Is your investing coach coaching you too much?

By John De Goey on March 30, 2018
Estimated reading time: 4 minutes

'I wasn't going to panic until my advisor called to warn me not to panic'

It’s amazing how much ink a recent market swoon in capital markets has generated. For those of you living under a rock, most markets around the developed world dropped by just under 10% over the end of January and beginning of February. Breathless commentators were chiming in about valuations, investor herding, algorithmic trading and (my personal favourite) ‘the consensus opinion that inflation was coming’. Any or even all of these things might be true. Then again, they might all be rubbish. The thing about sharp drops is that the media likes to write stories (and really likes to write attention-grabbing headlines) based on those same sudden drops. What does it all mean for ordinary investors?

There are a number of opinions about what (if anything) the swoon portends, but one thing that I see often is the notion that advisors should be in touch with their clients to “keep them grounded in times like these”. I only partially agree with that sentiment. Here’s my take: time and again, people within the financial services industry and people who write about the industry point out that the value of advice is often not what people think it is. Advisors are not clairvoyant and cannot be reasonably expected to reliably pick investments that beat their peer group over meaningful time horizons. Instead, it has been repeatedly suggested that good advisors earn their keep by offering helpful reminders of deadlines, working on tax optimization, income splitting, pension integration and other applied financial planning concepts and the big catch-all phrase: behavioural coaching.

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The thing about behavioural coaching advice, however, is that it is often assumed that all clients need the same kind and the same amount. As the Winter Olympics draw near, it should be obvious to even casual observers that the best type of coaching is the kind that is personalized to individual needs. Many in the media say things like: “your advisor should be in touch to keep you focused on the long term”. For the large majority of investors, I disagree with that perspective. My view is that if advisors have clearly communicated that markets will fluctuate, this is a non-issue. By the way, saying something like “markets will fluctuate” is about as interesting and newsworthy as “the sun will come up tomorrow”. It’s not actually news. Then again, markets have shown so little volatility over the past couple of years that one gets the chance that some journalists were almost hoping volatility would return – if only so that they could write something salacious for a change.

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My own view is that for most clients, the best thing an advisor can do in this situation is nothing at all. Doing something (anything) different when a volatility event occurs undermines the credibility of the message that there’s nothing new about it and nothing to do as a result. That’s particularly true if you repeatedly said that volatility was bound to happen eventually at any rate. Anxiously calling a client and telling her not to worry about market fluctuations almost certainly sends the wrong message for most clients. Obviously, there will be a few that could benefit from that kind of message, but the trick (currently being addressed through superior data gathering) is to know who to call and who to leave alone. Most people, when receiving an unsolicited e-mail or newsletter that says: “markets are falling drastically, but whatever you do “DON’T PANIC” are almost certainly more likely to want to panic as a result of getting that message. Clients would likely respond by saying something like: “well, I wasn’t going to panic, but then I got this urgent e-mail from my advisor and….”.

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The most professional and consistent way to communicate that current events do not warrant undue panic is to refrain from drawing attention to them. People don’t worry about developments that they are oblivious toward.

In other words, I think the media overstates the role of advisors by half. The assumption used all too often is that advisor can and should intervene to prevent unsophisticated clients from unwittingly engaging in what is ultimately self-destructive behaviour. In fact, I suspect that the more advisors contact their clients when things go (very temporarily) bad, the more it actually enables the kind of self-destructive behaviour that the media is usually implying can be overcome by advisor contact. Being consistent and “on message” is key to advisor effectiveness. Sometimes, less is more.

John De Goey is a Portfolio Manager with Industrial Alliance Securities Inc. and the author of The Professional Financial Advisor IV. Industrial Alliance Inc.is a member of the Canadian Investor Protection Fund (CIPF). The opinions expressed herein are those of Mr. De Goey alone and may not be aligned with the opinions and values of Industrial Alliance Securities Inc. or any of its affiliated companies.