Financial Advisers are the “personal trainers” of the investment industry

By: Mariska Comins, Head of Technical Support at PSG Wealth

We certainly live during interesting times!

When looking at global news headlines, we are inundated by negative news, from concerns about whether Russia will use nuclear weapons, the constant devastation in Ukraine, North Korea’s missile tests, a gas crisis in Europe, and supply chain disruptions to increased inflation concerns globally.

Looking a little closer to home, things seem equally uncertain. Politically, things seem precarious too and we are only likely to get more clarity after the ANC’s Conference in December. We recently experienced the highest level of continuous loadshedding in our 15-year loadshedding history. And the South African Reserve Bank raised its benchmark repo rate to 6.25% in September 2022, the sixth consecutive hike since November 2021. This certainly causes discomfort and uncertainty.

I haven’t even touched on the aftermath of Covid-19, corruption cases, riots last year, and flooding devastation – it really is overwhelming.

We are all too familiar with the saying ‘when the US sneezes we, in South Africa catch a cold’. There is no doubt that global events start a chain reaction which ultimately impacts us as South African investors.

With all the negative news around us, creating huge uncertainty how is it even possible for the investment industry to approach the advice process?

Doing so successfully requires dedication from both clients and advisers, and a willingness to look beyond the short-term noise. The investment industry should approach the advice process by focusing on what we can control. Investors rarely focus on:

• their goals/needs
• the plan to achieve each goal
• their ability to take risk
• time horizon

However, when we encourage clients to do so, the long-term outcomes achieved for clients tend to be far better.

The performance will always be relevant and part of client discussions, but it should not be the focal point or an overriding consideration. However, investment performance causes emotions that can cause ill-considered decisions, and therefore advisers should focus on helping their clients manage their own behaviours and reactions to market events.

Managing investor emotions can be achieved by explaining upfront and during reviews what the plan is to achieve each goal or a set of goals. It is important to explain that asset allocation is about diversifying investments across different asset classes (e.g. equity, fixed interest, cash) to ensure you achieve the desired financial planning outcomes at a level of risk that the investor is comfortable with.

Higher required returns lead to a more risky asset allocation, e.g. a higher allocation to equity. If the required level of risk is not acceptable, then the desired financial planning outcomes need to be reviewed to allow for adjustment of the asset allocation in a manner that reduces risk exposure. During tough market conditions, investors often feel that cash is a safe investment but that reminds me of the saying by John A. Shedd: “A ship in harbour is safe — but that is not what ships are built for.” By contextualising the behaviour of various assets in terms of their long-term outcome, advisers can provide clients with the confidence to remain invested, regardless of market developments. This is especially important in the current environment, where we are experiencing extreme volatility in risk assets, while inflation is high and cash investments are unlikely to deliver the required long-term returns clients need to achieve their goals. Separating the short-term volatility from the long-term goal clearly in the client’s mind, is key.

In addition, it is important to remind clients that while market volatility causes so much anxiety, it also creates opportunities for investors. While it is very difficult to block out the external ‘noise’, it is the only way to ensure that our judgement is not clouded and that decisions are being made with the best long-term outcomes in mind. This also means that regular reviews of the client’s plan is absolutely essential to ensure they remain confident and on track to achieve their goals.

In our view, financial advisers are the “personal trainers” of the investment industry. While it can be tough for clients to stay the course, helping them remain disciplined and confidant despite the inevitable market turmoil, and focused on their long-term plan, is the best way to help ensure that they will achieve their goals.