A market correction can spell disaster for a financial planning business. Time is lost calming clients’ nerves rather than building your business, some clients may even leave after seeing their capital shrink and your income may plunge along with the market. But this is not true for all financial planning firms; some businesses thrive during weak market conditions, which provide them with an opportunity to demonstrate their value.
The difference between a struggling and a resilient financial advisory firm, particularly during a bear market, is managing client expectations, portfolio downside risk and focusing clients on their goals rather than markets.
A goals-based investment approach utilises a client’s individual investment goals to inform their investment time frame and target return. These goals, and the client’s desire to achieve them, usually remain constant through both strong and weak markets. That is, they don’t waver during market cycles as their focus is their goal, not markets. This contrasts to the traditional advice model, which simply aims to maximise client investment returns for a given level of risk and benchmarks more closely to markets, leading clients to watch markets and ‘jump at shadows’ during difficult times.
People that seek financial advice are often looking for more than market-linked investment returns. At the top of a client’s list is financial security, particularly during the heightened market volatility that we see today. Poor markets that destroy capital value result in disappointed clients that can damage your financial advisory business. This can be compounded by the difficulty of attracting new clients in a depressed market. In addition, some advisers may be tempted to lower their fees, while those that are remunerated based on assets under management can see their income drop alongside the value of their clients’ portfolios.
On the other hand, the more client intuitive goals-based investment approach does away with market benchmarks, and instead tracks success against the progress that is made towards reaching the client’s target return. Clients are also less likely to be concerned about market performance due to the deeper level of confidence they have in their investment strategy. The process of goal discovery, which involves discussing your client’s financial aspirations and money preferences – rather than fees and returns – promotes meaningful relationships that can help you provide a superior service and highlight your financial expertise. This can help retain clients and boost referrals, even in difficult markets.
Dynamic asset allocation is another key factor that helps to protect advisory firms from downside market risk. Rather than just investing across the traditional asset classes in pre-set, fixed asset allocations of cash, bonds, property and equities – which leaves clients, and financial advice firms, to ride the wave of market performance - advisers can employ a more dynamic goals-based investment strategy that embraces a wider range of investments, such as commodities, currencies, precious metals and short-selling strategies, that can swiftly adapt their asset allocations in line with market conditions. This reduces correlation with market performance and protects portfolios from volatility and downside risk, while still targeting return objectives.
Given the need for resources and systems to manage portfolios dynamically, many advisers outsource that investment function to professional managers. Outsourcing investment management also benefits business efficiency, allowing advisers to service more clients, which in turn boosts a firm’s profit.
To find out how a goal-based investment strategy can help your advice business manage downside investment risk, contact Dynamic Asset today.