Current market conditions have financial planners digging deep to help ease clients through a downturn that has even the most well-prepared clients asking: "Why me?"
For many, double-digit returns have been the norm over the past five years, which only makes the market turnaround more difficult for investors to both weather and understand.
However, given the stability and dependability of returns since March 2003, history tells us a downturn was never far away.
According to AMP head of investment strategy and chief economist Shane Oliver, negative returns can be historically tracked - 1930-31 (Great Depression), 1938-39 (recession), 1941-42 (World War II), 1949, 1952 (recession), 1956, 1960-61 (recession), 1964-65 (recession), 1970-71, 1973-74 (oil crisis, stagflation and Watergate among other things), 1981-82 (recession), 1987-88 (share market crash), 1990 (recession), 1994 (bond crash) and 2001-03 (tech wreck and terrorist attacks).
Given balanced funds only came into existence 30 years ago, a simulated balanced fund can be used to track this cycle of downturns as far back as 1929.
Oliver says using this information it becomes quite apparent negative returns are not unusual. Rather, he says we can expect them every six years or so as a normal part of the investment cycle.
Feeling better?
While the financial planning industry understands better than anyone the ups and downs of market cycles, unlike other investment professionals, none are closer than financial planners when it comes to explaining market antics to investors.
"Certainly financial planners are reassuring their clients about their investment decisions. But if they have done the risk profiling and educated their clients, it's not been too bad," MLC Advice Solutions general manager Greg Miller says.
Strategic Consulting and Training managing director Jim Stackpool says planners' experiences with clients depends very much on how proactive they are in initiating discussions with them.
"If the phones aren't ringing, that's the litmus test for a product-based adviser. Many are not proactively entering into discussions with their clients. The majority of financial planners believe they have educated their clients," Stackpool says.
Ultimately a client's true understanding of investment markets is dependent on their financial planner, and the noise created by newspapers, magazines and barbecue talk can actually add to an investor's anxiety.
"There has obviously been a turnaround in the market and when you listen to the media, it can be quite frightening. But we have found our clients to be pretty comfortable," Ascent Private Wealth principal Mark O'Toole says.
Richard Navakas and Associates principal Richard Navakas says at this time his business is focusing on client preservation.
"We have been running seminars to give as much information as we can and we've started to get into new business. We've done a lot of education with clients. Our phones have not run hot," Navakas says.
But surely there are a few upsides to this market downturn?
The obvious one is the investment opportunities that stand to handsomely reward those investors who can stomach investing more money on the back of just losing a heap.
But are there are other business opportunities for financial planning businesses in a market downturn?
1. New clients
"When markets are down we are most busy," Paul Moran Financial Planning principal Paul Moran says.
This is because a market downturn creates an environment where people question the service they are getting from their existing financial planner.
"It's an opportunity for dissatisfied clients," Moran says.
O'Toole says: "In this market there is a flight to quality. Prospective new clients are looking for quality advice that's sensible."
He says clients that have previously had a bad experience with a financial planner, or indeed have lost a significant amount of money, are not necessarily turned off the profession altogether.
"If they can find a good firm, it becomes a pull marketing approach," he says.
Moran agrees. He says it really depends on the previous experience a client has had.
"If they've paid a lot of money and had no service, they might recognise there are good people out there. So it highlights people. They don't think financial planners are bad but they may recognise others are out there," he says.
Navakas says he is concentrating on highlighting the investment opportunities to prospective new clients.
"We are trying to engage new centres of influence. At a time when some go and duck for cover, we're not. Markets are down but they are going to come back. I've been in the industry since 1985. Anyone who buys in now, in three to four years' time things are going to be good," he says.
He says some clients go catatonic in the prevailing market conditions and are unable to seize on opportunity.
"We've seen some other clients when even in a bull market, they are not moving ahead," he says.
But surely encouraging investors to invest when they have lost a lot of money is a hard discussion to have?
Navakas agrees it is difficult, but it's all about control.
"There are things you can't control. You can't control financial markets. What you can affect is strategy. There is a refocus on asset allocation. We look at asset allocations every month anyway. For some clients, it is 11 months between reviews," he says.
However, businesses have to be careful of not taking on clients who in fact cannot take advice. According to O'Toole, if a prospective client is unwilling to take advice, Ascent Private Wealth would not want them as a client.
