How should advisers react when there is an unexpected downturn in markets and what do clients expect at such times? These questions were brought into focus as global equity markets fell in the first weeks of February.
At the time of writing, the fall appears to be a relatively small correction and far from a full-blown crash.
However, with so much uncertainty in the world, this correction should be seen as a dry run for a possible bigger one in the future and a wake-up call for anybody invested in drawdown without any regards to managing sequence of return risks.
As with most important questions, there are no easy answers. On the one hand, advisers will want to reassure their clients all is well but on the other, they have a responsibility to explain what has happened and, if necessary, review the investment strategy.
The best way to avoid difficult conversations following a fall in fund values is to do the job properly in the first place.
Good advice stands the test of time no matter what happens to markets, so it is important to think about what effect a future market crash will have on a client’s retirement plans and their personal stress levels. This often translates to a strategy that is not looking to shoot the lights out but achieve steady returns with a soft landing if markets fall.
This is all common sense but it is surprising how many older investors have inappropriate investment strategies.
Soon after the market falls earlier this month, Informed Choice’s Martin Bamford sent out an excellent email newsletter entitled “Gentle words of reassurance”, he began: “It’s often said our role as financial planners is to manage client behaviour, not to manage their money.”
In times like this, it is good to be quick off the mark and give a level-headed assessment of the situation, avoiding any sense of panic.
At all stages of the retirement journey, there are a lot of technical things happening that advisers understand and a lot of behavioural things going on that are important to clients.
This demonstrates why everybody needs an adviser. Left to their own devices, most people cannot properly manage both the technical and behavioural side of the equation. This means that when markets go south their financial security may well go in the same direction.
William Burrows is retirement director at Better Retirement Group