Before the COVID-19 pandemic, few if any financial advisors and their clients would’ve had such a black swan event on a list of circumstances most likely to cause profound volatility in financial markets and investments. With many investors now anxious about what shock may come next, advisors are focusing their communication around the resiliency with which portfolios have been built to withstand the effects of possible scenarios.
That need is as great as ever according to recent investor sentiment surveys. UBS AG’s Investor Watch survey of global investors conducted in May, 2020, found that 80 per cent of respondents feared a further market decline, with 83 per cent saying they want more guidance than usual from their advisor. And according to Bank of Nova Scotia’s 2021 Retail Investor Sentiment Report, 70 per cent of Canadians surveyed in January said it’s hard to know what to do with their investments in this environment.
For David Boyd, vice-president and portfolio manager with the Boyd Wealth Management Group at BMO Private Wealth in Windsor, Ont., the pandemic has driven home the importance of creating realistic planning for clients – namely the need to factor various variables into client portfolios via software.
His team has always looked at historical data, volatility and run scenarios to show the effects of various headwinds on portfolios. Yet, Mr. Boyd says BMO’s WealthPath goal-based financial planning software added interactive features in October that allow advisors to explore with clients how different scenarios and strategies could affect their plans. For example, they could test a hypothetically significant market decline at a certain point in time.
“Having something like [this tool] shows clients, ‘This isn’t new, we’ve seen it, and by the way, we’ll be fine, because we’ve already factored it in,’” he says. “We can show [clients], and ultimately give them peace of mind that, on this scenario, they’ll be fine, or on that scenario, we’re getting a bit concerned, so let’s address that.”
Although last year’s stock market downturn differed from previous ones in that the recovery was rapid, Martin Dupras, president of ConFor Financiers Inc. in Montreal and vice-chair of FP Canada’s board of directors, says the decline itself was far from unique. Data show about 10 instances over the past 50 years when the stock market dropped by more than 20 per cent.
In fact, Mr. Dupras says future downturns are embedded in FP Canada Standards Council and the Institut québécois de planification financière’s annual Projection Assumption Guidelines, which are drawn from a variety of data sources and help advisors make long-term financial projections. (He’s a member of the committee that works on developing these projections.)
Indeed, while a pandemic may not be the cause of a stock market correction next time, Grant White, portfolio manager and investment advisor with Endeavour Wealth Management at Industrial Alliance Securities Inc. in Winnipeg, helps clients plan for the reality that there will always be another adverse event around the corner.
As such, he says, the stress-testing process is part of setting client expectations from the get-go – including explaining why portfolios are constructed the way they are and ensuring there is clear communication about potential downsides.
“It’s important for clients to know if they went through the global financial crisis, or something like that, this is what they could expect potentially, and then understand if they’re comfortable with it or not,” he says.
“It’s also important to try to keep clients in check between these events because if they can stay on target with the volatility, they should be able to ride through [them] quite well, assuming their asset allocation is in line with their comfort levels,” Mr. White adds.
In addition to the tools Mr. White uses for portfolio modelling, he has also sought to improve client-facing communication around strategies and volatility during the pandemic, via further use of tools like YCharts.
For example, recent portfolio stress-testing, he says, has involved showing clients how a potential 2 per cent interest rate increase over a short period of time would impact the value of Government of Canada 10-year bonds.
For Nancy Graham, portfolio manager with PWL Capital Inc. in Ottawa, a consideration of the anxiety clients may be experiencing is part of stress-testing a portfolio against adverse events.
“If we’re in a strategy or in an asset mix that’s hard for the client to remain in through some kind of a market shock, then it doesn’t matter what kind of stress-testing we’ve done on the portfolio. We have to be able to carry the client through that,” she says.
Ms. Graham says her firm takes a broad, evidence-based approach to managing money, focusing on the client’s tolerance to market declines and the portfolio’s ability to meet their cash-flow needs. Investment and retirement modelling exercises consider historical volatility as well as Monte Carlo simulations, which consider the probability of different outcomes to determine the likelihood of the plan succeeding.
“When we start a relationship with somebody, we talk about unexpected events and how portfolios are built to get through them,” she says. “We create that expectation at the front end. We never say, ‘We’re going to save you.’ Rather, we say, ‘We’re going to guide you. We’re going to be there with you. We’re going to coach you. We’re going to help you understand.’”
Ultimately, Mr. Boyd of BMO Private Wealth says that running several adverse scenarios through software and discussing the data with clients removes the emotion from decision-making, decreasing both their anxiety and the desire to make changes.
“It’s [all about] communication – clients hearing from their advisors that the plan we built for them had factored in [an adverse event] like this,” he says, “and based on that, you’re still on the path [we set forth] in the plan and we don’t need to make adjustments.”