Couple getting financial advice

Resilience is an important concept in financial markets. As applied to the financial system, it means that markets are durable and can withstand shocks from unanticipated events. The term is equally important when it comes to retail investing.

While the regulatory framework and investor education are important, the front line of investor protection is enhancing resiliency — the ability of individual investors to avoid costly mistakes and withstand shocks from unanticipated market events.

What does the resilient investor look like?

A resilient investor understands that all investing has some degree of risk. Stocks, bonds, mutual funds and ETFs can all lose value when markets turn bad. Nevertheless, a resilient investor knows they cannot achieve their financial goals without risk. Therefore, a resilient investor is also one who takes only the amount of risk they can personally tolerate. Finally, a resilient investor can withstand market volatility and avoid panic selling in falling markets when losses can be crystalized.

The question is, how can we foster resilience in retail investors?

Evidence shows that one of the best ways an investor can develop resilience is by obtaining financial advice. A large and growing body of research shows that investors who work with advisors build more wealth over time compared to similar non-advised investors. The research shows that the specific aspects of advice that contribute to increased wealth is a combination of asset allocation and savings discipline.

The Pollara Mutual Fund and ETF Investor Survey, sponsored by the Investment Funds Institute of Canada, also reveals the power of personalized investment advice in building resilience — advice that answers questions specific to the investor’s circumstances in the context of a trusted relationship.

When asked, 74% of mutual funds investors and 68% of ETF investors stated that “because of my advisor I have better savings and investing habits.” Furthermore, 84% of mutual fund investors and 78% of ETF investors stated they feel more confident they’ll reach their investment goals when using a financial advisor.

The volatility in markets this year has no doubt reinforced the value of advice for many investors and the role it plays in building and sustaining resilience. In fact, 92% of mutual fund and ETF investors reported this year that they’re satisfied with their advisors, and 79% of mutual fund and 71% of ETF investors stated they wouldn’t want to handle their investments on their own.

It is also notable that when asked how they evaluate satisfaction with their advisors, the second most common response (after investment returns) was peace of mind and a sense of security in a trusted relationship.

Finally, behavioural economics has demonstrated that investors have predictable irrational biases, such as loss aversion and confirmation bias. An investment advisor can enhance resilience by coaching their clients to overcome bad investing behaviours, stay the course through volatile markets and avoid costly mistakes.

Competition and innovation will continually change and improve the way investors access investment advice. One thing that won’t change is the importance of long-tenured investment advice from a trusted advisor in creating the resilient investor — the front line in investor protection.

Paul Bourque is president and CEO of the Investment Funds Institute of Canada.