This week I visited the office of adviser Nick Lincoln, director of Radlett-based Values to Vision. I was there to sit in on a client meeting (which I will detail in another article) but as we waited for the client to arrive Nick showed me how to play with the Voyant cashflow forecasting and we got discussing how to plan for market falls.
Lincoln proudly informed me that his clients never pick up the phone to him in a panic from reading some doomy headline about the economy or market turmoil. That, he said, was the power of client education, as well as being pretty blunt that he did not want to deal with the sort of person who is prone to getting in a flap. This was a key part of what he sees as his value to clients, and driving that value is the cashflow planning process. The client has already looked at what happens to their assets and income in the event of a substantial, even extreme, market drop. When such an event does occur, therefore, the client should already know that their financial situation has been secured.
That was on Monday morning.
On Tuesday morning, markets fell. The news was taken up with ‘plummeting markets’ and ‘panic’. I emailed Lincoln to ask how many clients had called him. The answer was, of course, none.
In fact advisers were at pains to drive home this point on Twitter:
We're not going to add fuel to the fire by tweeting about markets. Our day job is financial planning and whatever the markets are doing (up or down) has already been factored into our client's planning. I'd be very surprised if we took any calls about market movements this week.— Dennis Hall (@YellowtailFP) February 6, 2018
When markets were setting record highs, people were saying they were too expensive. Now they’re falling, people are selling. This is what markets do. Don’t lose focus on your long term goal— Steven Barrett (@Bluewaterfp) February 6, 2018
In a blog this morning, adviser David Crozier, managing director of Navigator Financial Planning, wanted to add some context. he wrote: 'This morning’s BBC News headline is, “London shares hit lowest level since 2016”. While that is factually accurate, it could easily be read in other ways. What about: “Everybody that has held London shares since before 2016 has made money.”
'And that doesn’t even include the dividends that have been paid out in the interim. Anybody that is holding equities, or other risky assets, with a two year objective in mind hasn’t been listening.'
The news also chimed with another story we have been looking at recently, the enduring popularity of what I dubbed ‘buffer funds’, funds or managers which promise some downside protection.
For example, PruFunds uses smoothing mechanism and has attracted over £30 billion from advisers no doubt looking to protect their clients from sharp market falls. Meanwhile manager Neil Woodford, despite having endured a torrid year of poor performance, still has a loyal following from advisers who remember he avoided the bursting of the tech bubble and shunned banks ahead of the financial crisis.
One question raised in a separate piece on Standard Life's MyFolio range was whether any amount of downside protection would make up for underperformance in the good years.
Even PruFunds head of business development Fidell, said it would be ‘naive to suggest PruFunds could defy gravity’ or that ‘if everything started to fall, it would magically go in the opposite direction’.
I wondered at the contrast with Lincoln and his cashflow chart. It is so important to be able to work out in advance what will happen (i.e. will I have enough to live off and fund my lifestyle?) if investments take a tumble. And not only that but to understand why that is the case and be comfortable with those outcomes.
That’s not to say advisers should not think deeply about investments. One reason that warnings against continued exposure to fossil fuel energy stocks struck a chord with advisers at our annual conference was the notion of a fundamental, underlying issue was lurking.
Those that weathered the financial crisis seem to have learned two lessons. One is that clients’ panicked reactions can do great harm and there is much value in an adviser helping clients avoid this. The second is that the next great crash will not be predicted with any great accuracy but that it is diligent to ask good questions, like what will happen when solar energy becomes cheaper to produce than from fossil fuels, perhaps.