolios at the end of April to reduce our property exposure and were able to do so thanks to holding property investment trusts over open-ended vehicles.
Long-term time horizon
A client invested for the long-term, in excess of five years, has the time horizon to ride out the volatility, which is crucial in the sort of situation we have experienced this year. Above all there is no need to panic sell. This, after all, turns a paper loss into a crystalised loss.
Client communication
Communication to clients through volatile markets is essential. Understanding the proposition you have put in place with your DFM and communicating this clearly and frequently is important.
Regular weekly updates on both the markets and any changes that are being considered regarding asset allocation can be communicated either by email or, as we have seen in recent weeks, via conference calls using the myriad of technology systems that are available. These have been well received and by all accounts engagement from advisers has been extremely high. Importantly, this arms advisers with information that they can pass onto clients who understandably may be feeling nervous due to the volatility of markets. Having said that, it is important to remember that advisers may have been contacted by a number of wealth management companies in recent weeks with this sort of information and therefore the relevance and quality of what is produced is paramount.
None of the above should hopefully prove to be overly challenging but getting it right for the end client can be the difference between retaining and losing them. Let’s not forget the basics in what is becoming an ever more complicated investment environment.
Disclaimer and risk warning
This article is for professional investors only. By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Investment does involve risk. The value of investments and the income from them can go down as well as up. The investor may not receive back, in total, the original amount invested. Past performance is not a guide to future performance. Rates of tax are those prevailing at the time and are subject to change without notice. Clients should always seek appropriate advice from their financial adviser before committing funds for investment. When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.
