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Advisor Stocks When to leave the wilderness to seek expert financial direction

Alternating days of up and down may prove challenging for do-it-yourself investors.

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Ongoing trade disputes, rising interest rates and a Tweet-happy U.S. president have markets in a seemingly endless tizzy.

Times certainly aren’t easy for advisors, but they may be even tougher for do-it-yourself (DIY) investors. While the legions of DIYers have grown over the past decade of rising equity markets, a lot of advisors are now seeing many of them seeking their help.

Indeed many investors have forgotten what a correction can feel like, says Chad Larson, a Calgary portfolio manager with Mayert, Larson and Derlago Wealth Management Group, part of Canaccord Genuity Wealth Management.

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A few bad market experiences are valuable, Mr. Larson adds, as they are teachable moments in which investors can learn about proper risk management. The trouble for DIYers is that not many have been at it long enough to have had those experiences.

Yet it’s not just the downs that have them “fatigued,” Mr. Larson adds. It’s the alternating days of down and up. Current conditions of extreme volatility are so confounding that many DIYer “just capitulate,” he adds.

That’s where advisors can prove their worth, says Peter Hodgson, portfolio manager with The Hodgson Group, BMO Nesbitt Burns. “Experienced money managers have been through these gloomy days in the market before,” says Mr. Hodgson from Collingwood, Ont., who has more than 30 years of experience working in the industry.

“Someone asked me on the weekend how old I was, and I said I was eight bear markets old.”

Mr. Hodgson says that “been-there-done-that confidence” is what many new clients find attractive as they seek professional advice now that markets have really started to churn. “The markets have been an eye-opener for even professionals, and not just the DIYer.”

But he adds good professional money managers excel at keeping a steady course. To that end, the role of a financial advisor can feel a lot like a therapist, Mr. Hodgson says. They frequently find themselves soothing their clients’ anxieties while keeping them from being their own worst enemies. DIYers can sorely miss that sounding board.

“In the absence of having someone to talk to, and walk them through it, it’s hard for investors because they can rationalize for awhile that things will be okay,” Mr. Hodgson says. “But as they get overloaded by negative information, their ‘savanna brain’ often kicks in at the worst possible time.”

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Like wildebeests stampeding at the sight of a lion, investors are often spooked by just the shadow of a bear market, and they make bad decisions as a result, Mr. Hodgson explains. “When we sense danger, we tend to run.”

Advisors can be the cure to savanna brain. They can steer their clients away from their innate “sell everything” tendencies.

“During periods of stress, we often remind our clients that the brain releases cortisol which makes blood flow restrictive to the parts of the brain that are effective at making decisions,” Mr. Larson says.

Indeed, plenty of research suggests investors may be letting cortisol get the best of them, regularly engaging in the opposite of rational behaviour. As a 2017 Morningstar report notes, that includes buying high and selling low.

By the same token a study from the same year by Russell Investments found good financial advisors can add about 4 per cent of additional annual returns to a portfolio.

How advisors add value, however, has less to do with picking investments than with helping clients adhere to a formal investment process tailored for their needs, Mr. Hodgson says.

“In our practice, we articulate that their portfolio construction is a function of how many years of spending they need in cash and fixed income so when – not if – a bear market hits, they know they have enough money to see to the other side of the recovery,” Mr. Hodgson says.

“While it’s not fun to experience these markets, at least they then understand why they own what they do, and how it will help them get to where they need to be, so they don’t make a rash decision that will ultimately hurt them.”

Given clients will inevitably grapple with anxieties regarding their money, Mr. Hodgson underscores the importance of regular face time.

“When we sit down with our clients, at least twice a year, we actually articulate the risks,” he adds. “We try to give them a sense of how they might feel [in a bear market], but that’s also why it’s so important to highlight how the portfolio has that built-in margin of safety, which really gives them the confidence that they will get through it.”

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