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The credit crunch and financial adviser
If you lose 50% in current market you will need 100% gain to recover your money.
- By Sean Kelleher, Special to Gulf News
- Published: 23:40 September 27, 2008
Dubai: "When there is blood in the streets - invest," might be the refrain of the classic product-pusher, clothed frequently as a financial adviser. Glinting cuff-links and historical graphs demonstrating that markets generally go up-and-down; with "ups" lasting longer than "downs" create magnificent pictorial ammunition for the "buy now - whilst prices last" call.
For the average layman-investor, understanding when buying in a trough makes sense; and when buying in a trough doesn't make sense are skills that need to be understood. Forget what they taught you in English and Fizzicks (who needs a Van-de-Graaff generator?). Decisions made this month, this quarter, could have the impact of a month to a year's salary in a few years time. Upwards or downwards - read on.
Background first. Let's start with the "doom". Unless your stress-counsellor has told you to avoid the newspapers you can't have missed the "credit crunch". Pages of it. This week my ears have taken a drubbing on inward calls from stock-brokers and fund managers asking how "the crunch" is being translated in the UAE. This is the big point: normally I make the calls. What to buy, what's hot, what to sell? This week/ last week the calls are inward because, to quote Stan-the dealer at Brewin' in London: "I have nothing to trade. It's a casino here, what do you want, red or black?" Current nervousness, I am talking about coal-face market nervousness, is at a lifetime high.
Under such circumstances, the quality advisers will have three sets of graphs. The historical "mature market" stories over decades showing upward volatility; together with the Japanese version post their deflationary spiral; and the US decade after the 1929 stock crash when recession led to depression. The difference, I am told: "A recession is when your neighbour loses his job; a depression is when you lose your job". If everyone loses their jobs companies can't grow and markets can't reflect corporate growth. Bottom line: there have been times when troughs have been extended. This is why the traders-on-the coal face are nervous. They will have sat through many corrections. Corrections are opportunities, depressions are job losses. These are nervous times.
So to the financial adviser and the credit crunch. The "opportunity" is to get the best advice around. It has always surprised me that mortgage brokers, dentists, lawyers, and their ilk can easily extract fees for their professional services, but financial advice struggles to "earn" the fee. It leads to the "product-push adviser" selling commission backed product as a means of ensuring a crust. A conundrum spotted by the UK's FSA Paper on Retail Distribution, one of a number of studies driving a clear distinction between selling product and selling advice.
Selling advice
If ever there was a chance to "sell advice" in every market - surely it has to be now? The time to go to the doctor is when you get nervous about the lump; the time to go to the lawyer is when you can't control the neighbours' noise; the time to get a financial adviser is when market traders fear for their jobs and government and regulators are unclear and inconsistent on problem and remedy. Given the doom and drama of the current crunch: how do you recognise the difference between product push and advice? Three top-tips.
The first one is unbelievably boring. From fact-finding to solution planning. A process rooted in fundamentals and basics. All good advice on every subject is based on understanding the background - you can't give advice in a vacuum. No "buy now", "sell now" advice, however seemingly brilliant, can take place without full knowledge of an investor's present position and future needs. My reckoning, a quality fact-find takes a good couple of hours for an average (non-HNW) investor. This is before any advice can be reasonably passed-on. I told you it was boring - because we haven't got to the solution.
The "solution" needs to have a structure. I would expect any structure to incorporate the PRISM pneumonic where 'P' stands for "protection". What if you die before markets recover, what if you get seriously ill and can't work, who treats you when you are ill? Boring I know. Sort this out first and "doom and gloom" of equity markets become something that can be put into a different context. 'R' stands for real-estate. The "roof-over-your-head". Separating the one you live in from the one you own as an asset is critical to sound financial advice. Everything in property? You can't eat bricks. Again, if the investment strategy on property is worked into the overall plan, the doom and gloom of Stan and his mates recedes (even though slightly) into the background.
Talking cash
'I' is for investment and incorporates my last two points - giving me permission to jump it for now. 'S' is for savings. We are talking cash. How much is the right amount of cash? How valuable is cash? What is the opportunity cost of holding cash? I can't see how a fin-ancial plan can operate without a full analysis of the cash account. After all, everything runs through the bank account, the valve into the balance sheet.
'M' is for mortgages. Here "mortgages" is better-off translated into debt. It just doesn't make a good pneumonic if we had cash and debt instead of savings and mortgages. At something like 24% pa debt on credit cards being near to normal. Say no more. Analysing debt as a percentage of your balance sheet requires planning.
Back to I for Investment. The second and third tips. Here a good adviser will recognise the significance of downward volatility on capital sums. The second tip: "blood in the streets is not so good for a lump sum". Advisers should fully understand that if you lose 50 per cent in the current market you would need a 100 per cent gain to recover the monies. Portfolio skills are critical in ensuring that capital, during nervous times, would be at risk if the assets are overly exposed to equity markets. They should understand what risk management is.
That leads us to the third and final tip: "When there is blood in the streets - invest". The usefulness of current markets to regular savings plans; or for savings plans that are not doing well right now, or savings plans that have been previously ceased their funding. The comment has merit - as long as it fits that basic fundamental - a good financial plan.
- The writer is chairman of Mondial Financial Partners.
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