"There are a number of criteria to join our practice. They need to be prepared to take advice and pay for it," he says.
2. Keep other financial professionals at bay
The competitive nature of financial services is never far away even in a market downturn.
Some in the financial planning industry see the current investment environment as a good lesson for other financial professionals interested in becoming financial planners who may think planners have it easy.
"The current market conditions are a good cleaning phase," Gannon Growden and Schonell executive director Ben Devenish says.
"There are a lot of financial brokers and accountants who might now think twice about jumping over."
O'Toole disagrees. He does not see new competition coming into the industry as a major threat right now because he says Ascent Private Wealth's proposition is slightly broader.
"Our focus is niche and boutique. We don't want to be a large brand. We're not after thousands of clients," he says.
While there is always an ongoing turf war with accountants, he says there are quite a lot of accountants who do not want to get involved in financial planning.
3. Quick and easy housekeeping measures
"These are the times to get your ship in order," Stackpool says.
But this does not mean the small housekeeping issues.
O'Toole says a market downturn is not the right time to be looking at processes, procedures and back-office systems because efficiency and productivity issues should always be top of mind.
For Miller, processes and procedures are secondary to getting the business model right.
"Processes we can help with down the line. In this environment businesses could be making hasty and not very well thought out decisions because of the business cycle rather than saying in three years time, 'where do I want to be and how do I want to be a sustainable business?'" he says.
4. Reinvent your business
Miller says spending time discussing strategies with clients is part of the reassurance they require at this time and part of that discussion is whether in fact there needs to be reassessment of that strategy.
"And this actually adds to talking about the things you can control," he says.
"And it does allow advisers to reposition their business."
He says in the past few years, some financial planners have fallen into bad habits. Some businesses have either thought they could outperform the market or in bull market conditions have become too reliant on product to deliver investment performance rather than strategy, he says.
Over the past two years, MLC has been encouraging planners to ask themselves what sort of business they want to have and advocating value business models based on sound propositions.
"We've been spending a lot of time discussing core value propositions to focus on advice and strategy rather than picking the market," Miller says.
And these market conditions have certainly facilitated this thought process.
"A lot of advisers have been rattled and are questioning what they do. We know they are interested in change because for our client engagement workshops there have been more requests to attend."
Stackpool agrees the current market conditions are a major catalyst to change and says now is actually a very good market for his clients.
This is because through his program Cultivating Advice, Stackpool's clients are already looking to reinvent their practices.
"The role of an adviser is to hold clients accountable for things they can control, rather than the opposite," he says.
They are also realising clients will in fact pay higher values if they add value over and above investment performance.
"They are saying 'the value I add is not in investment returns'. But this change is difficult if they have pegged their price around this," Stackpool says.
To reinvent a financial planning business, he says a business must deliver leadership to their clients, make them accountable and help them set boundaries.
Further, planners need to understand their clients' financial goals and what can be done to achieve them. This can mean setting year-by-year boundaries for clients so they know how much they have to set aside to reach their goals.
"So if clients are hit with the unexpected, you are providing the expertise that they need," Stackpool says.
5. Looking after existing clients
Communication is king in a market downturn.
Moran says his business has sent two personal letters to all clients in the past three months.
Navakas says his business has a boat cruise for all its clients on Lake Burley Griffin in Canberra with a senior economist as guest speaker.
O'Toole says: "A lot of DIY investors have been burnt quite badly. A lot have lost a half or three-quarters of their portfolios because they didn't know the risks they were taking."
He says for this reason, a lot of the work with existing clients is about keeping them accountable and keeping them on the straight and narrow.
6. More drastic measures
Stackpool says if a business has a five-year horizon, it should consider mergers or joint ventures with accountants or perhaps specialise in the provision of advice.
Trimming of the back-end of the business's client base may help a business focus on its most profitable and valuable clients.
Another opportunity is to raise capital as Stackpool says there are still inflated prices being paid for income streams.
Of course, the ultimate reaction to prevailing market conditions is to leave the industry altogether.
"This is the time for financial planners to really assess how vulnerable they are to markets and how they are out of their control," Stackpool says.
"Prices are pretty good for financial planning firms."
