How should advisers protect clients from a potential Brexit shock to their portfolios?
In the latest edition of Money Marketing’s series of live debates, MM Wired, Chelsea Financial Services managing director Darius McDermott, Platforum consultant Danby Bloch and Square Mile’s head of investment Jason Broomer discussed what the different forms of Brexit could mean for investors and how advisers can prepare their clients.
Broomer and Square Mile recently surveyed a host of UK fund managers on what flavour of Brexit would be most beneficial to most share, and how sensitive their portfolios are to Brexit.
The results were highly polarised.
Broomer said: “One thing that we can draw from this survey: these people are highly incentivized to know the answers of the implications on stock market and seeing as they had such diverse answers, we can now say with the certainty, that no one knows.”
Keeping a wide bucket
Despite the panelists concluding, that just one thing is certain when it comes to Brexit – uncertainty – they offered some tips to safeguard portfolios. First and foremost: diversification.
McDermott said: “In a world, where we don’t know what areas are going to outperform, be diversified, have good mixture of asset classes and geographies.”
McDermott added that he would like to keep “a reasonable bucket of liquidity.”
Bloch agreed, saying “diversification has to be right,” but adding that he would not exit the UK altogether.
He said: “The UK stock market it is not exactly very highly priced at the moment and I would like to keep some of my money there”.
McDermott added: “History teaches us that uncertainty opens up opportunity. Maybe we get a good Brexit and sterling goes roaring off. If there’s a default to World Trade Organisation rules in March, I think you could see substantial opportunities, particularly in UK equities.”
Brexit isn’t the only source of uncertainty, however. In the case of changes on domestic political scene and Labour seizing power if the Conservatives come back with a bad deal, financial planners would be “extremely busy” with navigating all the changes that would follow.
McDermott said: “There would be huge changes to pensions, ISAs, simple tax and saving products. Mainstream UK industry would come under severe scrutiny and potential threat.”
The right perspective
Consensus across the panel said that when it comes to investment risk, Brexit is a event, rather than the event planners should be focused on.
Bloch said the advice firm he chairs, Helm Godfrey, has not made any Brexit-inspired “huge changes to portfolios”.
He says: “We are not panicking, effectively.”
Advisers might find that their clients have their own preconceived ideas on what Brexit might do to their investments. That is when advisers’ professional skills come into play. According to Bloch, managing investor expectations is one of the core skills of financial advisers.
He says: “Financial advisers are getting better and better at it, as they use risk profiling tools, techniques and discussions to take a client though possible risks scenarios that could occur. And frankly, Brexit is one of many risks that their portfolio faces.”
He adds: “The most important planning is cashflow forecasting and planning. It is absolutely crucial in helping people to understand, what they can afford to take hits on and how much they can’t afford to take hits. These are really crucial issues and that is how advisers are really successfully doing this job.”