How to get clients out of cash

Despite what Ho describes as a “good” investment season at the beginning of 2012, most of the money being invested was being directed into fixed-income products. “Even when investors are a little more confident,” she says, “they’re still putting money into bond funds. We have a record amount of deposits and money in GICs [guaranteed investment certificates], chequing or savings accounts – all at low rates.”

The double whammy of precipitous losses in 2008, followed by a rocky economic comeback and looming or current retirement, is overwhelming for many clients. “It’s a reflection of the demographic,” Ho says. “We have a lot of retirees who aren’t willing to invest in stock markets anymore. It’s a natural progression to a more conservative profile.”

The core problem, says Dan Richards, president of Toronto-based Clientinsights, a producer of video-based coaching content for Canadian financial advisors, is clients’ emotional response to the current situation.

But from an intellectual standpoint, clients know cash is not king. “It’s like somebody who weighs 350 pounds and doesn’t exercise,” Richards says. “They know they need to change, but giving them more intellectual arguments is unlikely to [get them to lose weight].”

Advisors need to understand the fear that stocks hold to many clients and help them appreciate – at an emotional level – the long-term costs of staying in cash, says Richards: “You need to tell them: ‘You’re going to be able to spend two weeks in Florida rather than four months if you don’t change’ or ‘Instead of paying your kids’ education, you’ll be able to buy them a suitcase for university’.”

But if Richards could use two words to help persuade clients to do what’s best for them, they would be “baby steps.” If clients have 100% of their money in cash, he advises recommending they move 10% of it into the market. If that has worked out well after six months or a year, see if they’ll move another 20% over. Says Richards: “It’s a lot easier for clients, especially older ones, to wrap their heads around taking 10% or 20% of their portfolio and putting it at risk [than much more].”

And just as doctors prescribe various medications to anxious patients, advisors can recommend a number of stress-reducing investment vehicles geared toward achieving the same result. Kashif Saya, director of Montreal-based National Bank of Canada‘s financial products solutions group, says the bank has a pair of guaranteed products that provide exposure to the stock market: its five-year Canadian Advantage Eight GIC is linked to a basket of 20 large-cap Canadian stocks, as well as a similar GIC with a three-and-a-half year term.

“[One of these GICs] is ideal for clients looking for capital preservation,” Saya says. “It’s a GIC alternative for people who are buying conventional GICs or potentially holding cash for an extended period of time.”

The five-year version has a maximum return of 35%, or about 6.2% compounded annually, while the shorter-term version has a 20% maximum return, or almost 5.4% compounded annually.

National Bank buys options to get exposure to stocks while clients hold a promise from the bank to pay out between 0% and 35% for the five-year product. “With an equity link,” Saya says, “you can participate on the upside without putting your capital at risk.”

You can ladder your clients’ approach with these products by reinvesting when the GICs expire and, he adds, eventually, they’ll have liquidity every year.

Richards also notes that clients who compare investing in the stock market with a trip to Las Vegas aren’t necessarily as far out in left field as you might think, given that the stocks of Bank of Montreal and Canadian Imperial Bank of Commerce were priced for bankruptcy, based on their 12% yield after the meltdown.

“It’s hard to dismiss this [perception of gambling] as completely foolish out of hand and say, it’s just a figment of their imagination,” Richards says. IE

© 2012 Investment Executive. All rights reserved.