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Advisor SunLife

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How to keep clients from panicking in turbulent times

It’s human nature to act impulsively when markets tumble and losses loom. The good news is that volatility can give advisors more opportunity to educate clients


Date:July 28, 2016

Most financial advisors will agree that there is no more challenging client meeting than one in which you present negative annual returns. Most people will understand down cycles, but an actual loss of capital – as temporary as it may be – can be difficult for some to accept.

But don’t blame clients. It’s human nature to dwell on the negative. A pair of Nobel prize-winning psychologists – Amos Tversky and Daniel Kahneman – first discovered in 1979 that the pain people feel from a loss is twice as great as the pleasure they receive from a gain.

This aversion to loss is “a powerful bias that can be a significant motivator in client decision-making,” says Rocco Taglioni, senior vice-president, head of distribution, individual insurance and wealth with Sun Life Financial.

“When clients feel this pain during down or volatile markets, they often act impulsively and ‘fly to safety,’” he says.

How widespread is loss aversion amongst investors? According to a 2015 Investors Economics Household Balance Sheet report, 32 per cent of all financial assets held by Canadians were in bank accounts and fixed-term deposits. That means a great deal of capital generating little or no net yield.

The good news, notes Mr. Taglioni, is that more volatility typically means more client conversations, providing advisors with more opportunities to present options, chart new strategies or stay the course.

“Once advisors understand what motivates clients to make financial decisions, or more specifically, what motivates them to make decisions that aren’t aligned with their long term goals, they can better address the powers at work and propose solutions to overcome them,” says Mr. Taglioni.

Advisors have an important role to play when it comes to countering clients’ loss bias and resulting loss aversion, educating clients on the critical role that equities can play in a balanced portfolio. That education often needs to be reinforced during down markets when the overwhelming urge is to cut losses. Crafting a well-diversified portfolio that features exposure to an array of asset classes and economic regions can also smooth out volatility and reduce client urges to exit the market in a down cycle.

“Advisors can’t change how clients feel about loss,” says Mr. Taglioni. “But adopting strategies that acknowledge these feelings can encourage clients to keep their portfolios aligned to their longer-term goals.”

Given the real and powerful instinct for loss aversion that many clients exhibit, wealth products with guarantees play an important role in clients’ investment and retirement mix, providing some much needed confidence and assurance about the future.

Mr. Taglioni points out that products like annuities and segregated fund contracts, also called guaranteed investment funds (GIFs), can offer significant income and capital guarantees. While these products carry a cost for the certainty of guarantees, it is less than the potential cost of clients sitting on the sidelines in fear of a future market reversal.

Alexandra Macqueen, a Toronto-based certified financial planner and author, sees wealth products with guarantees expanding in the future given the popularity of longevity insurance-like products, such as deferred income annuities, in the U.S.

“These are products that allow you to buy income that only kicks in at a fairly advanced age, like 85,” says Ms. Macqueen. “So you can buy income before 85, defer tax on it and then draw income on it in the future.” These kinds of products are attractive to investors who are concerned about running out of money should they live to an advanced age.

Deferred income annuities are available in Canada as well, but as yet they have not been heavily marketed to advisors or potential investors, she notes.

The role of the financial advisor is more important than ever as clients approach retirement, says Ms. Macqueen, co-author of Pensionize Your Nest Egg: How to use Product Allocation to Create a Guaranteed Income for Life. “Accumulation is very different from de-accumulation. With accumulation, you have time to recover from mistakes and the theory of asset allocation is very well known. We have a rich history to point to and talk about.”

Retirement, on the other hand, is quite different. Some investors may feel as if retirement is “a little bit like winning the lottery,” says Ms. Macqueen. Just like with lottery winners, retirees suddenly have what looks like a great big pile of money. The catch is that it has to last them the rest of their lives.

“It is probably the most money we will ever have,” says Ms. Macqueen. “[That is why] there is a huge role for advice.”

Advisor SunLife


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