Stocks and bonds are coming off a difficult first half of the year. The first quarter, in particular, ranked as the third-worst quarter for bonds in the past 50 years, according to Vanguard calculations of Morningstar Inc. data.BRENDAN MCDERMID/Reuters
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Investors’ patience and discipline have been tested repeatedly over the past several years. From the onset of the COVID-19 pandemic and the wild swings in the market to rising worries over inflation and geopolitical conflict, investors have a lot to consider when navigating the current environment.
The latest market turbulence has only amplified the recognized value that financial advisors provide to clients in the moments that matter. In fact, recent research from Vanguard Investments Canada Inc. found that investors believe human-led financial advice provides a perceived value-add of 5 per cent to annual portfolio performance versus “going it alone.” That’s also higher than the perceived value-add of 3 per cent for digital-only advice.
The study also found a dominant, enduring preference for advisors.
While more than 90 per cent of human-advised clients say they would not consider switching to a digital service, 88 per cent of robo-advised clients would consider switching to a human advisor in the future. In addition, three times as many investors report having stronger peace of mind when working with a human advisor as compared to do-it-yourself investors.
So, from where does human-led financial advice derive its perceived additional value? For the most part, it’s the need for guidance and coaching on financial and investing decisions.
The best wealth managers add value beyond investment returns by providing appropriate support and financial planning throughout different life stages and unpredictable events. An advisor who incorporates individual client considerations into a financial plan – such as intergenerational wealth transfer, legacy planning, and retirement – can add lasting value for generations to come.
These matters are often delicate, time-consuming, and complex, requiring a level of thoughtful support that’s difficult to replicate with technology. In volatile markets, advisors serve as behavioural coaches, helping clients resist the urge to change long-term financial plans based on short-term events.
Research shows investors maintain loyalty to advisors who are able to provide financial coaching in times of stress. Nevertheless, the most effective advisors use technology to drive efficiencies that allow them to leverage their unique relationship management skills to help clients achieve financial goals.
Technology has optimized portfolio management, tax optimization, and scenario modelling ‒ particularly the types of services investors prefer to be digital and automated.
As such, here are three helpful, often undervalued and overlooked, ways to help clients navigate today’s challenging market environment.
1. Anchoring to the long-term plan
Stocks and bonds are coming off a difficult first half of the year. The first quarter, in particular, ranked as the third-worst quarter for bonds in the past 50 years, according to Vanguard calculations of Morningstar Inc. data.
That means more risk-averse and conservative clients may feel a greater sense of anxiety around their portfolios. In turn, advisors are placing greater emphasis on behavioural coaching and reassuring clients to stay the course and avoid changes based on one unfavourable quarter.
During volatile markets, many investors are tempted to recoup losses by changing their risk profile or by moving into products that may not be consistent with their long-term financial goals. The risk of “chasing returns” into new or esoteric asset classes can introduce a greater element of risk in a portfolio and heighten investor anxiety.
Advisors can take this period to calm clients by revisiting their goals and investment plan to determine if there have been any significant changes to the underlying assumptions.
2. Reset expectations
Advisors can help set a realistic picture of the future after an unprecedented bull market.
Part of behavioural coaching involves engaging clients in thoughtful conversations about their long-term financial plan and the risks of deviating from it based on short-term market movements. Nobody has a crystal ball on what markets will do, but having candid conversations will enhance trust and credibility.
Successful advisors solidify the client-advisor relationship in stressful and volatile periods similar to the current market environment.
3. Control what you can
Sticking to a pre-determined financial plan doesn’t mean advisors are standing still. Proactive advisors are also seeking ways to make client portfolios more efficient.
Actions such as rebalancing into underperforming asset classes regularly are important. Tax-loss harvesting and lowering the overall cost of investment portfolios are two other ways advisors can help clients through the volatile swings in a bear market. While future market performance is uncertain, the only controllable certainty investors have is what they pay an investment fund.
Providing counselling, empathy and care can go a long way toward helping investors stick to their financial plan and long-term goals, even in volatile markets. Research affirms that emotional value is one of the top benefits investors attach to an advisor.
Focusing on those unique characteristics in your discussions with clients can provide additional value and deepen relationships when investors need it the most. That’s something that can’t be automated or replaced with a machine.
Tim Huver is head of distribution at Vanguard Investments Canada Inc. in Toronto.
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