by Clayton Coplestone | Thursday, 4 December 2008
It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently. Warren Buffett
How to bake a catastrophe cake: first, prepare the base with poor advice, sprinkle in some inexperience, opportunism and greed. Add a healthy pinch of finance company collapse. Now mix with a global credit crisis. Add uncertainty and government intervention for taste. Follow this up with an election and a budget deficit for more flavour. Cover with declining confidence. Serve cold.
All wit aside, it’s grim out there. The financial contagion that started with the US subprime mortgage defaults has spread to Europe and Asia. Central banks are currently the providers of cash with global economies struggling to function without access to credit. The financial services industry and its participants are struggling to make decisions on a rational basis with no sign of trust and confidence returning to financial markets in the near term. It’s so bad that some high profile advisers are recommending that investors pull any money they need for the next five years out of the markets, notwithstanding the losses this will realise.
The new challenge for financial industry participants is how they will retain their clients, or prevent them from acting on fear and liberating their portfolios. We’re at a major junction, where the expectations of all participants must dramatically reshape. Financial advisers are struggling to define their value proposition and consequently losing the confidence of their most treasured asset – their clients. Administration platforms are anticipating an unknown competitor – technology. Investment managers are endeavouring to unify their business ambitions with their investment ambitions. Circling above are the regulators who are hinting towards increased compliance overheads and tougher new rules. It’s hard NOT to be distracted by all of this uncertainty.
The recovery from two decades of client greed and advisory laxity will be more laboured and uncertain than the financial services industry has considered. The mountain of cash flooding into banks indicates investor’s prefer to remain absent from both equity and money markets. The media has become their new (and jaundiced) financial adviser in recent months, with the financial services community left to look on and wonder how to add value.
While the media has an insatiable appetite for reporting doom and gloom, they are unable to compete with financial advisors in key areas.
1. Knowing the client – conduct comprehensive initial and ongoing risk profiling
Technology offers readily accessible risk profiling tools for both advisers and clients to regularly appraise their risk appetites. This should not be considered a one-off exercise, and if done regularly and properly, it will help hold the legal fraternity at bay.
2. Providing clients with relevant and robust Strategic Asset Allocation
There are a handful of quality independent firms that provide this service to financial advisers for a relatively nominal fee. Any asset allocation must be well considered and relevant to the client’s unique circumstances.
3. Accessing investment vehicles able to deliver on expectations
Quality investment manufacturing has become the domain of the wealthy, with the bulk of ordinary investors being exposed to corporate investment mediocrity. Clients will pay a premium for access to investment talent and capabilities that are difficult to get into without the help of a financial adviser.
4. Developing relationships founded on trust and respect
Client surveys conducted during the aftermath of September 11 emphasised the significant value that clients place upon a relationship with a trusted adviser. Financial advisors who remained in close personal contact with their clients ended up with resilient client relationships – and businesses.
Now is the time for financial advisers to step up and navigate their clients through times of uncertainty and fear. These market conditions are exactly what robust financial plans are designed for – and while the current crisis may seem unprecedented, the market’s reaction isn’t. Sensible investing involves having a plan that anticipates periodic crises and allows the client to remain fully invested through them. This is the defining moment where informed industry participants will cement deep client trust – while others will watch 20 years of frivolous client encounters erode before them.
Clayton Coplestone is Director of Heathcote Investment Partners, a third-party distributor of global investment solutions. clayton@heathcoteinvestment.com
Articles posted here are not the views or opinions of Terry Rota or Professional Investment services. They are posted to provide a snapshot of the reading Terry does with his professional development requirements
