Talking to clients through a recession

16 September 2020

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

Australia’s first recession in 30 years has arrived. Get tips and advice from other planners to help you have conversations with clients to manage their concerns and expectations about what’s to come.

In 2020, COVID-19 has had a substantial impact on the financial landscape, for both investment markets and economic output. So it was no surprise to hear Federal Treasurer Josh Frydenberg make his announcement in August 2020 that Australia has entered its first recession in 30 years.

Financial planners are likely to have had their recession-ready strategies well underway before this official announcement was made. As this would also involve plenty of client communication, you’ve probably already been addressing some serious concerns from clients, regardless of their life stage or circumstances. However, with the recent recession announcement, those concerns could well be resurfacing in conversations in the weeks and months to come.

Here are five tips from David Graham CFP® from Story Wealth, Dacian Moses CFP® from Waterfall Way Associates and Doug Turek AFP® from Professional Wealth to help you navigate these interactions and manage clients’ anxieties and expectations for their finances and future goals.

1. Put things in context

Even clients who have lived through recessions may have difficulty in recalling what it was actually like, how long it lasted and how it affected them. As they’re in a different life stage now, their concerns about how it will impact them will be quite different too. To defuse some of their fears, it’s important to remind them that recessions and market downturns are a normal part of the economic cycle.

“Right now clients are scared and it’s up to us to tell them that these are normal events,” says Doug. “What has caused them isn’t normal but equity crises are normal.” According to Vanguard research, the world has seen 20 market corrections, nine bear markets and five recessions since 1980. So, this being the first recession in Australia for 30 years really shouldn’t be too alarming for financial planning clients.

 2. Focus on the long-term

To calm concerns clients may have about the impact on their lifestyle, it’s important to offer reassurance by balancing the present with a long-term view. Steep falls in equity markets and overall portfolio value can lead many clients to feel panicked and threatened by these events. But a well-constructed portfolio, with an appropriate allocation to cash and defensive assets, should tide them over and keep cash flow healthy without compromising on future goals.

“With retired clients, I’d expect advisers to have parked about five years of retirement income in cash and defensive bonds,” says Doug. “Therefore they don’t need to act or worry because there’s money set aside for their needs.”

3. A reality check on returns

Having said this, Doug, Dacian and David all agree that it’s important to frame longer term goals in the context of a changed environment for returns. Compared with the GFC just over a decade ago, the returns from both shares and defensive assets are likely to be very modest.

“I think we have an important job to manage expectations,” says Dacian. “A prospective client walking through the door thinking they’re going to get 10-15 per cent in the next decade and a half needs to adjust their view.”

“If you stay out of the share market, there are going to be far more consequences for your long term return,” says Doug. “Back in 2008 if you didn’t want to be in the share market a government bond would give us 6%. Today that return is 0.6%.”

Not only does this point support client conversations about asset allocation, it can also be an important part of a discussion about current and future spending and their overall financial strategy. “It’s useful to remind retired clients that with lower returns left on the table, they may have to eat into their buffer a little more,” says Doug. “For those accumulating it’s a conversation about retiring later or spending less. It’s also a reminder that structuring your money in super is extremely important when we may soon enter a stage where governments look to raise money and change how they tax income.”

4. Be cost wise

Given this environment, it’s more important than ever to control portfolio costs and demonstrate value to clients who aren’t getting the returns they have come to expect. “When returns are trending lower, cost is a big factor in a portfolio,” says David. “So you’ve got to work out whether you’re getting value for money to achieve outcomes for a client.”

When returns are lower, saving clients on their investing costs, including optimising their tax liabilities can be an important way to boost financial outcomes and prove your worth. “The post COVID-19 environment is looking to be one where returns are lower,” says Doug. “It puts a challenge back on us which is how can we justify our return on fees? What extra value can we add, and if we can’t deliver the same level of returns in a yield-constrained world how can we take costs out of the system?”

5. Act with conviction but be flexible

In responding to these challenges and talking through recommendations with clients, both David and Dacian recommend being confident in your approach. But they also agree that planners should keep an open mind about changing their strategy, if the outcomes aren’t as they’d hoped.

“With the amount of dislocation we’ve seen, the range of outcomes for equity markets, inflation and so on could be very wide,” says David. “From an advice perspective you’ve got to be flexible about your philosophy and change with the times. We have a good opportunity to see what worked and what didn’t during this recent crisis, and make some appropriate changes to our approach as appropriate.”

“As advisers dealing with real people and their money we are constantly handling tensions and contradictions, risk vs return being the classic one,” says Dacian. “We should focus less on trying to be right all the time about how we resolve those contradictions. Instead we should develop a philosophy on why we think these things work and test it rigorously. If it’s found to be incorrect, change it.”

You can hear more from David Graham CFP®, Dacian Moses CFP® and Doug Turek AFP® in the FPA {Virtual Congres}s session What does a portfolio look like in times of recession?. This session was recorded on 10 August 2020 and is available to registered congress participants via the FPA Learn portal.

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