Top advisors calm clients with IPS

So far, 2008 has been an interesting year for Canadian investors. The S&P/TSX Composite Index saw a drop from 14,000 to about 12,000 in January alone, and it has since lurched its way to new all-time highs above 15,000. It’s been a dizzying ride and no doubt it has led to some tense discussions with clients — but these are the market conditions that prove the worth of the financial advisor.

“The value of the advisor is not to beat the market, but to help the client avoid doing the things they shouldn’t do,” said Terrance Odean, associate professor at University of California’s Haas School of Business, speaking at the annual Morningstar Investment Conference in Toronto on Wednesday.

The academic says the best thing an advisor can do upon engaging a new client is explain the most common mistakes made by individual investors: under-diversifying; taking a short-term view; and trading too frequently.

In volatile markets, many advisors must remind their clients of these mistakes, as there is a natural tendency to tinker with one’s investment portfolio when troubled times hit.

“If you have clients that are worried, it’s your problem — it’s not the problem of the markets, it’s not the problem of the clients,” says John Horwood, first vice-president and investment advisor, Richardson Partners Financial. “Either they’re worried because their portfolio doesn’t match their comfort level, or you haven’t communicated the investment process to them.”

While communicating the market movements is important, making sure clients are in the right portfolio for them is absolutely vital. Even the most seasoned investment professional can become a little rattled by the whims of the equity markets, but having a proper plan in place makes it easier to deal with jittery clients.

“We need to be a calming influence,” says Jim Rogers, chair of Rogers Group Financial. “So often we get caught up in the very things that the clients are caught up in.”

To be that calming influence, he strongly recommends using an investment policy questionnaire to ascertain the client’s long-term goals. He points out that the average standardized KYC form is “absolutely and utterly” useless.

The investment policy quiz is the basis of the investment policy statement (IPS), which is a useful tool in soothing client concerns. With the IPS in hand, the advisor can ask clients if any of their goals have really changed, and remind them that a down-market is usually the wrong time to sell assets.

“It should be completed in every case,” says Rogers. “You will learn who the nervous Nellies are. Everyone wants a return that outpaces the long-term TSX return, but then you tell them the other side of that: ‘Are you willing to risk your money and in any one year lose 15%?’ and they’re less inclined to do that.”

Instead, he tells them that over the course of a decade, there will be two or three years where the client will not be happy with him at all and another two where they will be thrilled. The remaining years, they will likely not even think about him until he calls them in for their review.

Carl Spiess, senior investment executive and director, financial services, ScotiaMcLeod, agrees that the discovery process for the investment policy statement is vital.

“The big thing is to sit across from the client and ask the question, ‘If your $1 million portfolio drops to $800,000, how are you going to react?'” Spiess says. “You can gauge right then as to what the client says they’re going to do, and then should that happen, you can say, ‘We actually talked about that, and you said you would stay invested, so let’s stay invested.’ “

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.