That is why it is imperative for you to convince clients that staying invested is in their best interest. In fact, by heading for safety, your clients can « end up worse off, » cautions Craig Fehr, Canadian investments strategist with Edward D. Jones & Co. LP in St. Louis.
Fehr advises that you help your clients « separate facts from the fear and emotions » that typically are associated with weak market conditions.
« You constantly have to reinforce that it doesn’t matter what’s in the news today, » says Kevin Sullivan, vice president and portfolio manager with Montreal-based MacDougall MacDougall & MacTier Inc. in Toronto. « It’s where you’re going to be five to 10 years from today. Essentially, [clients] must be able to filter out the short-term noise in the marketplace. »
Staying invested is still the preferred strategy of financial advisors, says Sullivan, who also holds the chartered strategic wealth professional designation. He cautions that investing for the long term has come under increasing pressure because of sharp market corrections over the past three decades, including those in 1987, 1994, 2000-02 and 2008-09.
Staying invested, Sullivan says, thus becomes a « question of conviction and courage » for many clients. As a result, he adds, some clients end up « buying high and selling low. »
Hartman advises that the question of staying invested should be addressed « by setting expectations right up front. » The discussion about long-term investing should take place « early in your conversation with clients, » he adds – not after a market event.
Thus, it is crucial to gain the trust of your clients. The key to gaining that trust, says Fehr, is to demonstrate that you use a carefully tested process of selecting good-quality investments that are intended to provide solid, long-term returns. Fehr notes that you must be able to articulate clearly what the selected asset mix is designed to do and – more important – what it is not designed to do.
Given that market performance cannot be predicted accurately, Sullivan recommends telling your clients that their portfolio might « go off-course » every now and then because of changes in market conditions.
For this reason, periodic portfolio adjustments are necessary, Fehr says, whether these adjustments are made quarterly, semi-annually or annually. These adjustments will be driven by performance expectations and are not necessarily due to market volatility or uncertainty.
The bottom line is that you must be able to convince your clients that high-quality investments based on sound financial advice will help to achieve your clients’ goals.
It’s also key, adds Fehr, to inform your clients that you are looking out for their best interests.
When constructing your clients’ portfolios, advises Sullivan, it is important to show clients how the markets have behaved over extended periods. This will provide your clients with an understanding of market ups and downs over various time frames, and reduce the possibility that clients will overreact during periods of uncertainty.
Hartman adds that clients need reassurance that the markets generally will settle down to produce higher returns following periods of declines.
It helps when discussing market performance, Hartman says, to « make it personal » by quantifying what a client could be losing by staying out of the markets and choosing only fixed-income investments. This discussion could include demonstrating the effects of inflation on the lower returns that such an investment strategy is likely to produce.
Hartman notes that a client’s personal rate of inflation – based on the cost of the particular products the client consumes – could be much higher than the federal government’s official rate.
When deciding on your clients’ long-term asset mix, you should use various model portfolios to demonstrate potential performance outcomes. Such portfolios must be based on the unique risk profiles, time horizons and objectives of each client, Fehr says, and must recognize that « one size does not fit all. »
While you should make it clear to your clients that past performance will not necessarily be repeated, Sullivan says, the recommended portfolios must be tested to provide comfort to each client that there is a reasonable chance of achieving the returns you are projecting.
« Your goal, » say Sullivan, « is to show clients that you have a disciplined process that will help them achieve their objectives without panicking during market downturns. »
By consistently using these techniques, you will have a greater chance of convincing your clients that staying invested in uncertain times is more likely to increase their long-term returns.