Canadian advisors are still grappling with the major consequences from the Lehman Brothers implosion, and on its fifth anniversary they’re revealing why the business may never again be the same.
The anniversary of the collapse of Lehman Brothers was Sunday (15 Sept). The world has changed a lot since then. We asked advisors and industry professionals what has been the biggest changes they have seen in the industry?
Elvis Picardo, vice president-research and portfolio manager, Global Securities
The Lehman bankruptcy has had two major effects on investor sentiment. Firstly, it has increased risk aversion, since the 50%-55% plunge in most stock markets within an 18-month period – from October 2007 to March 2009 – highlighted the risks of equity investing. Secondly, because the Lehman bankruptcy brought the global financial system to the brink of collapse, central banks had to pull out all the stops to reverse the damage, and one of their favoured courses of action was to hold interest rates at record lows for extended periods of time. This resulted in investors flocking en masse to dividend stocks and other yield-bearing instruments.
Also, in Canada, the Lehman bankruptcy and credit crisis of 2007-08 created a debacle in certain markets like the one for asset-backed commercial paper (ABCP). This has led to increased regulation in our industry to ensure client suitability, as well as to provide greater disclosure of product risks.
Gardy Frost, advisor with Arbutus Financial
“Certainly there is a lack of trust at the consumer level, I would say. There seems to be a lot of concern from the consumer about the state of the world and the reliability of the system.”
Jaosn Nicola, Financial Advisor, Nicola Wealth Management
The collapse of Lehman was a hard lesson on the importance of diversification. Lehman survived the civil war, two world wars, and the Great Depression, only to be brought to its knees in 2008. I think that most investors now realize that nothing is “too big to fail.” Since that time investors have become more aware of and sensitive to fees, and rightly so. High fees were an issue in Canada long before 2008, but sluggish returns since then have put fees in the spotlight. Investors are demanding alpha – surperior returns – or some other value-add, such as financial planning services, and are no longer content to hand over 2.5% of their return as a given.
But what’s most interesting isn’t what has changed, but what hasn’t changed. Memories are short, and the pain of 2008 is already starting to fade. As the great investor Howard Marks said, “When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there’s chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. And it will ever be so.” An understanding of behavioral finance is a must for today’s advisor.”
What do you feel are the biggest changes since the financial crisis? Sound off in the comments.