Man facing stock exchange, financial chart overlay

The stock market collapse that followed the global financial crisis of 2008-09 was one of the worst in modern history. The experience of suffering a sudden and precipitous drop in the value of assets, much of which had taken years to build up, left most investors reeling. As a result, this episode had a long-lasting and profound impact on investor behaviour and altered the nature of client/financial advisor relationships for good.

Many clients who suffered through this ordeal developed both lower tolerance for market volatility and greater aversion to risk. In fact, although individual clients’ risk tolerance has long been considered to be stable, recent evidence challenges that perspective, says Lisa Kramer, professor of finance with both the Rotman School of Management and the department of management at the University of Toronto proper.

“There’s good evidence now that investors have varied appetite for risk, and I think that, analogously, this can happen over lower-frequency time horizons,” Kramer says. “For example, over a business cycle or in response to what’s happened to market corrections.”

In fact, many people – clients included – suffer from “recency bias,” which is a tendency to believe that events that have occurred previously are likely to happen again, Kramer explains. In the case of the global financial crisis, the significant market downturn may have translated into clients’ aversion toward investing in general. This could especially be the case if clients saw their nest eggs depleted – particularly if those clients liquidated their assets at the point at which valuations were low.

“People tend to be gun-shy after experiencing a market downturn,” Kramer says, “so this could lead to people becoming more reluctant to invest in risky assets.”

In fact, 46% of Canadian investors surveyed for Boston-based Natixis Investment Managers’ 2018 Global Survey of Individual Investors believe they’re exposed to greater market risk now than they were before the global financial crisis, while 56% said that the threat of volatility undermines their savings and retirement goals.

Underlining these sentiments is a major shift in the way investors define risk these days: as losing their assets rather than missing out on investment opportunities. In fact, 84% of Canadian investors surveyed for the Natixis study said they would choose safety over investment performance. These results are in contrast to the 75% of survey participants who said they feel financially secure.

“When investors become too conservative or want to move to a higher cash weighting, what’s happening is they’re achieving more of their short-term security at the expense of their long-term security,” says Stan Wong, director, wealth management, and portfolio manager with Toronto-based ScotiaMcLeod Inc. “So, in other words, investors are paying attention to short-term risk and they ignore longevity risk, which is the risk that they could outlive their retirement savings.”

Darren Coleman, senior vice president, private client group, and portfolio manager with Toronto-based Raymond James Ltd., says he and his team warn clients who are fearful of another downturn to focus instead on issues they really should be afraid of – namely, inflation and the decline of purchasing power.

“We spend a lot of time coaching people not to worry about protecting a dollar [and] instead worry intensely about what a dollar [actually buys],” Coleman says.

“If clients are very worried about the market dropping by 5%, 10% or 20% from time to time, and they’re trying to protect their principal, what’s going to happen is they’re going to spend all of their money,” Coleman adds. “The biggest risk is the fact that everything clients spend money on – such as food, shelter, property taxes and clothing – probably is going to triple in value during the course of most people’s lifetimes.”

Rather than fear a downturn, Canadians need to think about how to ensure their portfolios deliver an income throughout their retirement to pay for rising costs, Coleman says, adding that risk aversion alone could harm a client’s financial prospects.

Coleman and his team work hard to prepare their clients for another market crash – or for volatility in general – by conducting “fire drills.” During these scenarios, Coleman and his team watch clients react to opening their account statements and finding that they have anywhere from 5%-20% less money than the last time they checked.

“Going through this exercise is important so that we understand what clients’ emotional responses are likely to be,” Coleman says, “and we can condition [those clients in] what their response ought to be.”

The activity teaches clients that the one thing they shouldn’t do when they see a drop in the value of their assets is panic, Coleman says.

Another behavioural trend that has emerged since the global financial crisis, he adds, is that clients are far less interested in the details of their portfolio and are more concerned about the outcome of their investments instead.

“[Clients] just want the advisor to be the pilot,” Coleman says. “They don’t need to understand how the landing gear and navigation system work.”

This shift in investor attitude may account for the rising interest in discretionary portfolio management over the past decade.

“If you think back to 2008, and even before that, brokers would have had to call their clients for every trade they wanted to make; whereas now, that’s done at a push of a button, thanks to [advisors who practice] discretionary [portfolio management],”says April-Lynn Levitt, business coach with The Personal Coach in Waterloo, Ont. “Advisors now are able to respond a lot more quickly if there’s market volatility – both to protect clients and to take advantage of opportunities.”

As clients scrutinize the outcome of their investments more closely, investing based on environmental, social and governance (a.k.a. ESG) principles has increased.

“If investors have less trust in global financial institutions, one of the ways that might manifest itself is in more emphasis on the social uses of capital or the values-based use of capital as opposed to just trying to make money,” says Dave Lafferty, senior vice president and chief market strategist, U.S., with Natixis in Boston.

In light of clients’ changing attitudes, advisors also have had to adapt their practices to accommodate changing client service needs. Advisors now are forced do more hand-holding than ever, Lafferty says.

A big reason for that change is the rapid evolution in technology, Lafferty adds, which has allowed investment information to be scattered widely across the Internet – from media outlets to family members’ or friends’ opinions posted on platforms such as Facebook.

“A more complex global economy [combined with] more products, more volatility [and] more social media – when you pile on [those changes], the job of an advisor has become fairly enormous,” Lafferty says. “This is not calling your clients twice a year and telling them how their ‘buy and hold’ mutual funds have done.”

Instead, advisors often need to create more touchpoints with clients to manage their attitudes about investing.

In addition, advisors and their firms have shifted the nature of their services toward providing more comprehensive wealth-management. Advisors now provide services beyond investment advice or portfolio management – such as financial planning, estate planning and tax planning.

Financial planning, in particular, has become key to reassuring clients further regarding their risk tolerance in this post-global financial crisis world, Wong says. That’s because financial planning helps clients understand their financial situation more deeply and develop long-term thinking about their finances. (See story on page 22.)

With financial planning now considered by many who offer financial services to be a critical component of the client/advisor relationship, advisors need to go even further and become “problem solvers” to win over their clients – especially when clients aren’t as immediately trusting anymore, Coleman adds.

“Trust is harder to gain, but it’s more valuable when you have it,” Coleman says. “We’re finding that clients are almost desperate to find an advisor or an [advisory] team that can really look after them and solve more problems for them.”

This means going beyond picking investments to fund a retirement plan, Coleman says, and instead giving the retirement plan “colour, texture and wonder.”

So, if your clients want to travel, buy a car or a boat, help finance their children’s education, look after their aging parents or navigate the health-care system, Coleman says, then you must access the wider range of resources available to assist your clients in these pursuits.IE

This is the fifth in a five-part series on the long-term impact the global financial crisis has had on the financial services industry