Advisers acting as emotional anchors during market volatility
Financial advisers are not dissimilar from psychologists during market swings, according to Escala Partners.
Amid recent tariff-induced turmoil, the private wealth and investment advisory group emphasised the dual role that advisers have to play in terms of assisting clients.
Namely, that is guiding investment portfolios and decision-making while simultaneously offering emotional counsel during volatile periods.
“Advisers often act like psychologists,” described Scott Carmichael, founding partner and investment adviser at Escala. “We need to make sure that we’re communicating in both good and bad times, and stress-testing our client portfolios.”
This means reminding investors that short-term volatility is not a new phenomenon, but instead part of a longer-term cycle of ups and downs.
“Market volatility today is no different to any other upheaval over the past few decades. What sees investors through these times is following the golden rules – long-term investment in high-quality, diversified assets across, and within, asset classes,” Carmichael explained.
On the other hand, making the wrong decisions at the wrong time – such as letting emotion lead investment behaviour – will increase the risk of short-term underperformance, he argued.
The investment adviser instead encouraged advisers to avoid speculation and concentration risk, while having a deep understanding of the client’s personal liquidity needs, income requirements, and family circumstances.
Ben James, Escala co-founder and investment adviser, also recognised the difficulties of timing the market, stating: “Timing getting in is hard, but timing to sell is even harder.
“In periods of volatility like we saw in April, we reflected on our long-term rules to stick with high-quality investment managers, let capital compound, use asset allocation as your key defence, and trust the process.”
Both founders said it is critical for advisers to prepare their clients for market challenges and ensure their investment portfolios are structured to withstand such scenarios.
Echoing this, a JP Morgan Asset Management (JPMAM) commentator recently said helping clients navigate market volatility is a key way advisers can demonstrate their value.
Speaking to Money Management at the JPMAM Global Media Summit in London last month, head of global multi-asset strategy, John Bilton, highlighted the important role advisers play in reassuring investors and discouraging knee-jerk reactions, such as shifting their investments into cash during periods of market volatility.
Research by the firm of cash versus a 60/40 portfolio found that over 35 years, three-quarters of the time, a 60/40 portfolio outperformed cash by an average of 7 per cent over one year. Over three years, it always wins over cash by a cumulative average of 21 per cent.
“Being invested is still the most important thing investors can do, but a lot think that being in cash is a really good idea,” said Bilton.
AUTHOR
Jasmine Siljic
Recommended for you
ASIC has issued a warning to financial advisers to ensure they are complying with client consent requirements when entering into ongoing fee arrangements.
Initially developed more than two decades ago, Fitzpatricks Advice Partners has “revamped and relaunched” its flagship development program.
Over 20 per cent of advisers plan to increase their allocations to private equity and credit in the next six months as they grow bearish on US and Australian equities.
Commonwealth Bank has formally dropped to zero advisers following LGT Crestone’s acquisition of its advice arm – some six years on from the Hayne royal commission.
