Advisors: What are you doing to manage client expectations?

Advisors: What are you doing to manage client expectations?

Advisors: What are you doing to manage client expectations? Many financial advisors don’t appear too eager to have an honest discussion with clients about future returns. This could be detrimental to their clients’ future financial well-being.

Recently, WP spoke with Kash Pashootan, an Ottawa-based advisor who believes the financial community in Canada needs to do a better job managing client expectations heading into 2015. Pashootan’s view is that Canadian stocks have far less chance of delivering positive returns next year than those south of the border. Acknowledging this reality it’s incumbent upon advisors that they ratchet down expectations.

John De Goey, one of WPs top 50 advisors, suggests this discussion needs to carry on well beyond 2015.

With inflation contributing a significant portion of investment returns historically (except the last 20 years or so) it’s hard to justify a nominal return beyond 6%. The Financial Post does a good job explaining how to get to this rate in a guest column by Morneau Shepell chief actuary Fred Vettese from 2013. Yet many advisors are want to trot out double-digit equity returns when making a case with clients.

Unfortunately, the risk undertaken in order to obtain those types of returns might not be worth it.

De Goey, using bonds to illustrate, explains how overconfidence when making client projections, is like playing with fire. He states, “Traditional bonds are paying about 2% - the same as inflation.  In other words, the real return on most income investments is…. ZERO.  How many advisors’ projections (advisors do run projections, don’t they?) currently reflect that reality?”

Advisors like De Goey and Pashootan are doing their best to keep expectations in check because they understand that lower returns combined with people living longer is a recipe for disaster. In a perfect world all financial advisors would maintain a fiduciary duty to their clients which includes managing their expectations.

While the investment policy statement can help with this it’s important that advisors have an honest and frank conversation with themselves about the projections they are making to clients.

If the real return is more than 4%, something’s definitely amiss.