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Managing investor expectations is vitalAs financial planners, we need to be sensitive to the very real possibility that the public may not have the same level of trust in financial planners as they did a year ago, writes Morné Bezuidenhout.
The collapse in global markets, sparked by the failure of Bear Stearns and Lehman Brothers in the United States during the course of last year, has changed the mood among investors. Fear and panic gripped them as the sell-off in global assets took hold.
I am sure many investors are of the opinion that their financial planner should have warned them against the events of last year (particularly if they are of the view that they are remunerating their financial planner). As financial planners, we need to ask what we should be doing to bolster our clients’ trust.
There is a well-known trust equation where trustworthiness is defined as the sum of credibility, reliability and intimacy. The sum of these components is then divided by self-interest.
Credibility is earned by the ability to obtain the required expertise and by being upfront about one’s limitations. Reliability is based on consistency and dependency.
Reliable financial planners provide a sense of comfort to their clients. Intimacy is not about revealing our personal details or that of our clients, but rather about understanding the sensitivities of others.
Finally, self-interest is the degree to which one focuses on one’s own concerns when interacting with others. Self-interest decreases trustworthiness.
Credibility, reliability and intimacy can be augmented in our daily dealings with our clients. In our practice, we have found that placing the events of the last year in the context of a client’s long-term financial plan helps a client to gain perspective and at the same time, reinforces these three components.
In assessing our clients’ needs and objectives, we counsel them as to the required returns that their capital requires to generate. Clients must be informed of the various investment options available to them and, more importantly, the consequences following on the choices exercised by them.
As part of the counselling process, the recent economic downturn was examined and the effect on our clients’ long-term financial plans was considered. If we look at the 20-year period from 1989 until the end of 2008, the All Share Index (ALSI) returned on average 16.1% per annum. This is in spite of the -23.2% return from the ALSI during 2008. It is easy to see that although the events of the last year were particularly severe, they were a mere blip when taking a long-term view.
Against the backdrop of the financial downturn, financial planners need to be proactive with their clients. This includes the completion of instructions and administrative tasks mandated by clients. Prompt and efficient services can make a world of difference. Investors will feel that their financial affairs really are in good hands, which builds our reliability and credibility.
It goes without saying that prompt and efficient service without expertise with regard to investment planning is useless. Financial planners will be more credible with investors if they have intimate understanding of investments and tax.
In light of the additional volatility and uncertainty, financial planners should also be willing to spend more face-to-face time with their clients. Where clients were scheduled to meet with their financial advisers on an annual basis, the time between review meetings may need to be reduced; this will in turn reinforce the intimacy component of the trust equation.
Financial planners may need to review the various aspects of their clients’ financial planning in the wake of the economic downturn. For example, there may be many investors who rely on the realisation of assets, such as secondary properties, in the event of death or disability. Most properties are worth substantially less than they were a year ago and these investors may require additional life or disability cover to make up the shortfall due to depressed values.
In light of the fact that the financial world has been shaken by schemes and irregularities, some clients have been left not only concerned about the return on their money, but also the return of their money.
Investors need to be reassured of the numerous control measures in place to safeguard their investments. For example, unit trusts are separate legal entities whose assets are ring-fenced and do not reside on the balance sheet of the asset management companies. The unit trust industry is regulated by the Financial Services Board and governed under the Collective Investment Schemes Control Act and is overseen by the Association for Savings & Investment South Africa.
In conclusion, it is vital to manage investor expectations going forward. The world is not the same as it was a year ago. In future, it will be necessary to adjust original time horizons and return expectations.
If the current lack of confidence on the part of investors is handled sensitively and appropriately, we may even emerge from the financial turbulence in a more trusted position then we were prior to the downturn.
