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A recent survey from technology solutions provider Ortec Finance reports that most Canadian wealth managers believe more clients want to increase their risk tolerance in hopes of boosting the returns on their investment portfolios. But some advisors counter this would be a disastrous choice for clients.
“We like to remind clients that these financial plans typically take a very long-term outlook,” says Darcie Crowe, senior wealth advisor and senior portfolio manager with Crowe Private Wealth at Canaccord Genuity Wealth Management Canada in Vancouver.
“It’s important not to increase risk tolerance aggressively to make up the short-term retraction and inadvertently put yourself further behind if the markets were to see a further downturn in the year ahead.”
Ms. Crowe understands why many investors are uneasy about their short-term investment performance. She says most equity indices remain below the highs reached in early 2022 and investors have now seen 18 to 20 months of below average returns. They may be falling behind where they had expected to be in reaching financial goals.
“Compound that with inflation and interest expenses likely increasing for those with mortgages or other debt outstanding, and you can clearly see why many clients are seeing their investment goals and objectives affected adversely by the recent market environment,” she says.
Despite this volatility, she notes no major changes in the asset allocation of her client portfolios. She actually sees clients in some cases wanting to decrease their portfolio risk by taking advantage of high-interest savings accounts (HISAs) and guaranteed investment certificates (GICs) paying attractive rates of around a 5 or 6 per cent rate of return. While she invests the cash portion of portfolios in those products, she doesn’t tend to advise clients to pursue significantly higher cash allocations.
“We want to dissuade investors from all of a sudden changing their risk tolerance to try to play catch up because that too could end up very negatively,” she says. “We want to make sure that their plan is designed to meet their long-term targets.”
Many of Ms. Crowe’s client portfolios have an alternative investment component that isn’t reliant on publicly traded fixed-income and equities. She says those investments have been helpful in bringing down the portfolio’s overall volatility.
Looking for income and opportunities
Michael Anderssen, senior portfolio manager and senior investment advisor with Anderssen Wealth Management at TD Wealth Private Investment Advice in Bridgewater, N.S., also hasn’t made any shifts to client portfolios, noting his practice focuses on asset preservation for seniors who want consistent monthly income. That means assets that produce dividends and cash flow are king.
“They want to know that the income is coming in,” he says. “And if the client isn’t spending it, it’s such a great time to be reinvesting that income.”
He notes that he and his team don’t change risk tolerance in client portfolios based on the current environment.
One challenge comes with clients who are spending more income than their financial plan dictates, mainly due to the rising costs of everything. He’s working with those clients on budgeting.
“When the market is a little lower, it’s not the best decision to tap into more,” he says.
Making ‘tweaks’ in portfolios
Ian Provost, senior wealth advisor and portfolio manager at Vo-Dignard Provost Family Wealth Management with National Bank Financial Wealth Management in Montreal, says he has consistently focused on investing in solid companies that tend to be recession-proof, such as consumer goods. As client portfolios are managed discretionally, small tweaks occur such as adding structured notes and bonds to reduce volatility.
“There may be tweaks in the portfolio management but we don’t change the overall risk objective of the client just because there’s volatility,” he says.
Mr. Provost notes that while clients are satisfied with their portfolios, they are more hesitant to send new money to invest. And for those funds, there is more interest in GICs and HISAs due to the higher interest.
“They’re looking a bit more at conservative strategies for new money,” he says. “But we truly believe that long term, they’re better off in their investment portfolio strategy based on their risk profile.”
Ms. Crowe says advisors need to maintain open communication and be aware of any material changes to clients’ circumstances that may require a change in their risk profile and asset allocation.
“Taking any such changes into account, remaining committed to a client’s long-term risk profile and investment objectives through increased volatility, and varying market environments, is often the most successful long-term strategy to ensure you are removing emotional bias and decisions that can be detrimental to long-term gains,” she says.
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