“At this stage more than any in my career, our conversations with clients have to be really personal. We encourage planners and their clients to be really open about how they feel and their objectives. It is time to get up close and personal.”
With that in mind, advisers could do well to consider the human behavioural biases that can have a large impact on an individual’s investment decisions, particularly when markets are down. John Dani, national manager for advice development at ipac, says the flight to cash being experienced in markets now is the primitive man equivalent of hiding in caves when faced with a new event never confronted before.
“Hiding in their caves in an investment sense is being in cash,” he says. Dani believes there are three driving behavioural traps behind the cash investments. The first is loss aversion, where people have a stronger tendency to avoid losses than seek gains.
“If there is a clothing sale with 30 per cent off prices then you can’t hold the doors down, but if you apply that to markets and say prices are 30 per cent off [on] the sharemarket, people don’t see an opportunity to buy,” he says.
The second behavioural bias is saliency, where people tend to look at recently observed events and overestimate the likelihood of it happening in the future. For example, if there is a shark attack, people won’t go to the beach the next day. The third is herding. “The stockmarket is an interesting beast, but it is not a foreign entity that makes decisions or has an intellect. It represents the buy and sell decisions of millions of humans, who all suffer from behavioural weaknesses,” he says. “It takes a lot of courage to go against the herd.”
These three things are all coming together powerfully and driving the flight to cash. In recognition of the difficulty in changing thousands of years of hard wiring, and in anticipation of times such as these, ipac has quarantined two to three years of clients’ portfolios into cash so they don’t have to crystallise assets – and this has provided some resilience for clients.
While the markets are down, it is important for advisers to know their client base. For some, in the drawdown phase, the current market conditions may mean they need to temper their spending and defer lump sum expenditure. But for other groups the situation is different. Dani says clients that are very young and have money in super should be euphoric about today’s markets.
“This is a time where they can acquire assets at a very low price; they don’t need to access it for at least 20 years, so what happens in the next 20 days doesn’t matter. Similarly, for those around 55 years of age there is still a lot of time, so we would encourage them to gain the courage to stay with their long-term asset allocation.”
Farrelly agrees the appropriate cash allocation is different for each person depending on their circumstances, and for some it could be a “negative allocation”, or borrowing of money. “If you had the income to meet all the interest payments I would be encouraging borrowing to put money in the market,” he says. “The asset allocation process I go through is looking at what you are getting for what you are paying.
At the moment my calculations are [that] over 10 years you can get about 11 per cent per annum for Australian equities; one year ago that 10-year forecast was about 6 per cent a year.” Farrelly says if clients have the ability to look long-term then it shouldn’t matter about the current crisis and how it will be fixed. And he says planners need to encourage clients to look longterm.
“Planners are overly concerned about the short term, but they should be worried about the long term. Even when you are a retiree you should be looking out 10 years,” he says. “Cash of itself, I can’t say what the appropriate allocation should be; so much depends on the individual.
But everything else being equal, if you had 30 per cent in cash, then you should reduce that to about 15 per cent; there are so many good deals out there if you can take the volatility.”
In the past six months, since launching its term deposits in April, BT Wrap has seen more than $1.3 billion flow into that product, which Craig Lawrenson, BT Wrap head of product and strategy, says blows every other product on the wrap out of the water.
“The largest funds manager relationship BT Wrap has is just over $1 billion, since operation, and this has received more than that since April,” he says. Platforms are the facilitators of the investment advice process, or the outputs of advice, not the inputs.
So from that perspective, what allocations flow into which products is a direct reflection of the advice process. “These flows into the term deposit are reflective of the timing. At the beginning of the year advisers were saying there was demand for capital stability, and term deposits have turned into a sexy thing of the future because of the rates,” he says.
Within four to six weeks of the initial demand, the product was on the wrap and in the first month gained flows of $90 million, with the current peak of August seeing $390 million in flows into the term deposit. In addition, the traditional working cash account has gone from about 8 to 11 per cent of the total book since April.
