Financial planners advise, clients decide

In the current climate of economic uncertainty, financial planners who insist clients not make any change need to remember our role is to advise not direct.

There has hardly been a more difficult time for financial planners and their clients than the present.

Economic problems abound worldwide and notwithstanding the recent strength of the Australian economy, these problems have had a severe impact on Australian markets.

Investor concerns

Many investors have seen the value of their investment in equity markets reduced by as much as 50 per cent and investment in property related funds reduced even more.

Investors in an accumulation investment, such as superannuation, have seen fluctuations in value in the past and understand that markets rise and fall in regular cycles, although not as violently as we have seen recently.

If they do not need to draw their funds, they can await a recovery. However, investors who are relying on their investment to provide their income are in a much different situation.

Many retirees draw their superannuation benefits through an account-based pension and conventional wisdom among planners has been to include exposure to market linked funds.

When the value of these investments drop, maintaining the investor’s required income level increases their capital drawdown and compounds the problem that a loss in value can create.

Focus on the client

A lot of energy is spent analysing the cause of the problems and speculating on what may happen next.

A common forecast is that we cannot expect a recovery until at least late 2009 or in 2010. The only certainty is that we cannot change or influence the future directions of the markets.

Our role as planners is to provide advice to our clients and seek ways to alleviate their concerns and provide them with some assurances for the future.

Circumstances such as those we find ourselves in now require a close focus on each client and while maintaining a sound strategy for the long term is most important, an adjustment for the short term may give some clients a greater level of comfort.

FAQs and comments

Clients’ questions are many and varied, and include the following.

• Should I switch to more stable investments?
• Should I revert to cash?
• Will the US sub-prime market impact on my mortgage trust funds?
• I have lost X per cent of my capital, when will the markets recover?; and
• Will I run out of money?

Focus on the effect

We need to analyse the effect on the client’s circumstances. Questions to ask the client should include the following.

• Do you have sufficient cash reserves?
• Has your income reduced?
• Do you have access to your capital?; and
• Has your tolerance to risk in your investment portfolio changed?

One of the major problems, however, is the impact any changes to their investment may have on the recommended strategy and prospects of recovery.

We need to keep in mind that sound strategies should allow some flexibility, and changes can be made in some options without seriously altering the planned outcome.

Discuss the options

Many advisers suggest to their clients that they not make any changes to investments that have been set up with a long-term focus.

This is generally sound advice, but there are options that should be explained to clients.

These include:

• moving all the funds to a more stable option, which will preserve the value but may miss a recovery;
• moving some of the funds to provide more stability, which will reduce possible future losses but provide some benefits from a recovery; and
• reviewing the level of income being drawn.

Clients appreciate knowing what options are available so they can make an informed decision.

Planners who insist clients not make any change need to remember our role is to advise not direct. To provide strategic professional advice is paramount, not a directive based on one simple alternative.

Possible actions

• Protect clients’ income levels and quarantine — say, two to three years income in a stable cash-based option. If clients are already using this method, consider increasing the current amount to the original recommended level.
• Lock in to longer-term investment rates to protect income against expected future rate reductions.
• Consider the benefits of guaranteed income through annuities, particularly for terms of one to five years.
• Reduce market exposure by transferring some funds to capital stable options.
• Review clients’ positions more frequently.

Some of these actions will impact on the future outcome, but in difficult times we can provide assurance to clients by taking some prudent actions and that may ease their concerns.

These actions may increase our workload without increasing our income, but retaining clients is worth the cost and the effort.

A final word

When a client seeks advice generated by concerns for the security of their capital, it is important to recommend some alternatives that enable them to act to ease their concerns within their broad, previously agreed strategy.

Merton Miles is a financial adviser at Fiducian Financial Services.