In all the turmoil of this global financial crisis, one thing seems to have gone largely unremarked.We got an inkling of it late last year, at the Investment and Financial Services Association conference.The chief executive of Colonial First State (CFS), Brian Bissaker, said that the level of inquiries to CFS’s call centre was no higher post-June 30, 2008, than in previous years.
On the other hand, Ian Silk, chief executive of Australian Super, said that one place you wouldn’t want to be in late 2008 was the call centre of an industry super fund. The Australian sharemarket was down by more than 40 per cent in calendar 2008, and the typical balanced super fund lost more than 20 per cent in value.
Investors in CFS funds have had much the same experiences as investors in Australian Super.So why the difference in the reactions of investors? Where are the unitholder action groups suing fund managers and financial planners? Where, in short, is the general, population-wide panic? I contrast the past calendar year with what I saw in 1987, when the sharemarket fell by 42 per cent in a month. Then, it really felt like something, somewhere, had snapped, and the world had broken.
This time, the economic and financial impact of the crisis is immeasurably greater, but – or is it just me? – it feels like investors have taken events much more in their stride.
Perhaps we’re all like the boiling frog – the creature used by Macquarie Bank in 1989 to explain why a slowly rising Current Account Deficit would eventually overwhelm us all and why we wouldn’t respond to it in time. (The analogy was that if you drop a frog into a pan of cold water and slowly heat it to boiling point, the frog will happily swim around, unaware of the rising danger, until it cooks.) This crisis built up gradually – there were warning signs – and the decline of 40-plus per cent took a year. We made mental adjustments and rationalised things as the market slipped ever lower. Some of us had time to respond, or to reassess strategies. Some of us just boiled.
Simmering amphibians aside, there are probably a number of other reasons for the different reactions in 1987 and 2008. For one, many people have been exposed to investment markets much longer now than in 1987. Compulsory super came into effect in 1992; some fund members, therefore, have been experiencing the ups and downs of investment markets for the better part of 15 or 16 years. But I think the main reason is that this time around, a far greater proportion of investors and fund members have had contact with financial planners.
That explains both why CFS and Australian Super have had such different experiences, and why the general public is far quieter than in previous financial calamities. Most money that sits in CFS funds has been placed there on the advice of planners; most of the money in Australian Super is there because it has to be, and very few members have consulted a planner. One of the notable characteristics of each of the Financial Planning Association’s Value of Advice Awards last year was the time and effort each of the winners said they put into educating their clients. That’s not to say that they try to turn each and every client into an investment expert, but rather, that they go to great lengths to make sure investors know what can – and will – happen from time to time when they invest in volatile, growth-orientated investment markets.
When the equity market plunges, or when the value of a super fund declines, their clients suffer exactly the same financial loss as everyone else in the same investments. However, because they understand that these events are not just possibilities but probabilities, when they happen they are less inclined to panic, or to thrash around looking for someone to blame. And educating clients isn’t a one-off deal; it requires consistent, ongoing and often repetitive communication to reinforce the main points and place what’s currently happening in a broader context. Perhaps one of the greatest services that financial planners have provided to the community, then, is exactly this. Planners have acted as a most effective circuit-breaker between financial market calamity and public hysteria.
How do you put a dollar value on that? How do you communicate to the public that the greatest value a planner can add is not choosing Fund A over Fund B, but the provision of broader, more holistic and not immediately quantifiable services? Most people think they need to have a lot of money to invest before a financial planner can be bothered to see them, and that the only reason to go to see a financial planner is to get investment advice. But as the Value of Advice Awards confirm, the product element of financial planning is merely a by-product of the larger, more important and far more valuable development of sound strategic advice, sound (and ongoing) client education and effective communication.
There are still rogue elements in the planning business that give everyone a bad name. Inappropriate advice, commission-hungry product-floggers and the reckless use of debt are still blights on the landscape. But overall, the majority of planners should be given much more credit for what they do behind the scenes.
Simon Hoyle
simon.hoyle@conexusfinancial.com.au
