usiness team in a meeting looking at a sheet of paper

Much debate has arisen about the near-term economic outlook, with positions split between continued high inflation and the onset of recessionary conditions. The difference in outlook turns on monetary policy. Will authorities crack down hard on rising inflation to reduce consumer demand and inflationary expectations, but likely overstep to push the economy into a tailspin? Or will policy measures ease prematurely only for inflationary pressures to relight, as happened previously in the 1970s and 1980s?

The consistent misreading of inflation by central banks over the past year has given investors little confidence that monetary policy will succeed at a so-called soft landing — raising interest rates enough to slow inflation while avoiding an economic downturn. Investors are more convinced that volatile and uncertain financial markets are here to stay, at least for the near term.

It is left to the investment advisor to anticipate monetary policy and the timing of likely near-term economic consequences, and then provide the requisite portfolio repositioning.

These portfolio adjustments will be quite different depending on financial and economic conditions. If an inflationary environment persists, adjustments may include a shift to commodities, other inflation hedges like gold, and equities such as financials and energy stocks; for recessionary conditions, shifts can be made to cash and de-leveraged investments, and investment increased in government and high-grade corporate bonds.

The immediate and foremost priority for advisors in these uncertain conditions is to invest in ongoing communication and relationships with clients to hold their emotions in check and keep them invested, and to explain the reasons for the volatility of financial assets and respond with suggested portfolio adjustments. Clients need this close contact and support from their advisors, as many of them are on the knife-edge, as the high proportion of retired and near-retired clients are challenged to preserve their accumulated retirement savings in turbulent and uncertain financial markets. Returns may have to be sacrificed for increased cash holdings and investment hedges.

To bolster client communication, it is important that advisors utilize innovative fintech applications for better client interfacing for online communication (Zoom, Teams, etc.), as well as online access for financial information and statements, and planning tools to monitor investments against financial plans and goals. Further, the client-focused reforms rules for know your client, suitability and conflicts of interest give better guidance and clarity to encourage client-advisor contact and documentation of recommendations and transactions.

With these measures, we can be optimistic that advisors and firms are up to the task of maintaining client confidence and making the right investments to protect portfolios, as well as finding investment opportunities, in this changed environment. Further, advisors have the advantage of collaborative structures through advisor teams and specialized expertise, with supervision, to find effective solutions. Advisors have also improved productivity in the investing process for greater efficiency and lower costs through narrower, focused clientele and larger asset size under management.

Finally, regulatory structural reforms, notably self-regulatory organization (SRO) consolidation, will facilitate portfolio adjustments by giving mutual fund dealers greater scope and efficiency to access non–mutual fund assets — whether in inflationary or recessionary conditions — to invest more efficiently in certain equities and ETFs, and government and lower-risk corporate bonds. Moreover, SRO consolidation will enable dealers to collapse separate dealer platforms (registrants of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada) into a single dealer platform, reducing operating costs.

While stressed financial markets may take longer to find their footing than in early 2020, investor confidence will hold up until markets stabilize and the economic outlook is clearer.

Ian Russell is a partner with Russell Deacon & Company and past president of the Investment Industry Association of Canada.