Guarding against downturns

Planners should tell their clients about all eventualities with their plans, as a means of preparing them for downturns, says Tim Farrelly of Macquarie Bank.

Planners should tell their clients about all eventualities with their plans, as a means of preparing them for downturns, says Tim Farrelly of Macquarie Bank.

“You need to bullet-proof your clients by making their portfolios robust,” he told the recent FPA Convention.

Part of this strategy is to use balanced funds, which give better returns by providing diversification.

“It is impossible to be over-diversified,” Farrelly says. “And for robust returns, you can’t do better than a diversified portfolio, as they tend to give strong returns.”

According to Macquarie, the best return for balanced funds over five years was 12.9 per cent and the worst 9.5 per cent.

Farrelly says while planners give clients all the facts, like the low point in balanced fund returns, they don’t get a sense of what it feels like to experience poor returns.

“Clients have got to understand how an investment will look beyond the upside,” he says. “Tell the clients the bad news.”

Farrelly says clients work on four myths when it comes to their investment decisions.

The first is the slippery slope myth which causes clients not to accept long-term views. The client believes the investment can never improve, Farrelly says.

Next is the utopia myth. “You might have told clients that shares go up and down, but they expect the planner to get them out of the market before the downturn,” he says.

The control myth is where the client knows better. “Clients take risks that they wouldn’t expect to take with someone else in control,” Farrelly says.

The final one is the volatility myth. The client wants to go to a fund manager that is volatile. “Clients believe fund managers act together on volatility in markets,” he says.