Help clients avoid knee-jerk investment decisions

By Vikram Barhat | August 4, 2010 | Last updated on August 4, 2010
3 min read

The loss of investor confidence is a predictable public response when the financial tide turns against continuous wealth accumulation. Too often it triggers knee-jerk investment decisions with investors, later settling into resigned expectation of low growth.

So what can advisors pass on to their clients at a time like this? Advisors say they want to see investors play an active role in planning and be more informed.

“The difference between those who benefit from these temporary setbacks and those who miss out is largely a question of investor behaviour,” says Rod Tyler, a financial advisor with PEAK Investment Services in Regina. “Actively following the financial planning process, combined with regular discussions with their advisor, allows them to feel more certain that they are making the right financial choices.”

Prem Malik, a financial advisor with Queensbury Securities in Toronto, says he knows a bad financial decision when he sees one. And he sees them way too often these days. “When you see low interest holdings in the client’s TFSA, you know sound decision-making is not on the agenda.”

Malik’s advice hasn’t changed. He says a financial plan is even more important in this environment than at any given time in his career. “[It’s] important to have a plan that identifies short-, mid- and long-term goals and investment portfolios for those targets.” The focus, he says, is on understanding a client’s goals and coming up with strategies that address their needs and their risk profile.”

Oftentimes, investors ignore the market and park their money in the safest and most traditional asset classes — a strategy as passive as it is poor. Investors need to be more proactive, says Aaron Fennell, senior market strategist, portfolio manager, with Lind-Waldock, a division of MF Global Canada Co. “In reality, investors should actually put more effort into understanding the new economic reality and act to capture profits from these large economic shifts using new and non-traditional strategies.”

Informed investors demonstrate greater understanding of complex strategies and tools, and that frees the advisor to work in a more sophisticated way, says Fennell.

Engaging clients in discussions about their financial goals is another effective way to prevent reactive decision-making.

“I believe the constant communication, the regular updates to written financial plans and the well-crafted risk reduction strategies will reduce worry and increase confidence,” says Tyler.

A trusted advisor helps his or her clients to sift through the constant barrage of news headlines and determine what is really important to them. “This continuous sober second thought is the most effective antidote to knee-jerk reactions during market storms,” says Tyler.

Malik couldn’t agree more. “I bring up the plan and continue to remind them why we invested in those funds and for what investment reason.” There are times, however, when it is difficult to persuade, or dissuade, clients. “If the client is still adamant, I do request that we change the financial plan to encompass their change of mind, and we take it from there.”

One thing advisors have to remember is that they are custodians of their clients’ wealth. “It belongs to them and not us, and it is important to respect this fact at every moment of the client/advisor relationship,” says Malik.

Although experts recommend the use of a trusted financial advisor, some investors would rather go it alone. These self-managers are actively engaged in making their own investment and financial decisions. “They are likely to learn certain lessons, adapt and move on, with some degree of success,” says Tyler.

Those without a disciplined process will eventually seek professional advice to help navigate the choppy waters of financial markets.


Vikram Barhat