Ultra-low interest rates limit choices for conservative investors.
Sure, they could move into riskier investments they may not be able to stomach, pay a premium to be in a guaranteed product, or simply accept they won’t keep up with inflation. None of those options has mass appeal.
And even people with risk appetite won’t see adequate returns from traditional investments, because artificially low rates and the sheer volume of investor capital flowing into markets conspire to inflate asset prices.
These days, finding income forces everyone farther along the risk continuum.
Such conditions call for clear-headed counsel, yet regulators signal there’s little reason to be confident in our advice infrastructure.
Suitability rules say conservative clients must own low-risk investments and require conservative allocations for both registered and non-registered accounts, even if that’s tax inefficient (sometimes it’s better to hold fixed income in registered accounts, for instance).
Some firms even require advisors to get special dispensation to put seniors into higher-risk investments.
To create confidence, politicians, investor advocates and regulators argue we need more directives and enforcement, even if they duplicate what exists.
Yet if you’re reading this, you likely don’t just comply with the law—you go beyond it. You’ve got lots of designations, disclosure documents and discovery strategies. You know asset allocation isn’t a paint-by-numbers exercise.
You don’t need more regulation.
Instead, you need investments that work in volatile, low-return environments while still protecting clients across long time horizons. (Perhaps investor advocates could push governments and manufacturers to find ways to make these products affordable.)
You also need compliance departments and regulators that reflect current risk-reward paradigms in their guidance.
And you need to tell clients what they’ll be giving up if they hoard cash. Explain that focusing on never losing money means they might run out. Help them to understand not just investment risk, but also those risks stemming from longevity and portfolio concentration.
And then balance those needs to determine their true profiles. If they’re still highly risk-averse, enumerate the higher fees they’ll pay for peace of mind—clients may deem them worth it.
Great advisors consider both macro and micro concerns, regroup when market conditions change and go beyond checking boxes when it comes to risk.
Such foresight can’t be legislated.
Since 2009, the Bank of Canada’s key interest rate has been 1% or lower. It fell to 0.25% in April 2009.
CSA Staff Notice 33-315—Suitability Obligation and Know Your Product, IIROC Notice 09-0087, and Best Practices for Product Due Diligence do not discuss diversification.”
– Mark Yamada in “Regulators don’t understand diversification,” Advisor’s Edge Report.
Melissa Shin is editorial director of Advisor Group.