Talking to your clients about uncertain markets

(August 2008) Fidelity’s research shows that, proportionately, more people retire at the beginning of the summer than at any other time of year. This makes sense, since it allows retirees to combine good weather with new-found leisure activities — golf, gardening, travelling, time at the cottage— the list is endless.

Here’s another activity recent retirees might consider taking up: talking to their financial advisor. Although clients might be preoccupied with other non-work events, it’s important for the advisor strike up a conversation, especially during these turbulent financial times.

Unsettled markets mustn’t be a barrier to having that very important client conversation about finances in retirement. It is true that the economic and financial market news at the moment is difficult to digest and, on the surface, even more difficult to act on. But when you step away, it isn’t that different — or that much more difficult — than at any other time in the past several decades. Let’s spend a moment looking at the current environment and what can be done to help your clients deal with it.

The first thing to point out is that there is almost always some economic or financial market uncertainty out there. In the early 1970s, it was sharply rising oil and other commodity prices. The experts, the media and even well-meaning friends wanted us to believe that the world was ending. It wasn’t. Instead, it adjusted to the new reality.

In 1987, the industry saw a major market correction, which prompted the same message from the doomsayers. The world didn’t end then, either. The late 1990s and the early part of the new millennium were marked by the dot.com meltdown. It was painful for investors who were not diversified, but again, the world adjusted. Today, we have a big spike in the price of oil, horror stories of write-downs by financial institutions, talk of a recession and very choppy markets. This is probably the first time your clients have retired, so helping put today’s issues in perspective is one of your most important roles.

Considering that gas prices are affecting almost all of us, let’s look at current concerns regarding the price of oil. The debate around why the price of oil is so high, and where it is going, centres around the question of the roles being played by (1) rising demand, (2) constrained supply, (3) the decline in the U.S. dollar and (4) the role of financial investment and speculation in oil. The most likely reality is that all four are playing some part and that we have seen a permanent shift to higher oil prices, though not necessarily as high as the $140 or more we are seeing this summer. The write-downs by financial institutions are a regrettably necessary solution to the excessively risky lending practices of the past few years.

The common thread in these two situations is that markets are adjusting to the new reality, even though there is still some uncertainty as to what the new reality will actually turn out to be. Things are a little clearer when discussing whether the economy has entered a recession. From my point of view, there isn’t a recession, at least not yet. What there is, however, is very slow economic growth. Even though subsequent analysis may reveal the existence of a recession, the analysts (and some otherwise well-regarded business people) who declare we are in a recession, so far, are only guessing. They don’t really know. But it is unfortunate they’re saying that, because the word “recession” has negative connotations and makes people feel worse than they need to. The matter of very choppy markets gets right to the heart of the concern felt by newly-retired clients. There are powerful arguments that, once the current adjustments are done, markets will become less choppy, i.e., a market environment in which financial institutions’ balance sheets are healthy, inflation is well-contained and company profits are growing. At the same time, it is inevitable that the uncertainties of today will give way to different uncertainties down the road.

So how do you deal with your clients and choppy markets? Hopefully, by the time the clients get to retirement, you will have had lots of discussions around risk tolerance and diversification. If you haven’t done so recently, now is an excellent time for you to revisit these fundamental principles. The conversation might centre on how portfolio managers and professional money managers are dealing with client investments. For example, are they maintaining a great long-term investment thesis while also showing the ability to deal tactically with the short-term investment issues currently at hand?

The markets may not be signaling near-term happiness yet, but there has been one recent development that should give considerable comfort to your newly-retired clients. Central banks around the world are shifting their focus away from worrying about slow economic growth and financial institutions’ balance sheets and toward dealing with a much more fundamental issue: inflation. We may not see much in the way of active inflation-fighting by the central banks for a few months, since there are still some serious financial-market fires to deal with. But the central banks have clearly signaled where they are going. And it is useful to remind your clients that the biggest favour a central bank can do for them, by far, is to keep the rate of inflation well contained. If not contained — and not planned for — inflation can do a huge amount of financial damage to your clients’ financial health in retirement.

So, make sure to have that post-retirement conversation. It might not be as smooth as it would be if economic and financial market circumstances were more cheerful, but financial advisors really prove their worth by talking to clients when times get tough.

Peter Drake is vice-president, retirement & economic research, for Fidelity Investments Canada. With over 35 years of experience as an economist, he leads Fidelity’s research efforts in retirement in Canada today. He can be reached at peter.drake@fmr.com.

(08/11/08)