Financial markets received a jolt recently. Bond markets slipped in May and June on the possibility that the United States Federal Reserve might begin to taper its bond-buying program and the sell-off spread quickly to share prices around the world.
While the US stock market resumed its climb to new highs in July, Australian shares bounced up and down – as they have almost daily since the financial crisis began in 2007. The painful result: the ASX 200 Index is still about 25 per cent below its 2007 peak.
We all discuss the market’s volatility at great length during industry gatherings. Yet, there are some financial planners who seem to avoid discussing it with those who are affected most and may understand it least: their clients.
With so many investors in Australia heavily invested in domestic shares – even many retirees are holding upwards of 40 per cent in equities – the volatility of the past several years has caused huge swings in the value of portfolios on a daily basis.
Lately some industry journals have recommended that advisers steer clear of this “tricky” topic with clients. Indeed, the economic outlook is not bullish for share prices. Slower growth is likely after the mining boom peaks.
However, I would argue that this is exactly the time financial planners need to talk to clients about the volatility and its impact on their portfolios.
What is there to say? It’s important to go back to basics. First, it helps to discuss diversification as the basis for successful investing. Trying to explain a high allocation to bonds in a client’s portfolio when interest rates are volatile is tricky; explaining the benefits of a measured exposure to each key investment sector on a long-term basis is much easier – and that may include a strategic approach to the diverse sectors of the bond universe.
Talk about risk tolerance
This is also the perfect opportunity to explain that the portfolio was structured based on the client’s tolerance for risk and an analysis of how asset classes tend to behave. Reassuring the client that the long-term strategy remains in place can calm nerves and provide useful information.
For example, can the client give up some return in the short term for a potential long-term gain? Sometimes financial planners may not be doing enough analysis and segmentation of client types, and these discussions offer a chance to correct that.
PIMCO sent out many communications to financial advisors, discussing the volatility directly. In designing our communications, we try to put ourselves in the financial advisor’s position. I’d suggest advisors put themselves in the client’s position.
Many clients are undoubtedly very confused. No financial theory prepared any of us for the volatility we have seen across asset classes recently. These extraordinary periods require additional communication; it is the key to building and sustaining long-term relationships with clients.
Peter Dorrian is head of global wealth management at PIMCO Australia.
