Portfolio manager shares robo-advisor's strategy for managing volatility and explains why KYC work is paramount
On Monday night, after the DOW jones dropped around 1,000 points, Wealthsimple’s portfolio management team sent an email to their clients. The gist: “keep calm and carry on.”
Whether by email or phone, any seasoned advisor knows how to talk their clients off a ledge when markets turn south. As equities tumble around coronavirus fears, robo-advisors are having the same conversation with their clients. Wealthsimple portfolio manager Michael Allen told WP about how his team frames that conversation around context, history, and a long-held conviction in passive investing.
“At the end of the day this doesn't impact them very much in the long run,” Allen said. “Coronavirus doesn’t impact our view of what the markets are going to do in the next five, 10, or 20 years down the road.”
Allen believes that advisors need to be proactive in communicating with clients in times like these. They need to be reminded that someone is taking care of them, that they’ll be okay and what can be controlled is still under control. He says those conversations need to tie back to the risk tolerance in a client’s portfolio.
In their Monday night email, Wealthsimple drove home the point that even though the Dow Jones dropped 6.7 per cent in the past 10 days, it’s gained 181 per cent in the past 10 years. This isn’t the first shock or drawdown in the long bull market that’s followed the great financial crisis, either. The Brexit referendum, Trump’s election, and the Chinese market slowdown, all happened during that 181 per cent rise. A steady voice, a history lesson, and a reminder of why that client started investing in the first place are key to managing anxiety at moments like these.
“Drown out the noise and stop reading the newspaper, or at least the investment section,” Allen said. “Especially during this time because that can lead to emotional reactions.”
Advisors need to be careful in situations like these not to play to a client’s desire to trade out of their loss. Allen stressed that that instinct can often backfire and worsen the situation.
As for older clients with a shorter timeframe, Allen thinks a sensible advisor will have done the know-your-client work to make sure their exposure to this downturn was limited already. Wealthsimple’s approach, when their clients fill out a questionnaire, is that a client approaching retirement shouldn’t be holding much in the way of equities. Even when a client is five years out from retirement, their Wealthsimple portfolio will skew “conservative”.
Though he accepts advisors should be talking to clients with a short time frame, setting them up to weather other short storms, he thinks any investor with a longer-time horizon doesn’t need to worry.
“Whatever the event may be, and there always seems to be trouble brewing into the future, we classify all of this stuff as just essentially noise,” Allen said. “We've had a ton of bad events either over like the past 100 or 120 years, and yet the markets are still doing very, very well.”