Money Management - Advisers face their day of reckoning

The latest rounds of interest rate hikes and the falling values of share markets around the world raises a number of questions for the financial planning indus-try.

The latest rounds of interest rate hikes and the falling values of share markets around the world raises a number of questions for the financial planning indus-try.

For most of the past decade, share markets have been benign to most investors as falling interest rates produced one of the longest periods of share market growth in our economic history. Investors have become comfortable with share in-vestments, either directly or through managed funds, to the point where some have failed to comprehend that what goes up must come down.

The massive falls in April are a great case in point. Almost every adviser we contacted after the big dives told us exactly the same thing. "None of our cli-ents panicked. In fact the only calls we got were from those investors looking for buying opportunities." Sound familiar?

Most say this is a testament to the quality of education provided by financial planners to their clients. Perhaps this is a bit optimistic and self-congratulatory.

One adviser told us that a client phoned wanting to buy into the market. Unfor-tunately, he was fully invested in shares and had no cash in his portfolio to buy more. This sounds more like irrational exuberance and a stubborn belief that share markets do not go down.

Yes financial planners have done a good job at explaining investment risk, but is the message really getting through to clients? Clients may be comfortable with short-term losses but the real test of the education process will come when we start to see prolonged losses due to gradual share market declines. This is-sue is likely to get a good airing this year as the FPA thrashes out risk pro-filing.

A prolonged decline in share markets may not come this year but rest assured, it will come. And when it does, it will change the whole financial services land-scape.

For a starter, it is sure to increase the demand for quality financial advice. As online brokers are discovering, when investors are stung by losses, they are reluctant to re-enter the market. What these newly conservative investors re-quire is advice. After all, the financial planning industry didn't really come into its own until after the share market crash of 1987 and the subsequent years of flat share market returns.

The only problem with the hunger for advice will be that the profit margins for planners could fall. As investment portfolios suffer from falling returns, the amount clients are able to invest will surely decline. Falling investment dol-lars translates to falling trail commissions.

On top of that, investors abandoning direct channels in search of advice tend to be those with low investment balances. These are the type of clients most plan-ners try to avoid because most planners have not found a way of profitably ad-vising lower net worth individuals.

So falling markets offer a double-edged sword to financial planners. The real challenge will be to not fall on that sword.