Market Cycles

One of the great joys in my life is the monthly arrival of my favourite motorcycle magazine, Two Wheels.

There’s a ritual to reading it — front-page headlines first then, for reasons unclear to me, straight to the inside back page where ‘Groff’, a bearded, veteran motorcycle journo, usually ponders past motorcycling adventures and their life meaning.

Most often Groff’s column is a great read, full of hard-learned wisdom, with some wit and self-deprecation thrown in.

Occasionally, the column is peppered with more than a scent of anti-establishment sentiment, which I’m sure resonates well with a lot of readers simply because many motorcyclists see themselves as different from the rest of the community because, well, we just are.

The bike magazine is a great escape for me and thousands of other readers. Reading it takes us away from our daily grind to a world many of us would otherwise love to inhabit seven days a week — riding and writing about motorcycles.

So imagine my dismay when I recently opened the latest edition with a ritualistic flick to the inside back cover to reveal a column laden with Groff’s view on the financial state of the world.

There was a massive disconnection here for me; the last thing I wanted to read about in my favourite column in my favourite bike magazine was the financial carnage that is sweeping the world. How could it be? How could they blemish the magazine with the topic that I read, talk and write about everyday? Where was the escapism? Where could I retreat to now to escape the slow water torture of the daily reminder of how tough things are?

A weekend run on the Triumph offered the escape I sought, but there’s no escaping the fact that right now everyone has an opinion on the state of the world and its financial prospects.

More people from a broad spectrum of backgrounds are talking (and writing) about this financial crisis than at any other time in market downturns in recent decades.

If for no other reason than this growing awareness, things will be much tougher and more prolonged this time around. As more and more people talk about the economic problems, their every action will reflect their fear of losing their job and their capacity to feed and shelter their families.

John Maynard Keynes, the noted English economist, described it as ‘the paradox of thrift’, wherein consumers fearful of unemployment revert to reducing their consumption in order to accumulate savings to fall back on in the event they do lose their jobs. Paradoxically, with sufficient momentum across an economy, such a mindset brings on the very outcome they most fear as businesses shed jobs to rein in costs.

This environment of fear is undoubtedly the environment financial planners must now contend with for the next several years, and for many it must be extremely worrisome.

How can they give words of comfort to clients who now have far more inputs to their thinking than the nightly news and their planner’s commentary? How can they reassure them that in time things will settle down? How can they convey complex economic conditions in a way that will make sense and also engender some comfort?

Such challenges will be far more difficult for planners who failed to prepare their clients for the inevitable end of the good times. So will it be for planners who recommended highly leveraged portfolios that have been beset by margin calls — sometimes repeatedly.

The question most will be asking is how long they have to wait for recovery. Suffice to say that ‘longer term’ is quite a bit longer this time around.

Many of the problems financial planners now face with client satisfaction have their origins in the way in which they set their clients’ investment expectations.

Constant reference to, and emphasis on, capital growth returns in recent years will be the undoing of many a client/ planner relationship.

In contrast, the mantra of repeatedly counselling clients that the high growth rates prior to the market meltdown were abnormal has, for some planners, been extremely successful in securing the client/planner relationship.

For many planners, a major rethink of the so-called value proposition they offer clients must surely now be underway.

Planners who lathered themselves in the undeserved kudos of the fleeting capital growth of recent years and failed to talk about the importance of income returns while simultaneously failing to prepare clients for the downturn are now largely bereft of a service offering. It’s almost analogously biblical — building houses on sandy foundations and the like.

Financial planning continues to evolve around the world, nowhere more so than in Australia. We know from Darwin that the evolution of the species favours those who adapt to their changing environment. Survivors adapt whereas extinction awaits those who fail to modify in line with changing environments.

The investment environment for financial planners and their clients the world over is now one of several years of prospective low capital returns induced in part by the contagion of fear that continues to circumnavigate the world.

Financial businesses with strong client retention rates and strong recurring income streams will survive, there is no question about it.

Others will fail for having not taken account of how their world was changing.

In a hypothetical forecast of conditions in 2007 that I made in this column in 2004, with reference to a world that was clearly changing, I argued: “If you are a … planner whose portfolios are skewed to high international/US weightings and the macroeconomic plates do shift, perhaps now is the time to contemplate the explanation you will give your clients when you have to look them in the eye and give them the bad news.”

Clients are getting bad news from a myriad of sources, including gnarly old motorcycle journalists who are pontificating on the destiny of the world.

If you want to be in business five years from now, get on the front foot with client investment expectations and temper the overwhelmingly negative inputs they are absorbing.

There’s a lot to look forward to for financial planning in Australia, provided you manage your clients’ expectations.

Ray Griffin CFP is the managing director and a representative of Griffin Financial Services.