The recent stockmarket downturn and health emergency could well have led to advisers asking themselves some difficult questions: 

• How long will the downturn last?
• Is this a buying opportunity?
• What should we say to clients?

The answer to the first question is unknown to anyone. And even if we knew the answer, there would remain doubt about how the world will look in a post COVID future. The question relates to the medium and longer term. Of more immediate concern are the remaining two questions.

Is this a buying opportunity?
It might be! But it equally might not. There is truth in the old saying that time in the market is more important than timing the market. One reason for this is that predicting stock market moves over the short term lies somewhere between extremely difficult and impossible. Research by Vanguard indicates that popular gauges such as growth rates, price-to-earnings ratios and profit margins offer virtually no guidance on equity prices over an annual period. Why? Because the market has already “priced in” what is known. By definition, it’s impossible to price in what is not known! 

In addition, some commentators believe that it could be a mistake to base investment decisions on the historic bounce backs of markets, as it can be argued that the economy bears “no resemblance” to previous booms. 

In a recent note to investors, Peter Hargreaves stated that some of the best times to invest over the last 50 years had been just after stock market crashes, namely 1975, 1980, 1988, 2003 and 2009 but noted that sectors which had the reputation of eventually ‘coming-good’ might not follow past experience. 

Another commentator agreed and stated that although stocks are cheaper currently, the coronavirus crisis meant people were not spending money on whole swathes of the economy meaning that companies need to be financially sound businesses as well as having the potential to be long-term winners in order to bounce back. Some might not.

So, given the impossibility of guaranteeing that ‘now is a good time to invest’, this is a strategy that we believe advisers should be wary of basing client recommendations on – at any time – but especially so in a very uncertain world such as exists at the moment. Of course, any client who self-identifies a perceived ‘opportunity’ and wishes to invest additional funds at this time can be dealt with in the normal way with a personal recommendation.
 

What should we say to clients?
That leaves client communication aspect as the most immediate concern. Where portfolios have dropped by more than 10% the client will have (or should have) been informed by the firm providing the portfolio management service. However, there is nothing magic about 10%, a drop of 9.9% could equally concern clients. Either way, major market events should be seen as a catalyst for firms for communicate with clients. 

What should the communication say? It should aim to be reassuring, and perhaps remind clients that the investments were intended to be medium to long term but should also be factual and informative. Don’t forget that the communication should be ‘fair clear and not misleading’.

It’s likely that many clients are well aware of the market downturn, so the primary purpose of the communication is to not to tell clients what  they already know but to let clients know that the firm is thinking about them and is available if clients have any concerns they would like to discuss. Advisers are self-evidently visible to clients at the outset of the relationship and on a regular basis thereafter if the client takes ongoing service. That much is just expected and not in any way noteworthy. What is noteworthy is the adviser firm that is proactive and visible when there is a glitch. So, an initial communication, followed up by others as is considered appropriate to the situation, is the minimum that should be implemented. It is therefore concerning that a small survey reported by Citywire on 29 April 2020, found that barely a quarter of clients surveyed had been contacted by their IFA during April!

Regardless of the content of the communication, there should be a clear invitation to clients to contact the firm if they have any concerns they wish to discuss further. This enables clients with concerns to come forward and firms to focus on and address those concerns in an appropriate manner. Remember TCF outcome 6 – “Consumers do not face unreasonable post-sale barriers imposed by firms ….” 

Some clients will be comfortable to remain invested in what was recommended as a suitable investment strategy at outset and at least annually since*, and to await the next scheduled review. Others will not. Whether it is a change of circumstances, attitude to risk or just an immovable desire to escape to a less volatile financial position, the client’s portfolio will need to be reviewed and changed – or disinvested – as appropriate to the client’s requirement. Any such changes will be a personal recommendation and should be documented in a suitability report with all necessary suitability requirements met.

(* where a firm has an ongoing relationship with a client, there must be an assessment of suitability undertaken at least annually.) 

What should the communication NOT say? Well, where portfolios are invested on an advisory basis, there can be no changes made without the client’s consent. It also means that the communication should not include any ‘blanket’ suggestions such as ‘we should rebalance the portfolio now’ or ‘you should consider disinvesting’. Any such suggestions would, like any ‘normal’ rebalance, be a personal recommendation requiring a suitability report and should be individual to each client, not part of a mass communication.

Execution only
Finally, it is pertinent to comment on the position in relation to execution only. It is just about possible to imagine an existing client, without any prior influence from the firm, giving a clear instruction for a course of action, for example a total disinvestment of the portfolio. If the firm believes that the conditions for Execution Only are satisfied, then the instruction should be dealt with on that basis. 

However, it is highly unlikely that Execution Only will apply in the circumstances we are describing here. Indeed, it is prudent to consider that any transaction for an existing client is unlikely to meet the definition of Execution Only. Previous discussions with the client could be deemed to have influenced the client, even where those discussions may not have been recent – the FOS has found against firms on this basis. 

Whether business is advised or Execution Only is determined by facts rather than by a statement from the client that they want to proceed on an Execution Only basis. A client may state that they do not require advice, but the existence of a prior relationship is likely to mean that advice has already been given that may have a bearing on any Execution Only request. You can read our previous article on Execution Only here.