Advisors, do you know your clients' real risk appetites?

Todd Schlanger from Vanguard Canada talks to WP about a new tool that helps advisors better understand investors

Advisors, do you know your clients' real risk appetites?

In order to measure the risk appetite of Canadian investors and give advisors a clearer picture of what their clients might be thinking, Vanguard Canada has launched its new ‘Investment Risk Speedometers’. Designed to paint the current picture of investors' risk appetite relative to the past, the risk speedometers calculate cumulative net cash flows into high-risk and low-risk asset categories.

The result is a risk measure that can be tracked over time and displayed in a risk speedometer index over 1, 3 and 12-month periods ending September 30, 2017.  “A lot of cash flow reporting tends to focus solely on flows, but we wanted to put that data in context as it related to investor behaviour and what we’ve seen in the past,” explains Todd Schlanger, Senior Investment Strategist, Vanguard Canada.

Previous studies have shown Canadians to be among the most cautious investors in the world, but did Vanguard’s new tool discover anything to contradict that belief?

“One of the interesting things was that, in an environment where the equity market has been strong and we’ve had low volatility and low episodes of drawdown risk, the risk appetite is either average or below average,” Schlanger says. “Over the longer horizon of 12 months, the appetite was well balanced, and that was encouraging for us.”

The speedometer found global bond and Canadian bond investments to have attracted the most cash flows over the past month. Over the 3 and 12-month timeframes, global fixed income investments were the top pick for investors.

“Based on what we’re seeing recently, we would say this is a great news story because when risk appetite is either below average or balanced in an environment where equities have been strong that means investors are not chasing returns and that they are rebalancing,” Schlanger says. “We view all that as very positive.”

Schlanger believes that savvy advisors should attempt to interpret the speedometer’s data in order to improve their offering in one of the key facets of a modern advisor: behavioural coaching. “Having access to a tool that monitors changes in risk appetites will be really helpful for advisors who understand the importance of behavioural coaching, which we know is so important to the advisor-client relationship,” Schlanger says.

“Our advisor alpha framework looks at all of the areas where an advisor can add value to client relationships. One of the biggest areas is behavioural coaching, which we estimate makes up about 150 basis points (annualized) over the life of the advisor-client relationship.”

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