When the current market correction took hold, Doug Warkentin, a financial advisor with Investors Group in Winnipeg, got on the phone with the 30 or so clients he knew were worriers. Then he relayed the same message in letters to the 350 families whose investments he and his team manage.
"Had I told my clients to borrow $50,000 on Sept. 15, 2001, and invest it in the market," Mr. Warkentin wrote, "most would have shown me the door. However, the few bold individuals who saw this as a buying opportunity would have gained 80% to 100% over the past six years. Compare that with someone who sold and crystallized the loss at a low point, and invested what was left in a GIC. This individual would be up approximately 30% to 35% over the same period."
The message is one advisors across Canada are delivering to clients: that they should hang tough because bull markets have historically outlasted and have been of greater magnitude than bear markets, and that defence moves can be costly.
Continually prompting clients to look on the bright side can be stressful, notes Rick Forchuk, associate vice-president, individual distribution, at Empire Life. "Clients are calling and saying, ‘I need to do something.’ History, of course, shows the best thing is to do nothing. But an advisor may not feel he can say, ‘Stay put, things will improve.’ At the back of his mind lurks the thought, ‘What if it’s different this time?’"Client’s concerns have to be addressed immediately. "Even though we have BlackBerrys and other technology at our finger tips, nothing beats picking up the telephone," says Sandra Foster, president of Headspring Consulting, a Toronto-based financial services consultancy. "You have to take this first step, and ask about the client’s concerns."
It’s not always easy. "Clients may lash out at you if they think they’re losing money," Ms. Foster notes. "And they’re more likely to do this if you’ve taken credit for the good markets instead of acknowledging that the markets have been good. If you put yourself on a pedestal, you are likely to get knocked off. You should let clients know you’re a conduit through which they can achieve their financial goals rather than someone with a crystal ball."
Educating clients to understand how investing works goes a long way in retaining them in market downturns. "We coach our clients to see that withdrawing assets or moving to more conservative investments is not the best course of action," says Brett Simpson, president and CEO of Rogers Financial Group in Vancouver. "If a client already has the right asset mix, there is no reason to change it. If he’s invested in a good company with good management, it will remain a good company."The client who plans to retire in the coming months may require further strategies to insulate him from market volatility.
Pierre Payeur, director of fund management at Industrial Alliance Investment Management Inc. in Quebec City, says this client’s portfolio should already have a sizable fixed-income component. "The advisor should have been gradually taking risk off the table," he says. "Now the client won’t have to sell investments that have dropped in value."
"If the client has three years’ worth or more of annual income requirements – say a year’s worth in money market funds, another year’s worth in a one-year GIC and a third year’s worth in a two-year GIC – this should take him out of a market downturn," Mr. Simpson says.
Mr. Warkentin tells those who are nervous about their pending retirement to decide the amount of income they want for the next few years. "Then I’ll suggest buying an annuity that will guarantee that income for five years, and leave the rest of their assets in the market," he says.
There is an upside to the current market environment. Mr. Warkentin says he acquired four new clients in January with assets totalling $2 million. "They were referred by existing clients," he says. "Their former advisors rarely contacted them, and the market downturn was the straw that broke the camel’s back."
Mr. Payeur, a value manager, notes there are buying opportunities, and the advisor may want to take advantage of them for clients with cash. "There are some great companies that we are able to buy for far lower prices than a few months ago," he says.
As for leveraged investments, Ms. Foster is cautious for now. "Say a client has $100,000 to invest, but with current low interest rates the advisor suggests borrowing another $100,000. The client could make a nice profit if the market goes up, but if it drops further or the client loses his job, this could lead to a situation where the client may consider taking legal action against the advisor.
Advisors may find themselves on the firing line when angry clients blame them for their losses. But, again, nurturing the client relationship is the advisor’s best protection, says David Lipton, president of Fairwinds Financial Group, a Toronto-based consultancy that specializes in mediated settlements, arbitration and serving as expert witnesses in securities disputes. "When markets are up, call your clients and share the good news," he says. "When markets are down, call your clients and have them talk about their concerns.
"With the baby boomers now entering their 60s and looking forward to another 25 or 30 years," he adds, "chances are they’ll need a higher rate of return so as not to outlive their assets. And they’ll probably need to take more investment risk to get that higher rate of return."
Keeping KYC (know your client) information up-to-date is key to serving your clients well. "Know your client’s age, net worth, income, risk tolerance, investment knowledge and investment experience," Mr. Lipton says. "You have to know all six in order to give suitable advice. And you should update KYC information once a year to see if events such as a divorce, a death or health problems have altered the client’s risk tolerance. If markets are bad, do it sooner.
"This will protect you if a client decides to sue," he adds. "You’ll need to show a court that you made your best effort to know the client’s circumstances and gave suitable advice in accordance with his investment preferences and risk tolerance. And if the client maintains an existing position or initiates a new purchase the advisor thinks is unsuitable, the advisor should tell the client this directly."
Create an electronic trail
Advisors get sued because they don’t take notes, says Barry LaValley, president of the Retirement Lifestyle Centre in Nanaimo, B.C., and special advisor to Scotiabank Group on retirement issues. "Make your notes electronically so there is a clear trail," he says. "And making notes is especially important with an older client whose children may want to take legal action."
Mr. Warkentin updates KYC information at every client meeting. "I take notes at every meeting including discussions of objectives and strategies," he says. "I read them back to the client and have him sign them."
Many judges are pushing the boundaries of advisors’ responsibility, notes John Fabello, a lawyer with Torys LLP in Toronto who defends advisors being sued by clients. "Even in cases with financially sophisticated clients, advisors have been held liable for not upholding their fiduciary duty."
He says recent cases have driven home the point that full, open communication with the client that is documented by the advisor is the best shield against liability. "If a client indicates he might take legal action, preserve your records and contact the client immediately in an effort to head off the complaint – and as part of your documented full communication."
And know your product, Mr. Fabello adds. "Never sell a product unless you can fully explain its risks and its attributes," he says. "Some of the financial products on the market are complex, and it’s shocking how many brokers and advisors don’t understand what they’re selling. It’s enough for them that their firm endorses the product."
Mr. LaValley says signs that a client may be considering legal action include phoning you every day, questioning everything you do and not remembering what you said. "If you think a client is behaving unreasonably," he says, "you might suggest he should work with another advisor whose investment style is more in line with his needs."
If you’re losing sleep over a client or you don’t want to go into work because you know he’ll be calling, you should end the relationship, Ms. Foster advises.
"And in this stressful time, if you find your physical and emotional balance is at risk, there is no shame in getting help, perhaps through your company’s employee assistance program. Don’t try to handle it all on your own," she adds.
"And your financial planning team will also be feeling tense. Give them a half-day off now and then, or treat them to something. Losing an important team playe r makes things even more difficult in a difficult market."
See pages 23 to 26 for more information on protecting yourself from lawsuits.