Conversations on the impact of Covid-19 on financial advice
BY ANNA RICH
Although Covid-19 has made it more challenging for financial advisers and their clients to maintain their relationships, it is important to make the effort. This is the view of Roland Gräbe, head of Old Mutual Wealth Tailored Fund Portfolios, who says that although clients might have had “vaguely connected negative news”, such as the initial market response to the pandemic on their own investments, they didn’t have a concrete idea of the extent.
“So when advisers updated clients on poor investment performance, this came as a shock to most of them. And that threatens trust,” he says. “The thought process that it sparked is this: if my investments are not performing, does it mean my adviser isn’t any good, or has failed to steer me in the right direction?”
It is not possible for financial advisers to foresee events such as the pandemic, says Gräbe. However, advisers need to have the important conversation about risk with their clients, ideally at the outset of the relationship.
“For trust to develop between adviser and client, promises need to be kept and there needs to be behavioural consistency,” says Gräbe. “When unforeseeable events do arise, the adviser can refer back to the conversation they had about risk.”
At the outset, the adviser assesses how much risk clients need to take and are willing to take to achieve their goals, and sets up an investment strategy within that framework. And if any changes take place, they adapt the strategy accordingly.
As a result of lockdowns, clients and their advisers have not been able to sit face to face over coffee or tea, says Gräbe. Although there are other potential channels of communication, they have not been interacting as frequently, possibly because there is some reluctance associated with conducting yet another conversation over a mobile phone or virtually. And when they do set up meetings, clients often just want to get them done as quickly as possible. Gräbe flags this as a serious issue.
“First, if the frequency of interaction between advisers and clients drops, then trust is going to be an issue. And second, financial planning conversations are crucial to keeping clients informed and for clients to update advisers on changes in their circumstances so that the right decisions can be made,” he says.
“Practitioners who have been able to engage with clients digitally are finding it easier to service their clients, in spite of social distancing and regulations,” says Gräbe.
“This is likely to be the way of the future, so don’t expect things to go back to the way they were before the pandemic. The world is fast becoming more digital, and embracing this trend will make you much more efficient.”
DON’T BE AFRAID OF DOING NOTHING When a financial adviser tells a client “Your funds have gone down, but just be patient, they will go back up”, this is difficult for the client to accept, says Gräbe. “No one else – not a doctor, not a mechanic – gives you that type of advice. If your car breaks down, it’s not going to fix itself; you need to do something. So you start asking yourself ‘If my investments aren’t performing well, what should we be doing to fix this?’”
We become fearful when things go badly, and tend to react emotionally to market movements. This is the worst way to act, Gräbe says, and it typically leads to investment mistakes – as illustrated by the events of March last year.
As the pandemic and attendant lockdowns and job losses took hold globally, local equity, bonds, property and global equity all fell at once, causing significant drawdowns even in well-diversified investment portfolios.
“The subsequent market recovery was as swift as the drawdown, but many advisers and clients reduced risk at the worst time, so they failed to participate in the broad market upswing,” says Gräbe.
The principles that work for us in other spheres of life – such as reacting promptly and decisively to an adverse situation – do not necessarily apply to investments, he notes. “With investments, once you’ve set your strategy, it’s often completely appropriate to do nothing.”
For many of us, the pandemic shouldn’t change our investment planning, because our investment horizon and risk tolerance are unlikely to have changed, says Gräbe.
“If you still have a job, you don’t really have to adjust your strategy, because for the most part, life is the same.” On the other hand, if your circumstances have changed substantially – for example, through loss of employment – it makes sense to reassess your financial plan, he says.
“The key thing is that our individual circumstances are of greater import than the external environment. With financial planning, you are on a lifelong journey, so you have to think about it from that perspective, rather than reacting to day-to-day news. This is the age-old challenge.”