Advisors should have the courage of their convictions when faced with a client who is anxious to tap into an investment fad.Pekic/iStockPhoto / Getty Images
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Being confident is usually a good thing. But a recent Ontario Securities Commission (OSC) study found that almost a third (30 percent) of 2,500 Canadians surveyed were overconfident about their own financial knowledge.
The survey also found investors with financial advisors were able to answer on average more than half (52 per cent) of the 27 financial literacy questions correctly.
“No matter what level of knowledge an investor has, an advisor can bring value to the table in helping them further their knowledge,” says Tina Tehranchian, senior wealth advisor at Assante Capital Management Ltd. in Richmond Hill, Ont.
Ms. Tehranchian says educating clients about risk and risk management is key because that’s where overconfidence can backfire for clients.
“I have a lot of resources on my own website I refer them to,” she says. “I encourage the ones who are really interested to take the Canadian Securities Course because that’s a great basic education, not just for advisors but for investors who want to get more involved in the decision-making for their portfolio.”
Overconfidence can include a client’s knowledge of one industry and allowing that to cloud investment judgment.
“I had clients who worked for Nortel Networks Corp. [They] believed that the telecom was going to be the future of the world and the stock market and put the bulk of their wealth in Nortel stocks. We all know how that ended,” Ms. Tehranchian says.
It all goes back to bringing risk management into the picture and putting it on their radar, she adds.
Advisors should have the courage of their convictions when faced with a client who is anxious to tap into an investment fad, she says.
“Every once in a while, we have a flavour-of-the-month investment that everyone chases. At one time, it was cannabis stocks, and then it was cryptocurrencies,” she says. “Do your due diligence. Don’t be afraid to be labelled old-fashioned or too conservative.”
At the end of the day, an advisor’s job is to preserve the client’s wealth and help them grow it at a healthy rate of return, she adds.
Misconceptions about financial planners
Knowledge gaps aren’t only in the market investment realm. Ms. Tehranchian says she finds even savvy investors find financial planning related to estate planning a completely new territory.
“Strategies around minimizing taxes on their estate, philanthropic tax planning – these are things that even clients who are market savvy benefit from working with an advisor on,” she says.
John Moakler, president and senior executive financial planner at Moakler Wealth Management Inc. in Milton, Ont., specializes in advising doctors and dentists. He says he encounters physicians who say they have a financial plan and a financial planner but don’t know how much of their current paycheque is fully taxable, tax-preferred or tax-free income.
Mr. Moakler tells them they don’t have a financial planner; they have an investment advisor. He says the biggest misconception clients have is that every financial planner is the same.
The OSC survey found that one particular gap in investor knowledge is the cost of investing.
Mr. Moakler is a fee-for-service certified financial planner. He says he begins a relationship with a client first with a 20-minute call; then does an hour-long discovery meeting and at the end tells clients how much the fee will be to develop a plan.
“We need to be more transparent in the industry about what people are paying and what they get for it,” he says.
Mr. Moakler adds that attention to detail can save clients considerable sums. He discovered a dentist client was spending more than $13,000 extra each year in insurance premiums because he was paying premiums on several policies monthly rather than annually. The dentist said his insurance advisor hadn’t told him about the difference.
Overestimating risk tolerance
Lisa Applegath, senior wealth advisor with the Applegath Group at CIBC Wood Gundy in Toronto, points out that the prolonged bull market has led to overconfidence in investors who now don’t understand volatility.
She advises going back to the essentials of what the client needs, what rate of return they require to meet that need, and how much risk are they willing to take.
“The majority of people overestimate their risk tolerance when the markets are good. And then when the markets are bad, all of a sudden, they can’t handle it anymore,” she says.
Her group supplies clients with an investment policy statement that has a clear definition of what the practice is doing for them, what their asset mix is going to be, and what the parameters are in terms of returns.
She also meets with clients monthly in the first year to explain the mix of the portfolio, asset allocation and the methodology of their investment process.
Ms. Applegath says she finds younger clients are hungry for knowledge.
“We do a lot of education for young couples who are getting married. They want to know a lot more than they used to,” she says.
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