December 6, 2011 / 7:54 PM / in 6 years

Wealth manager: "Do nothing" often best advice to edgy clients

(Reuters) - Tina Tehranchian has seen what volatile global markets are doing to Canadian investors.

“I had a client who was quite nervous. She came into my office last week and she wanted to bring down the risk level in her portfolio,” said Tehranchian, a certified financial planner with Assante Wealth Management in Richmond Hill, Ontario.

Adviser and client talked it out, revisiting the woman’s asset allocation, her long-term goals, the history of market downturns. The woman eventually left without changing a thing.

“Once I went over the choices with her in terms of moving to cash, increasing bond exposure, selling some of the equities. Even though she was very nervous with the market, she decided absolutely not, she was not prepared to sell any of the equity portion of her portfolio to move to cash or bonds. She decided to stay the course.”

Typically in volatile markets, Tehranchian tries to reach out to her clients before they even think of calling her, but the stereotype of the angst-ridden investor panicking as European debt crises roil markets isn’t far from the truth.

“There are clients that are certainly picking up the phone and asking ‘Why is the situation in Greece or Italy affecting the market in Toronto and how is that affecting my individual portfolio?'” said Katie Walmsley, president of Portfolio Management Association of Canada.

“There is an increased awareness of the impact of global economic events,” said Walmsley, whose organization represents more than 150 portfolio management companies watching over C$800 billion ($790 billion) in assets.

Helping investors - whether individuals or giant pension funds - limit their losses by staying the course amid volatile global stock markets is top priority for wealth managers around the world right now.

Nearly half - 47 percent - of fund professionals managing 259 of the largest tax-exempt funds in Canada cited market volatility as the most important issue facing institutional investors, a recent survey showed.

The survey by Greenwich Associates, taken from July to September, also showed institutions are moving to adjust strategy to boost returns and minimize volatility, overweighting cash and short-term investments.

“Given long-term trends and stated intentions, the continued shift away from domestic equity and toward fixed income, alternatives, and global equity seems likely,” Greenwich principal Andrew McCollum told PMAC’s annual conference in November.

As front-line advisors ramp up efforts to communicate and educate nervous clients, an increased appetite for new, less-volatile investments is fueling product development.

“Product preference in general has seen a big tilt towards fixed income,” said Carlos Cardone, a consultant with research firm Investor Economics.

“Some funds that have been selling quite well are the strategic yields and strategic income funds. They are funds that are balanced or fully fixed income, but these are funds that tilt the portfolios towards whatever assets are yielding the most at the time.”

The faster Canadian investors pull out of something like an equity-based mutual fund, the faster wealth management companies roll out fresh products with guarantees, passive rebalancing or the promise of better returns from relatively untapped markets like infrastructure or real estate.

“In terms of newer products, it’s the guaranteed minimum withdrawal benefit segregated funds that are offered by insurance companies. They did great sales of them in 2008 and 2009 ... and it seems to be coming back up,” Tehranchian said.

“Just one example: Manulife MFC.TO recently came out with a pension builder program, which is a new twist of the guaranteed minimum withdrawal benefit plans with a portfolio that is going to be mainly invested in bonds with less volatility than the more equity-based portfolios,” she said.

Canadian mutual funds suffered nearly C$1.3 billion ($1.3 billion) in net redemptions between the start of July and the end of September, the first quarter of net outflows since the financial crisis of late 2008, according to Investor Economics.

While it is unsurprising that most of the redemptions were of equity and balanced funds, the speed of the action was far more rapid than even relatively recent downturns like the 2001 dot-com crash, Cardone said.

“Especially we saw it in the context of Q3 2011. As markets go down you see some movement in terms of redemptions -- it’s almost immediate. Probably the access to information has something to do with that,” Cardone said.

The Internet and 24/7 nature of news flow has meant that investors can not only watch markets minute-to-minute, they can also do something about it instantly, buying or selling with the click of a mouse or phone call.

But quick data carries little context and rarely reminds investors of long-term goals. That’s where advisors like Tehranchian come back in.

“Portfolios are built with a long-term time horizon, but our emotions are totally focused on the short-term,” said Tehranchian. “That’s what is difficult for investors and fund managers: they get swayed by emotions in the short-term, using short-term data.”

While plenty of products are emerging to address volatility and investor anxiety, advisers say the best strategy ends up being less about asset allocation and more about communication.

“The challenge when you have the meltdown in the market is getting people to see light at the end of the tunnel,” said Tehranchian. “You have to spend a lot more time than usual with clients when markets are like this.”

$1=$1.0131 Canadian dollars

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