Canadian investors have become so nervous about the state of their portfolios that they’re accepting little to no risk. In fact, many clients have chosen to avoid equities investing altogether, sitting on the sidelines of the markets, hoarding their cash.

A good advisor knows that under these conditions, part of the job is to help quell that anxiety and gently encourage clients to get back into equities, where, history tells us, real growth can be realized over the long term.

But how best to help your clients get over their aversion to risk?

One method is by letting your clients know that their feelings are normal, says Ian Wilson, a certified financial planner and regional director with Investors Group Inc. in Fredericton: “It’s OK [for clients] to be nervous.”

Encouraging clients to revisit their risk tolerance when markets are down can help ease their fears. It helps them understand that the base components that affect risk, such as age, employment and family goals, don’t necessarily change when there’s a drop in the markets.

Wilson encourages advisors to use the recent downturn as an opportunity to delve deeper into clients’ feelings about loss. As unfortunate as the economic situation is, downturns make once theoretical scenarios more relevant and reveal how a client responds to loss.

“There is a huge difference,” Wilson says, “between answering a questionnaire that says, ‘I’m comfortable with a 30% decline’ and seeing your portfolio go down from 100% to 70%.”

By asking your clients about their feelings during both good times bad, he adds, you can get a better read on their true risk profile.

To help tentative clients get their feet wet again in equities, Wilson recommends dollar-cost averaging. He encourages his clients to set up a cash account from which a regular amount will be transferred into equities each month. This way, clients get the benefits of DCA (averaging out the cost of the stocks) without putting everything into the market at once.

You can use one of the automatic-transfer programs offered by firms such as Hartford Investments Canada Corp., which transfer funds from a money market fund into a mutual fund of your client’s choice on a monthly basis.

“In the end, our role as advisors is to control a person’s risk exposure,” Wilson says, “not to manage return.”

DCA is a sound strategy that Betty-Anne Howard, a CFP with Independent Planning Group Inc. in Kingston, Ont., regularly encourages her clients to adopt.

Another strategy for easing your clients’ fears is to arm them with knowledge. Says Howard: “As the old adage goes, information is power.”

She runs regular personal finance seminars for clients and offers to meet with them whenever they have concerns or questions. “I try to give them as much information as I can, stating it as simply as I can,” she says, “and then [I can] gauge their response.”

Making that investing information available helps put clients’ minds at ease. Howard also lets her clients decide how they will be contacted — through regular phone or email contact or a review in a few months time, for example.

“I also reassure them that we can start or stop [the DCA program] any time they want,” Howard says. “If they’re going to be obsessively looking at their statements and how their investments are doing and then fretting about it, we won’t proceed.”

Howard uses risk-tolerance questionnaires, asking her clients questions throughout the process in order to gauge their comfort level at each step.

Understanding how people respond to risk, and how external factors can influence that response, can help you and your clients better understand the nature of risk tolerance. New research indicates that an individual’s tolerance to risk can change over time. For example, risk tolerance is subject to seasonal shifts, according to Lisa Kramer, associate professor of finance at the Rotman School of Management, University of Toronto. Kramer’s research has found that risk aversion increases during winter months for most people, which can result in collective sell-offs that dampen market performance in winter.

More recent research indicates that people’s risk profiles can experience split-second fluctuations; tests have shown that positive, stimulating images make people more tolerant to risk.

Your role as an advisor is to help your clients understand the financial and emotional consequences of certain scenarios and then make decisions that distance them from those emotions, says Kathleen Holland, a CFP with Investors Group in London, Ont. Communication with your clients is key to keeping their anxiety at bay.

@page_break@Holland has sent out several mass emails to discuss market fluctuations. She also contacts her clients before they get their account statements so that there are no surprises. “We’re the voice of reason they’re paying for,” she says. IE