As markets begin to show signs of volatility and technology stocks drop, Rick Eling, investment director at Quilter Financial Planning, has offered six tips to advisers to help them deal with client conversations around their investments.
“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,” Eling said.
“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’s six tips for advisers are:
1) Make sure the client has the right risk level
The client’s risk profile is the ‘one decision to rule them all.’ If it’s wrong then everything else is wrong. Risk is king and it is the advisers are the ones who help clients pick a risk level. In this environment it’s even more important for advisers to check that clients are in the right risk profile. Advisers should clients 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
- What they plan to do if/when that “bad year” occurs. If their answer is “sell” then they either need a recap of the basics or they need a lower level of risk.
It is vital to check these things now before any sustained downside appears. It’s too late to fix it afterwards.
2) Don’t be tempted to ‘market time with risk’
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.
