Advisors: is it time to adjust your investment strategy? | Financial advisers
Today’s investing environment is a whole new ball game, and financial advisors naturally wonder if it’s time to come up with some new games.
The fourth quarter of the year, in particular, is a critical time for advisors. They must ensure that their investment strategy and the communication of this plan to clients are airtight.
Financial advisers not only need to deliver results, but they also need to make sure that the story behind all of these efforts is clear.
The playing field has changed
Take into account the current investment climate for you and your clients. Stocks are retreating from record highs. Bond yields are so low that you need a microscope to see them. The bond alternatives you’ve used in the past don’t pay much either, and they’re backed by some of the most insecure corporate credit terms ever.
You want to provide quality fiduciary advice, but also satisfy your clients. And when the other side of this frenzy strikes, you won’t want to rub salt in their wounds by having no response or a response that makes them think they’d rather invest on their own. Based on the constant stream of ads offering robo-advisor-type services, you know many will think exactly that.
Meanwhile, the Federal Reserve seems to have convinced many investors that they can take tons of risk without actually taking any risk. In this case, however, there will be consequences for investors’ portfolios. These are not normal times at all.
Complacency can be dangerous
In this environment, you can’t call the same old games in the investment strategy playbook. Your customers are probably feeling confident, complacent, or both. You know from history that this is not an eternal market for speculation, and the rush for cryptocurrencies, non-fungible tokens, specialist acquisition companies, etc.
Few people remember that when the S&P 500 lost 33% of its value in just five weeks last year, that loss wiped out the entire gain the index had made for a month after the 2016 election. C It’s true: the S&P 500 was down 0.98% from December 9, 2016 to March 23, 2020, a period of more than three years. So you don’t have to go far back in your memory to realize that stock market investing, no matter how good, is very cyclical. And bonds are essentially powerless to help in the long run, thanks to years of suppressed returns.
Is it time to adjust your investment strategy?
After more than a decade of a generally favorable investor environment, financial advisors now face a major assessment of their practice. They need to consider the extent to which the growth in assets under management, client retention and the stability of the firm’s investment segment are simply due to market conditions.
In other words, did the tail of the stock market wag the advisory training dog? Or have the proactive steps you’ve taken in planning, customer service, and investing created a fortress-like business that no bear market or recession can penetrate?
Financial advisers should take these best investment practices into account when rethinking their strategies.
Have a clear goal. Your clients may be concerned about stocks, exchange-traded funds, mutual funds, bonds, or alternative investments that they hold in their portfolio. However, that is nothing compared to how they care about why they own these titles and why they are allocated the way they are.
Rather than sticking to what every other advisor is saying, give them something that gets right to the heart of the matter. Specifically, draw a figurative line between their goals and actual goals and what ends up in their portfolio, now and in the future. Because a portfolio is not the end goal. It is simply a means to an end.
Be flexible and adaptive in building your portfolio. Direct index companies take up this concept. Instead of investing in an index or a group of indices as a final strategy, they use those indices as the starting point from which an endless amount of portfolio changes can be made.
No two advisers have exactly the same cut when it comes to a dress or a suit. Wallets can be too now. And frankly, that’s what customers are likely to demand in the years to come. This means that you need a mechanism that can add flexibility to your primary investment approach.
If you do this, you will also better prepare your portfolio to adapt to a rapidly changing market climate. The wait on the bridge is another pandemic wave, a panicking Fed policy change in the markets, a geopolitical threat, inflation, stagflation or deflation. Your customers are probably a microcosm of the general mood of the market. So when they start to feel threatened by a volatile market, it will already be too late for you to close the gap between worry and confidence.
Be selective. When you can buy just about any stock and have a good chance of making money, this success can blind your clients to the fact that their bonds and cash are likely producing a negative return net of your advisory fees. .
While there is still time, ask yourself if their wallets contain too much “dust”. That is, can you identify some of the investments that really bear the brunt, while the others are just a facade? If so, now is a good time to raise the bar on what you are willing to invest in and communicate to your clients that you are doing so.
Taking this proactive step now can plant a valuable seed in the minds of your clients, reducing the risk that you will have to scramble to find an explanation for temporary performance shocks, or whatever else, during the next bout of volatility. .
To take with
Customers’ memories may be short when it comes to lightning crashes like those of 2020 and 2018, but their panic will return the next time the markets fall but not recover right away. Be proactive and non-reactive to gain their trust and keep their business for the long haul.