Advisers are divided on whether new rules forcing them to notify clients when portfolios drop 10 per cent will put people off seeking advice and staying invested for the long run.
Under Mifid II, which came into force in January, investment firms providing portfolio management services must inform clients by the end of the following business day if the value of a portfolio has depreciated more than 10 per cent from the beginning of the last reporting period, and at each subsequent 10 per cent drop.
According to financial advisers Skerritts, given how the FTSE 100, S&P 500 and DAX have performed since January 2008, if the rules had been in place from then, they would have written to clients around 31 times.
Skerritts investment director Andrew Merricks argues that advisers could lose clients as a result of the rules, since they may decide to sell investments, and the warning letters could also give inexperienced investors the wrong impression about how planning works. He says: “We are told to tell investors that they should only invest for the long term. How do quarterly investment reports and alarming letters telling of 10 per cent falls – then maybe 20 per cent, 30 per cent or 1970s or 2000s-style 40 per cent and more – help to achieve this?
“There is even an argument that these letters, which will surely be needed sooner rather than later, will actually trigger a correction if a wave of selling drives markets even lower.
“You can only tell someone so many times that they’ve lost a significant amount of money, but ‘don’t worry, it’ll go back up’. As professionals, we know that this is probable, but if it’s your pension fund, retirement pot or inheritance, it’s a very difficult thing to take on board unless you have experienced a downturn before.
“This isn’t about hiding bad news. It’s not about keeping information back (most people access their accounts online anyway). And it’s not about trying to hold on to clients’ assets at all costs. It’s actually about trying to help fewer professional investors do the right thing during difficult times.”
Higgins Fairbairn financial planner Gianpaolo Mantini says that he has recently had to send two of the letters out. However, he also called the clients to explain that while over the first three quarters of this year the lowest the FTSE had fallen was 11 per cent, year to date it was running at only a 2 per cent loss.
He says he has reminded clients “it will happen again” and that with long timeframes people should “ignore short-term performance”.
Whitechurch head of partnership proposition Ian McIver says: “Most clients of advisers are fairly well educated that markets can go up as well as down and volatility is part of the game.
“It plays into the multi-manager, discretionary manager, outsourcing investment trend. I’m beginning to find a lot of advisers say they can do it on their own, but then they have to deal with reporting and all this stuff.
“They’d rather it was done automatically by a DFM, rather than forgetting to do it because they just didn’t see it and they’ve got better things to do with their day.”
Investment Quorum chief executive Petronella West says that while the firm does not buy esoteric stocks, it does hold some for clients like Keystone Petroleum that have dropped more than 10 per cent, even if none of its portfolios have.
However, because it runs discretionary models too, it is able to diversify away from systemic risks when markets go down, while clients buy into a financial plan rather than just investment growth.
West says: “You can scaremonger clients, saying they are going to start getting these letters.
“But if your relationship with the customer is one where you speak every week, saying we are going to see flash crashes but equities is still the only game in town because there is nowhere else for money to go, with a long-term plan from your adviser with a specific targeted return, you shouldn’t be in a position where you are worrying.”
West notes that those who began investing over the past six to 18 months would likely have seen negative real returns, “but we don’t say we are going to make you money in the next 18 months”.
She says: “If 2008 to 2009 has taught us anything, it’s that panicking lost people a lot of money … a 10 per cent fall might even be a buying opportunity.”