Discipline and trust remain key for 2004

(December 31, 2003) With 2003 in the bag, financial advisors must now focus squarely on 2004. Focusing on anything might not be the easiest thing to do on New Year’s Day, of course, but that’s why it’s a holiday.

Discipline and trust appear to be the watchwords for the New Year, as advisors look ahead to the challenges of 2004. So what should be among your clients’ resolutions?

“A strict and disciplined rebalancing strategy is one of the most powerful tools in harnessing negative emotional reactions to market volatility,” says Michael Newton, an investment advisor with CIBC Wood Gundy. “After 2001 and 2002, many investors decided to hide from the instability and flocked to cash and short bonds and missed a strong equity rally.”

“I would urge investors to continue to adhere to an asset allocation program regardless of what the pundits, or their guts, say,” he says. “If you have defined 35% as your fixed income component, then you better stick to it regardless if rates may be rising.”

But there is another aspect to investment discipline to be considered. While some clients might aggravate you by chasing the hottest new trend, others might be paralyzed and refuse to dump their dogs. Apparently these clients hold to the cliché “every dog has its day.”

“The biggest issue I see for investors today is inertia,” says Jack Lumsden, of Assante and recipient of the Advisor of the Year Award for Ontario. “This is caused by not having a written financial plan and investment policy statement.”

Lumsden says that too many clients were reluctant to adjust their portfolios when the market was down because their investments “might come back.” In 2003, the market rebounded and now clients might still be reluctant to make changes as they “wait to see what happens.”

“Unfortunately, you can always be waiting to see ‘what happens’ and nothing gets done,” Lumsden says. “People who had inappropriate portfolio’s a few years ago and made no changes still have inappropriate portfolios. Their investments may have rebounded with everything else and are starting to feel better, but still have an inappropriate portfolio.”

Lumsden prescribes a written financial plan to combat inertia. If the client already has one, review it with them. A sound and convincing financial plan will make it easier to keep them on track, whether they are flighty or rooted in one spot. With the plan in place, there is a logical progression to which investments the client should be holding.

“For 2004, investors should have a written financial plan developed — it leads to the investment policy statement and this leads to the specific asset classes and then to the actual investments,” Lumsden says.

And what about trust? This past year has seen scandals continue to plague the U.S. investment community, with the mutual fund industry being rocked by an investigation by the SEC and the New York State Attorney General.

“The most significant lesson [in 2003] is that mutual funds are not necessarily the best, most ‘democratic’ investment vehicles out there,” says John De Goey, a senior financial advisor with Assante Capital Management Ltd., and author of The Professional Financial Advisor. “There are lots of problems associated with them — witness Eliot Spitzer’s crusade.”

DeGoey’s criticism of the mutual fund industry is not unique. Sandra Foster, president and founder of Toronto-based Headspring Consulting and author of numerous personal finance books, says investors need to look at more than a fund’s public image before making a selection.

“I am reminded of something my economics professor used to say over and over and over again: ‘follow the money,'” she says. “For a mutual fund, how much does it cost, how much is made by the investor and manager and fund company, et cetera? Investors need to feel they can really trust the company numbers, and where the numbers came from.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com