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Good advice essential during market turmoil

By Andrew Rickard | December 19 2011 04:09PM

Products and demographics may be changing, but industry leaders believe that the need for good advice is constant.
At the annual Investment Funds Institute of Canada (IFIC) conference in Toronto on Oct. 14, a panel of three financial services executives discussed the future of the mutual fund industry. They all agreed that financial advisors have a crucial role to play, especially during periods of market volatility.
Brian Murdock, chairman and chief executive officer of TD Asset Management, notes with regret that high levels of volatility have caused some investors to capitulate and withdraw from the markets entirely. “That was probably the wrong decision,” he says. “I think they need better advice to get back into the game.”
Recalibrating expectations
On the other hand, Mr. Murdock thinks that those who remained in the markets are now recalibrating their expectations about risk and reward, and about how best to measure investment performance. He suggests that advisors have a central role to play in this process.
According to Mr. Murdock, advisors can help investors choose a more appropriate asset allocation mix and also address liquidity concerns, for example by choosing investments with higher trading volumes. “This summer people were running for high ground, running away from investments and making emotional decisions out of fear that they might be trapped in something they could not sell,” he comments.
“Clients are nervous and shaken by what they’ve seen. Nobody likes to lose money,” adds Blake Goldring, chairman and chief executive officer of AGF Management. “As we look into the future, we need better end client education, and that is where the advisors are going to pay an integral role,” he says. In his opinion, product manufacturers should do everything possible to provide advisors with the information they need to help investors regain their faith in the financial markets. “Confidence is what this business is all about,” he notes.
Representing the insurance industry on the panel, Industrial Alliance president and CEO Yvon Charest noted that the crisis in the stock market has illustrated just how complex and inter-related the financial world has become. In this kind of environment, Mr. Charest believes that advisors should have an easier time convincing people that they can add value. “It is even more important to have an advisor helping you,” he says.
Mr. Goldring says that there have been a number of studies indicating that consumers are almost always better off if they use a financial advisor. He notes that a recent survey of 425,000 American investors showed that, between 2006 and 2010, those who worked with an advisor enjoyed investment returns that were 219 basis points higher that those who invested on their own.
In Canada, Mr. Goldring points to the most recent IFIC survey conducted by Ipsos-Reid and suggests that there is a causal relationship between the use of an advisor and wealth accumulation. “People have four times the household net worth on average if they have an advisor,” said Mr. Goldring. “It’s understandable. People, left to their own devices, will get a little bit anxious when they read the newspaper and will pull out at absolutely the wrong moment. And they will never make that money back again.”
For his part, Mr. Charest pointed to recent data collected by IFIC revealing that 43% of mutual fund assets are held in balanced mutual funds. In his opinion, this shows that clients would like to have a greater level of certainty about their investments. He notes that this is one of the reasons that the insurance industry has had a great deal of success with guaranteed minimum withdrawal benefit products. “It’s an indication that the mutual fund industry needs to think more about the de-accumulation phase, and ways to offer clients a minimum amount of income every year,” he comments.
In Mr. Murdock’s opinion, aging investors are measuring their investment performance differently, and as a result there is a growing emphasis on absolute returns. “As we age as a population, people are going to solve for different equations,” he says. “It’s not so much about expected rate of return against a benchmark, but rather how much for how long.” Mr. Murdock believes that advisors are increasingly going to be judged on their ability to provide investors with the income they need and manage longevity risk.
“The great thing about demography is that, unlike all the other sciences, it offers a degree of certainty,” says Mr. Charest, who is an actuary by profession. “Contrary to interest rates, contrary to the stock market, demographic trends are quite predictable.” Given the trends that are coming, he suggests that the successful financial services companies will be the ones that are able to develop products that provide the outcome-based solutions aging clients crave. “We have to be smart in terms of product development,” he comments.
Next generation
Mr. Goldring agreed with Mr. Murdock’s and Mr. Charest’s assessments, and concluded by pointing out that it is not only clients who are aging. Advisors are also approaching retirement. “It is absolutely critical that the next generation of advisors is properly nurtured and they are given the tools to fill the role of the bigger advisors who will soon be retiring and passing their books on,” he comments.
Next generation
Mr. Goldring agreed with Mr. Murdock’s and Mr. Charest’s assessments, and concluded by pointing out that it is not only clients who are aging. Advisors are also approaching retirement. “It is absolutely critical that the next generation of advisors is properly nurtured and they are given the tools to fill the role of the bigger advisors who will soon be retiring and passing their books on,” he said.

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