95. Is the advisor to blame if markets go down?

 

The market has been quite difficult to ascertain as it comes out of pandemic, easy monetary policies that aims to jumpstart stalled economies due to lockdowns are now rearing an ugly head of an "unintended consequence" in the form of rising inflation. As a result, Central bankers all over the world are responding aggressively by raising interest rates, leading to another "unintended consequence" of a liquidity crunch for financial institutions especially the banking sector because of higher funding costs. The last few days saw the closure and almost closure of some of the biggest banks both in the US and Europe. This could lead to a contagion considering how connected financial institutions are in a globalized financial market that operates without borders.

To sum up where we are today - Pandemic > Lower interest rates > Inflation > Higher interest rate > Liquidity crunch > Global contagion?

Is it the fault of the advisor that the client he convinced three years ago to start investing for his retirement is currently nursing a significant amount of "floating" losses?

The stock market (typically where funds intended for long-term goals such as retirement is invested) has delivered above average returns over the long term, but this does not come with occasional anxiety brought about by "market volatility", the regular gyration of stock prices due to changing market conditions.

Changes in market condition is totally out of the control of the financial advisor!

So, is the advisor to blame for the client's current predicament?

This all goes down to how the "retirement funding plan" was sold in the very beginning, did the advisor fully explain the "risk" associated with going after the extra returns provided by the stock market? The risk being the uncertainty of future returns brought about by market fluctuations? That keeping the faith and holding on to the plan may eventually lead to the fulfillment of a financial goal?

If these information are not fully disclosed and understood by the client before he made the commitment to start investing, then it is the fault of the financial advisor.

One of the account opening forms is a "risk disclosure statement" which the client has to sign signifying he understood the risk involved.

This part of the sales process is the most important part in managing client expectations, unfortunately, some advisors would simply rush through this process fearing that an extensive discussion of "risk" might discourage clients from investing. These would be the very same advisors who are now in a very awkward situation in trying to explain to clients why it is best to hold on to the plan, that the market will eventually recover, and all will be well.

So, dear advisors, full risk disclosure may be something we inadvertently take for granted, fully explaining to the client the risk involve can help in keeping the client invested which is key to goal fulfillment, remember it is not "timing the market" (knowing when the market will rise or fall), but "time in the market" (how long we are invested).

All the best my friends!

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