Idealist: Planners asleep at the wheel over world markets

The world as we have known it for more than a decade is changing. The macroeconomic ‘tectonic plates’ are shifting and yet there are financial planners asleep at the wheel. Not enough are casting their mind forward to what the world economic map may look like in as little as five or 10 years time.

Recall that in the late 1980s the world’s biggest sharemarket by capitalisation was the Tokyo exchange. It outgunned New York, and the Japanese economy, underpinned by an enormous book of exports, was then the largest in the world.

But as the rest of the world went through the October 1987 reality check, Japan forged on in denial of unrealistic lending and valuation practices. The Bank of Japan refused to bring lenders to heel as they hid bad and doubtful debts in balance sheets, while simultaneously, executives of financial institutions and government ministers resigned over corruption and fraud scandals.

Yet in the late 1980s, not too many people were talking about the possibility of Japan slipping out of the number one economic position.

Similarly in 2004, there will be many financial planners who, either through assumption or blind faith, believe the world’s biggest economy, the United States, will always hold its place.

Fast forward to 2007 and the grim reaper of debt-ravaged US fiscal and household budgets has finally sunk its teeth into the American economy and the rampaging economic powerhouse of the ’90s is now paying for its debt binge.

US consumer confidence and spending — which since 2001 held up a debt laden economy — has finally slumped and 10,000 points on the Dow Jones seems like light years away.

Meanwhile, the Chinese economy faltered only momentarily when the US economic shockwave hit, regaining momentum quickly as the rest of the world outsourced much of its manufacturing to the once sleeping giant.

Back to the present day, and we can but wonder how many financial planners are even thinking about what may lie ahead for their clients in the medium to long-term. As an industry with a history of forecasting future outcomes for clients based on past events, the possibility of such a rearrangement of the world economic order has probably not even entered the consciousness of thousands of financial planners.

There are planners who believe that the old world economic order will live on and that because ‘it’ worked in the ’90s, it will be the same in the future.

Then there is the ‘thinking’ financial planner who has been across the unfolding economic changes for more than a year now. These financial planners are very consciously addressing how to prepare clients’ portfolios for the changes that may eventuate. They are actively thinking about critical issues such as what allocation should be made to international markets and how much of that should now be placed in, for example, US markets.

Unthinkable as it may be to some, the ‘thinking’ financial planner is looking at how the world may function with the possibility of at least one other economy usurping the US in time. They are thinking about where the returns may be — that is, where the medium-term risks lie, and then bringing that back to the domestic economy to determine how portfolios may need to be aligned.

The third category is the financial planner who has no, or very little, say in where clients’ money is invested. These are the users of non-discretionary platforms where other people, unknown to both the planner and the client, make decisions on asset allocations. These are the platform providers who, through whatever justification, will continue to plough money into international markets seemingly based on what worked in the ’90s.

Which of the three financial planner positions will be right? Clearly, no one can be certain, but at least the first two are actively engaged in a conscious process of considering the issues at hand.

However, for the non-discretionary portfolios, where the planner has no say, it could almost be argued that thinking about the issue is a waste of time. With no ability to control the asset allocation, these financial planners must hope like never before that the portfolio managers get the asset allocation and timing right as the world changes around them.

Typical non-discretionary balanced and growth master trust portfolios have up to 35 per cent international share exposure. It is also typical to see up to half of this invested in US shares. Any reshuffling of the economic world order, we can only presume, would adversely impact on such portfolios, scarring investors yet again.

While high international/US share exposure worked in the 1990s — when there was strong US economic growth, little or no threat of terrorism, ‘normal’ oil prices, manageable government and household debt, and when the US dollar was king — it would be gross negligence to believe that things have not changed.

This time it really is different — different because we may be seeing the world economic order change. And this will be the most significant economic change in the history of financial planning in this country.

People working for large financial institutions and who are required to ‘sell’ product into platforms to meet funds under management goals, may likely be in the section of the financial planning community who have very little say over asset allocation and where their clients’ money is invested.

Unfortunately, if economic events unfold in such a way that will lead to the US market relinquishing its dominant position, people who have invested through such financial planners may well be the most savagely affected by inappropriate asset allocation. Worse still, it may be that these product sellers — those with no input into asset allocation — have a greater negative portfolio impact on more Australians than those ‘thinking’ financial planners who know that the world can and does change.

The financial planning community is in very real danger of having its reputation tarnished yet again because too few planners and planning firms are prepared to take the time to look ahead and consider the new world. Too many care more for the race for funds under management than sound asset allocation in a changing world. Regrettably, too many have relinquished, or never stepped up to their role in managing portfolios.

If you are a ‘non-discretionary’ planner whose portfolios are skewed to high international/US weightings and the macroeconomic plates do shift, perhaps now is the time to contemplate the explanation you will give your clients when you have to look them in the eye and give them the bad news.

Ray Griffin is a Tamworth-based planner and former chairman of the Financial Planning Standards Board International CFP Council.