Clients of financial planners do not see risk as market volatility or deviation from the benchmark but as a capital loss and a failure of advice according to Ibbotson head of adviser services Matt Esler.
Esler, speaking at the Associated Advisory Practices conference in New Zealand, said the financial advice sector has defined risk as a relationship between the level of volatility and the level of returns investors receive.
However this was inconsistent with the view of clients who regard risk as the loss of savings, an income stream or retirement funds.
"Losing money matters to clients because they will need to gain even more in the following years to get back what has been lost. A 50 per cent loss requires a 100 per cent gain to break even," Esler said.
"Humans are not rational and investors experienced the global financial crisis by panicking and moving to cash. They lost faith in financial planners and went to cash because they wanted to control their own investments."
"In their minds they did not see their planner as doing their job, protecting their capital and the clients were driven by emotion and absence of peace of mind."
Esler said the standard fund manager response to these losses, that the market will come back and investors should ride out the downturn were inadequate for investors.
"For some clients the market has not come back and having a financial plan that is all about avoiding a 45 per cent loss is not what advisers should be offering," he said.
"They should instead create strategies that avoid that as clients don't seek advice to receive a white knuckle ride."
He also stated that long term time frames are also not a good reason to expose financial planning clients to risk given that long term market returns have been mixed with periods of heavy losses.
"The idea that investors have a 30 year timeline is not a good reason to have risk in their portfolio. No one wants to see their money fall and investors are not as aggressive or high growth as many think," he said.
According to Esler there have been seven times in the last 100 years when the Australian stock market lost more than 25 per cent but took a total of 47 years collectively to recover those losses.
"This number is still growing as we have not yet fully regained the losses from the global financial crisis."
Jason Spits travelled to the 2014 Associated Advisory Practices conference in Queenstown, New Zealand as a guest of AAP.