'That's the plan and we're sticking to it'

Managing client expectations and ensuring they don't internalize the market volatility top of mind for advisors

'That's the plan and we're sticking to it'
Zach Davidson, Wealth Advisor at National Bank Financial and a Partner with the JMRD Watson Wealth Management Team

The biggest challenge for advisors is managing client expectations while doubling down on the importance of staying the course when it comes to their respective investment strategy.

“Coming off three solid years for equity markets and strong overall investor returns, 2022 was tough not just for equity markets but bonds as well which was a shock for many investors,” Zach Davidson, Wealth Advisor at National Bank Financial and a Partner with the JMRD Watson Wealth Management Team, says. “Last year, nothing worked as far as being diversified.”

A difficult year impacts decision-making, with some clients becoming too conservative and others too aggressive trying to make back losses, but no matter the allocation of a client’s portfolio Davidson warns against internalizing that volatility. Advisors need a steady hand in 2023, he says, and keep in mind that a good wealth management team adds value in a tougher market environment. Over the last six months, his team has ramped up communication with clients through newsletter send outs, being easily reachable, and providing touch points to let them know what’s going on in the markets. Actively keeping in close contact is where advisors really add value during uncertain periods where concerns ramp up, Davidson notes, adding that while last year held some negative surprises, this year potentially could have some positive ones.

For example, valuations are much lower meaning future expected returns should be better, and dividend yields are a lot higher meaning clients will get more income from their stock portfolio. With fixed income yields, where the main complaint over the last few years was not getting paid on cash and bonds weren’t returning much, now you can get a pretty good yield to maturity from a fixed income portfolio and, again, that’s going to provide better returns going forward.

Davidson also points to companies that are returning capital to the shareholders, have strong insider ownership or are buying their own stock back, have good management teams, and a strong balance sheet as another area of opportunity. Still, in a higher interest rate environment, companies with the flexibility to make acquisitions that strengthen their business will come out of this in better shape — and those are the companies clients want to own.

“There will be some great opportunities, we just don’t know exactly which sectors they’re going to come from,” Davidson says. “We want clients to stick to a plan, be diversified, and not use a down year as their baseline forecast.”

To that end, Davidson doesn’t expect many wholesale changes: the thrust of his strategy is rebalancing client portfolios to take advantage of a recovering market. Where things are today aren’t necessarily where they’ll be a year from now — there are some great opportunities when investors look out 12-18 months, he notes — and today a balanced portfolio is better positioned to provide a good return going forward because of valuations being lower. It’s about positioning clients to take advantage of a recovery and “at some point we expect we’ll have better returns for investors".

Markets are constantly changing and there are always going to be unexpected events, both positive and negative, but companies want to grow and they want to provide good shareholder returns, so stay positive,” Davidson says. “We’ll look back at this period and see the tremendous opportunities it provided — we’ve just got to be open minded going forward.”