Advice for novice advisors in tough times

Tell clients that bear markets are inevitable, but that tough times might not be as bad as the headlines suggest, experienced advisors say.

In times like these, advisors may need to “reset” their clients’ expectations, said Duane Ledgister, vice-president and portfolio manager with Connor, Clark & Lunn Private Capital Ltd.

“The more calm and confident we are as advisors, the more confident our clients are going to be,” said Rosemary Horwood, Toronto-based portfolio manager and investment advisor with Rosemary Horwood Wealth, Richardson Wealth Ltd.

Advisor’s Edge asked Horwood and Ledgister what they learned from previous tough times and their advice for rookie advisors.

Since the 2008 financial crisis nearly, some investors have expected inflation to be low “forever,” Ledgister said. Furthermore, “a number of advisors haven’t seen a different market than we’re in right now,” he added, referring to the combination of inflation, rising rates and market volatility.

Also since the financial crisis, many investors have expected equities returns to remain strong and for fixed income to continue providing “stability” to investment portfolios, Ledgister said.

When meeting with a client for the first time, focusing the conversation on investment successes may be tempting, Ledgister said. “But I think it’s really helpful early on [to] set expectations [for] the type of markets we have now: that they are not going to happen frequently, but they will happen. And when they do happen, it’s going to be difficult.”

It is “extremely common” for clients to believe the economic situation is worse than it actually is, Horwood said. This is due to headlines clients see in the news or content they see on social media.

“A lot of our role right now, as advisors, is to re-direct conversations to the truth and to the reality of things, so that our clients are not living under circumstances thinking that things are far worse than they are.”

Horwood cited the onset of Covid-19 as an example. In February to March of 2020, Horwood spoke with several clients in their 80s who had “very conservative” portfolios and mistakenly believed their investments had fallen by 30% to 40%. But in reality, those clients’ portfolios had lost about 5% to 6%, Horwood said.

Those clients didn’t realize “that their portfolio is not made up of only one market … so they shouldn’t see 100% of the volatility of that market in their portfolio,” she said. Explaining the diversification levels of clients’ portfolios “was a conversation I had many times [in 2020] and is still something I talk to clients about now.”

For example, “if you have only a U.S.-based portfolio, particularly in growth names, it would really hurt you,” Horwood said. Instead, a “regular portfolio” should be comprised of stocks, bonds and alternatives.

“A lot of our clients own real estate personally, whether that be residential or investment property, so that would make up a part of [their investment portfolios] as well. A number of them would have private equity or businesses that they manage or own. That would also make that part of their asset allocation,” Horwood said.

For his part, Ledgister advises clients to own not just stocks and bonds but also alternative assets such as commercial real estate, private infrastructure and private debt. These, he said, “have shown more consistency of return without really increasing the risk to the portfolios.”