Stand by me

27th June 2013

This article was published in Professional Adviser on 11th July 2013.

The inauguration of Franklin D. Roosevelt as the 32nd President of the United States of America was held on Saturday 4th March 1933. After taking the oath, he delivered a speech perhaps best remembered for the words, “The only thing we have to fear is fear itself.”

This astute observation was made at the time of the Great Depression, a period of slow economic growth, high unemployment and volatile equity markets. We find ourselves living in similar times, with sluggish growth, high unemployment and as we have just witnessed, the fourth large sell-off in equities since the lows of early 2009 – a fall, once again prompted by talk of the removal of central bank liquidity in the form of QE.

Uncertainty heightens the anxiety of clients who easily become fearful and risk averse. Indeed, there is a whole field of academic study dedicated to investor behaviour and irrational, emotion-driven decision-making. Many of these studies conclude that as financial assets fall and investors become more risk averse, they put at risk their long term financial goals. This is where ongoing education and strong client relationships are so important.

Having worked in partnership with many advisory firms for a very long time, I believe that in these uncertain markets the role of the Adviser has assumed even greater significance.  Advisers establish and build their long term relationships with clients on trust. They maintain that trust by meeting client’s long term goals whilst understanding and respecting their appetite for risk. Essentially their job is to manage client emotion and ensure they remain focused on achieving their objectives, especially during periods of market turbulence.

I firmly believe that education is the key to reducing client anxiety brought on by short term market fluctuations. A large part of this often subliminal instruction has to be delivered by the Adviser demonstrating an ability to translate theory into practical advice. I am keen to support our Advisers and typically once a quarter will present to their clients. At a recent presentation, clients although delighted with the returns I had delivered over the last year, nonetheless had concerns about the near future. I warned of a potential decline in prices, but could foresee no reason to abandon the asset class. To support my argument I showed how equities had historically helped clients to achieve their long term financial goals despite the interim ups and downs.

It has been nearly five years since the Global Financial Crisis when many investors decided to head for equity market exits. Whilst bond investments, supported by extraordinary monetary policy have been very rewarding since then, the chances of this being repeated are unlikely. As we all know, equities have recovered strongly, albeit not in a straight line - and it is Advisers who have played a critical role in managing clients’ risk, emotions and return expectations. Clients who have not wavered from their long term strategy have been rewarded, but we can be sure that the recent heightened market turbulence will test their nerve once more.