Using economics to reach clients

Your clients aren’t economists. Their backgrounds range from business executives to civil servants to labourers or even inheritors. They came to you because they need advice and reassurance about their investment position. What’s the common ground between you? The economy, of course! Just as you don’t necessarily have to be meteorologist to predict the weather, anyone and everyone has an opinion on the economy.

It is expected that before your meeting, your client may very well have taken a little extra time to listen to the business news or scan a few web sites. He or she may have caught the very latest economic news on the radio while heading to your office. How often during the first few minutes of a conversation have you realized that the person you are counseling has fashioned some firm – and not necessarily entirely consistent-feelings about global economic conditions?

Even if you might be tempted to start a debate, don’t. You know it won’t benefit either of you. Your client may already be a little intimidated by his or her lack of investment knowledge and challenging them on their economic views may only increase their discomfort. Worse, they may conclude that your opinions are unsound and therefore question your strategy.

How can you stay prepared to constructively discuss economic conditions while helping your client to develop their investment plan?

Know what’s on your client’s mind

You already know the various backgrounds of your client base so you can gauge their political and social leanings. Make sure your own reading and viewing includes a selection across that range. Don’t watch the same news channel all the time. Include both a U.S. and Canadian business channel in your viewing schedule. Regularly scan the web for political news. Read the Globe and Mail and the National Post. Pick up the occasional copy of The Economist, the Wall Street Journal – even if you only scrutinize the headlines or the table of contents.

It’s not crucial that you form a comprehensive view on all the issues. Economists can’t, so why should you? Remember the old adage: If you laid all the economists in the world end-to-end they still wouldn’t reach a conclusion. Over my career, I have observed that most people’s economic opinions are highly influenced by recent events or the latest high profile prognostications. To be current, you only need to know what is being said. If that seems a bit shallow to you, then by all means delve a lot deeper. Just keep it to yourself. Your client doesn’t want to be overwhelmed.

Know what is happening

I used to feel that Canadian economists had a major disadvantage. While U.S. analysts only needed to understand what was happening in their own country, Canadians had to first assess U.S. conditions and their impact on Canada before turning attention to purely domestic conditions. Today, global economies are so intricately interwoven that what is happening anywhere is in some way or other likely to have an impact everywhere.

That means that we are all labouring under the same analytical burden. The good news for the individual investment advisor is that the burden is insurmountable. Why is that good news? Because nobody could expect to keep up with the flood of data being released around the clock-let alone analyze or even remember it. That reality frees advisors to focus on what they need to know: whether the economic situation is grave, dubious or healthy but bound-to-turn-down-soon.

Focus on these:

Domestic Product (GDP)

That’s shorthand for whether things are good or bad. Few people remember the latest quarterly figure as it is constantly being revised. You should know whether it is declining or falling and whether the rate of change is accelerating or not.

If GDP is declining we are in recession (technically if it declines for two consecutive quarters). But from an investment perspective there are typically only a few months every decade when the risk of a recession isn’t imminent. That’s when we are actually in one! Remember, recessions seldom last for more that four quarters or so-the rest of the time the economy is expanding. But our nature is to worry. At the macro level the solitary measure of our investment’s value is “the economy”. So naturally, we live in a constant state of apprehension lest threats of war, political uncertainty or unfriendly animal spirits will forestall GDP growth. There is a good deal of truth underlying the joke that says: “Economists have accurately forecasted seven of the last five recessions”!

Unemployment rate

Many of your clients will express doubts about the rationality of economists especially when they see news stories declaring the end of recession when personal experience suggests otherwise. Be careful! The implied message is that if economists are out-to-lunch then investment professionals are likely close behind! From the previous paragraph it should be clear that recession is a technical condition determined by declining GDP and is a relatively rare and short-lived event. Fortunately, you are in a position to sympathize with the skeptical client while demonstrating a deeper understanding of economic data.

Labour markets tend to lag behind overall GDP growth. Employers who have just experienced a painful period of job shedding are slow to rehire as the first new orders trickle in. They work their employees harder, add extra shifts and stagger their deliveries. The result is that the unemployment rate continues to deteriorate during the early stages of recovery. Explaining that to a client demonstrates your analytics. But, go one step further. Unemployment rates are published at the provincial and major city levels. Make sure you know your local rates and how they compare to other places. That gives a chance to respond to comments like: “What recession/recovery…I don’t see any signs of it here!” Maybe they are right and the headline national figure doesn’t conform to local conditions.

The U.S. and Canadian unemployment rates are usually released on the morning of the first Friday of the following month. Watch for them. Talking about them knowledgably can be your segway from a general discussion on the economy into market conditions and how to position this as a benefit.

Interest and exchange rates

Your daily activities guarantee that you know what interest rates are across the yield spectrum. Similarly you will be following the movement of the dollar. But, your client probably wants a view of the future and your training cautions you against providing one. What to do? Present other people’s view. Those you can attach some credibility to. Quote respected economic forecasters, the view of central bankers, some politicians etc.

When it comes to exchange rates, the track record of virtually all forecasters is abysmal. That’s not because they haven’t been diligent in their analytics, it’s because exchange rates reflect simultaneously all the economic, financial and psychological factors at play in all the major countries. Use that to your advantage. Any discussion of longer-term prospects for the dollar is an opportunity for you to demonstrate your knowledge of global economic trends and a chance to introduce your client to investment possibilities that can benefit from them.

Where to find data and projections

If you are associated with one of the major Canadian banks your first source should be their Economics Department. On their web site you will find detailed forecasts of economic and financial variables as well as analysis that you can introduce to your client as: “Our economists predict….” If you view them as competitors, use their sites anyway…they are available everybody! Just don’t quote them to your client!

Statistics Canada produces vast quantities of data and one of the best ways to stay current is to scan “The Daily” on-line. It’s free and the best source of national and regional employment data.

If you have access to “The Economist” make a copy of the back pages. There you will find recent economic figures for all the key economies. As well, they publish regular average forecasts for major countries and provide a flow of valuable background indicators. Don’t have access? Don’t worry. A great deal of what you can use is on their free website.

If you or your employer are willing to pay for services, consider subscribing to some of the offerings from the Conference Board of Canada or possibly the UK firm Consensus Economics. That company collects forecasts from scores of forecasters for dozens of world economies.

By the way, how did I know that your clients are not economists? Well, according to census data fewer than ten thousand Canadians say that is their occupation…so law of averages! Still, if you add in all those who majored in economics or took a few courses…or read the business pages…or…well, I guess we are all economists.

Don McIver is a Halifax-based economic consultant who has served as chief economist at Sun Life Financial and has held senior postings at the Conference Board of Canada, Atlantic Institute for Market Studies and the Canadian Bankers Association. He has sat on the board of directors of the Toronto Board of Trade and served as president of two separate chapters of the Canadian Association of Business Economists. His overseas consulting involved lengthy stints in Sri Lanka and Guyana.