Martin Bamford: How the next recession will test planning

Changes to the landscape mean next time there is a recession it will come with unprecedented challenges for the profession

I’m worried about the future.

It’s not that I don’t firmly believe we’ve got reasons to be cheerful. Some beautiful things are happening right now in the fields of technology and healthcare that should prompt a lot of positivity.

My big concern is that many financial planners are setting themselves up for a massive fall.

It’s July 2019. If we use the US economy as a guide, then we’re now more than a decade into a period of sustained economic growth. In fairness, the first few years of that growth weren’t entirely pretty. But it was growth regardless.

Since the 1950s, economic cycles have lasted for an average of five-and-a-half years. Some were shorter and some longer. But the average in modern times is close to half that still in progress today.

I can’t see the future. My successes in predicting the election of Donald Trump, the Brexit referendum result and the failure of Neil Woodford were nothing more than educated guesses, luck, and open-minded thinking about the outcome.

But it doesn’t take a soothsayer to recognise that we’re nearing the end of this current period of economic expansion. It might not happen this year or next, but before too long, we will enter a period of recession.

When a recession takes place, it doesn’t always result in falls in the capital markets. It’s hard to predict what might happen to global stock markets when the next recession collides with years of central bank-funded, artificial capital market inflation.

Martin Bamford: Advisers can’t keep outsiders on the outside

For the sake of argument, let’s hypothesise a substantial and prolonged global equity market correction takes place. What might that look like for financial planners and their clients?

First, for a large number of what we commonly refer to as “next generation” planners, it’s going to be the first time they have personally experienced the sky falling in during their professional careers. How we respond to theoretical events is likely to differ from how we respond in practice.

Secondly, it will be the first time it’s happened, to any real extent, since the onset of pension freedoms. The last time the markets tanked, buying an annuity with your pension fund was the norm. Today, the majority of that post-retirement pension wealth is exposed to the markets.

Finally, those following the ‘markets always win in the long-term’ model, and investing their client assets entirely into global equity index tracker funds, will have the opportunity of a lifetime to test their behavioural coaching skills.

I’m absolutely on board with the idea that it is investor behaviour rather than markets that lose money. Humans are rubbish investors, as the fascinating field of behavioural finance continues to discover.

I would suggest that, even with a highly skilled and passionate financial coach in your corner, avoiding the heuristics that cause us to sell when all those around us are losing their heads is not impossible, but it is indeed challenging.

We’ve had a taste in recent weeks of what happens when a popular fund manager combines a liquid fund structure with a high proportion of illiquid funds. When that illiquidity is systemic, rather than isolated to fund manager carelessness, we face trouble on a much bigger scale.

There’s never been a more critical time to apply some of the fundamentals of sound financial planning, including diversification, holding healthy cash reserves, and modelling catastrophe scenarios.

Martin Bamford is a chartered financial planner at Informed Choice

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