To avoid market panic, understand what you own and why

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If you’re an advisor and your phone isn’t ringing off the hook during this latest bout of market volatility, chances are you’re doing something right.

While there will always be some investors seeking solace as the markets swing, more advisors have been preparing their clients for volatility, both emotionally and financially, to avoid any potential knee-jerk reactions such as selling equities at a loss. The goal, advisors say, is to ensure investors stick with their long-term financial plans. Volatile markets can also be a chance for investors to test their risk tolerance and ensure they’re still comfortable with their current mix of stocks, bonds and other assets.

“When you discuss portfolio volatility proactively with clients, you often minimize the need to discuss portfolio volatility reactively with clients,” says Ron Fox, a certified financial planner and CEO of Toronto-based Glidepath Portfolio Services. “This is tremendously helpful in setting client’s expectations and helps clients manage their own emotions during inevitable periods of market turbulence.”

For instance, Mr. Fox says his firm works with financial planners to custom manage clients’ investment portfolios “within their desired volatility” to help investors stay on track with their financial plans.

“Volatility is really connected to an investor’s risk tolerance,” Mr. Fox says. “It’s a starting point for all of our discussions and it’s done proactively. It’s not like we’re talking about volatility once it happens in the markets. It’s inevitable. It’s going to happen. Assessing this up front and having it as a starting point of your risk assessment with a client is critical.”

Mr. Fox says advisors also need to assess a clients’ capacity to take on the risk, which means having enough money set aside for near-term goals, such as lifestyle spending or a child's education, for example.

“It’s important for us to understand, ‘Is there an essential spending need here that has to funded with this money that could impact their capacity to accept that risk?’” Mr. Fox says. “As a discretionary portfolio manager, we have to get into that level of client awareness and understanding and do the job right and we use financial planning professionals to help us with that.”

It’s the role of investment managers and advisors to help clients understand how their investments will help them meet their financial goals.

“When we do this properly as professionals – portfolio managers working together with financial planners – then we have a comprehensive picture for the client,” Mr. Fox says. " Know your client is what this is about. It means knowing what they need the money for and scheduling the cash flow around that. Too many advisors aren’t doing that work, helping these clients to fund what their investment account is intended to fund with confidence, comfort and their personal care and guidance."

Jennifer Radman, vice-president and senior portfolio manager at Caldwell Investment Management Ltd., says clients can also better cope with market swings if they understand what they own and their investment time horizon. For instance, Ms. Radman’s firm has been talking to clients about their cash needs in the near term.

“The biggest risk for individual investors is being in a position where you’re forced to sell something when you don’t want to,” Ms. Radman says. “We’re saying now, if you need this money within two years, maybe don’t have it in the market because we don’t know what’s going to happen within that period. Beyond that, there’s probably enough opportunity out there that can do a good job managing money beyond that. I think that’s where the most important conversation is.”

Her advice is to ensure investors understand what they own and why. “Understanding that helps with the emotion of the market,” she says. “Working with a great investment advisor – who walks you through the planning – is a great way to do that.”

Simon Tanner, the principal financial advisor at Vancouver-based Dynamic Planning Partners, says he has received only a handful of calls and e-mails from clients in recent weeks as the market moves dramatically up and down. He welcomes the contact but has also been warning clients for months that the markets will be more volatile than in the past few years, when markets were unusually steady.

Mr. Tanner is also using these markets as an opportunity to reach out to clients proactively to ensure they’re still comfortable with their long-term financial plan, including their risk tolerance and asset allocation.

“This is the ultimate time to verify their risk tolerance and have them assess, ‘Am I really comfortable with more or less volatility or risk in my portfolio?’ ” Mr. Tanner says. “Then I say, ‘If you’re still uncomfortable, let’s go back to basics, assess your risk profile, time horizon and investment policy statement and how it’s relative to your portfolio.”

To date, all of his clients have stayed with their current plans, despite the market swings.

Mr. Tanner believes it’s during markets like these that advisors are able to prove their value to clients and cement a long-term advisor-client relationship.

"These times really test the structure of advisory services; have we followed the process, is the risk commensurate with the portfolio structure?” Mr. Tanner says. “This is also where advisors can demonstrate what ‘staying the course’ really means.”