When Good Investment Advice isn’t Obvious

I have just been appointed by a client to manage their investments and pensions. On reviewing their existing holdings, the risk looks a little high compared to where the client has indicated they would like to be, but not outrageously so.

I find myself however faced with a ticklish situation: Equities have risen significantly this year, with the UK and USA indices close to record highs. As a result of course, of late the client’s existing portfolio has done pretty well. What I now see happening is that I should reorganise the portfolio into a lower risk, more defensive position (more appropriate to the client’s risk assessment, and which in turn will hopefully help lock in the recent gains). I believe we are probably going to see a correction soon in those equity markets which have surged – then UK and USA being prime examples. So, perhaps in a year’s time, the portfolio may be little further ahead than it is now. I may have done an exemplary job in maintaining the value in a tricky market, but how does that look to the client? Good gains under the first guy, but  it flat-lined as a result of my ministrations over the next year perhaps? Possibly.

It’s not always about making profits, sometimes it’s about avoiding loss. So long as the client is reasonably aware of the factors involved, then they should appreciate the value one’s advice adds.  Hence the importance of communicating with clients and being able to demonstrate the value added, by e.g. comparison to benchmarks.

The message? For the client, judge your adviser over the medium term at least, and ask him about reasonable expectations from your portfolio. If you are no more of a risk taker than “middle of the road”, then don’t expect double digit returns too often (if at all!).  For the adviser – remember to manage your clients’ expectations for their investments.

Investment management isn’t just about finding the best returns, it’s about mitigating risk too. If you have seen great returns of late, but consider yourself a cautious investor, then now might be a good time to contact your adviser to re-open the discussion about the level of risk in your holdings.

 

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