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Financial advisors should warn clients of downside risks when they start investing, Hugo says.
NASTASSIA ARENDSE: This is a conversation with Janet Hugo about the job of a financial planner. She is a director at Sterling Private Clients.
JANET HUGO: It’s an amazing job. We get the chance to influence clients and that makes a real big difference in the outcome. What most people don’t realise is that when you ask them about their dependants, they usually say they’ve got children or grandchildren or parents that they are looking after.
The one thing that a good financial planner will be able to do for them is to say to them: “You’ve actually got a dependant, which is you, yourself, who is unable to work when retired.” And a good financial advisor can help someone to plan for those events when you can’t work, or you don’t want to work. And to do that planning you need reality in the sense that somebody can believe in it, that it’s not just numbers…
NASTASSIA ARENDSE: And in terms of the current investment environment, how are financial planners having to adjust to what’s going on?
JANET HUGO: A good financial advisor is not adjusting. They warn their clients that is a difficult market. And when you get into an investment the advisor should be warning you as a client of the downside risks. In a five- or ten-year period you need to expect that this investment can go down, and the amount this investment can go down is maybe up to 30%.
If a client is advised that that could happen, they are not as likely to get scared by the fact that it has happened or is happening, and jump out of the market. That’s when clients actually do such damage to themselves in their investment returns.
I was reminded yesterday that investment returns are usually the things that everybody remembers, the thing that is published in the newspaper. It’s the thing that everybody talks about. But what the investor achieves can be a very, very different story. What people do is they stab themselves in the foot and jump out when the market goes down and then they never know when to get back in again. They don’t get the returns that those average returns give over long periods of time that their portfolios are able to publish.
NASTASSIA ARENDSE: Talk to me about behavioural finance and how this links to the actions of investors like myself or even the financial planner.
JANET HUGO: It’s such exciting field of study. Recently Richard Thaler won the Nobel economics prize for his work done on behavioural science. And a lovely analogy I heard was some people know that being obese is bad, that it’s going to give you dreadful medical problems in the future. But they allow themselves to get obese. We often know what’s the right thing to do, or we’ve been told what’s the right thing to do, but we land up going with either fear or greed for each extra piece of cake, or run after that hot-stock tip, or take last month’s best unit trust. But we forget that there is always the downside to that, and the downside that he talks about is good investor behaviour, staying with the lesson for the long term, knowing the term that you want to be invested for.
When I get to my clients I spend a lot of time understanding how long they want to be invested for. What is this money going to do – is it for the next three months? Well then it most certainly needs to be in their bank account, in a money market or in a savings account. But if it’s going to be money that they need in a few years’ time, then it’s easier. We can say that’s fine, go into a lowest-risk investment where the probability of the investment returns being predictable is a lot more certain, so they know what they are getting into. If they are waiting to have an investment that they’ll only need in 10 years’ or 20 years’ time when they retire, that investment needs to be as aggressively invested as possible. But along the way that’s going to have some downside in there.
There are periods when those portfolio managers underperform money in the bank and that’s often what people compare those investments to when they go into a dip, and they’ll come to me and say, “money in the bank is doing better”. Of course it is. But it wasn’t meant to do that. They know that this is a long-term story which has a five- to ten-year investment horizon, and if they stick it out they will achieve those fantastic returns that are available.
NASTASSIA ARENDSE: So in terms of the relationship that one would have with their financial planner, what’s the best way to approach them when it comes to the returns – like if you feel like they are not really doing the job that they had set out to do from the very beginning?
JANET HUGO: A lot of people have a misconception that a financial adviser is going to help them choose the best unit trust, or the best hot stock tip. A good financial advisor would rather spend a lot of time working with the client and saying to them, what are you doing here, what are we wanting to achieve in the outcome? So the outcome needs to be tax-efficient, and the outcome is also to be invested wisely for the right time frame. The advisor can help them, guide them and really steer them during those moments of weakness when they are feeling afraid that the markets are not doing the right thing, the advisor can give them courage to stick with the plan – and we always go back to that with the plan. The plan was to stay in this investment for five years or seven years, the plan was to build up your retirement annuity so when you are 55 or 65 years you are able to retire comfortably. And the advisor can keep nudging them in the right direction of sticking with the plan, sticking with the long-term strategy and not jumping in and out of the market, because that is the best way to do damage to yourself and achieve the worst investment returns.
NASTASSIA ARENDSE: Janet Hugo, thanks so much for your time.
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