Advisors are struggling this RRSP season to keep anxious clients from sabotaging their long-term goals, either through total paralysis or hasty and emotional actions.

In fact, a joke making the rounds pokes fun at the cautious mood gripping clients: “What’s the new definition of a balanced portfolio? A mattress and a guaranteed investment certificate.”

Behind the joke, however, is the painful reality that not only have clients been burnt by the severe erosion of their equities holdings, they are also continually being bombarded with news of job layoffs, soaring government deficits and corporate bailouts.

“The RRSP season is off to a slow start, and a lot of clients are sitting on the sidelines,” says Randy Ambrosie, president of AGF Funds Inc. in Toronto. “There’s been an onslaught of bad news and clients have a bad case of ‘headlineitus.’ Confidence has been shaken. Given the unprecedented economic circumstances, it’s not surprising.”

Money market funds have been the biggest-selling fund category for more than a year, and Ambrosie expects this to continue. Banks are also reporting an increase in GIC sales as clients opt for safety and preservation of capital rather than the potentially higher rates of return offered by long-term funds.

“We have witnessed a flight to certainty as well as a flight to quality in clients’ mindsets and behaviour,” says Max Thompson, head of GICs and savings with Royal Bank of Canada in Toronto. “As evidence of the flight to certainty, our RBC high-interest e-savings account and GIC portfolio have experienced significant volume growth in recent months.”

Clients are also seeking the reassurance of products offering guarantees, such as segregated funds with a guaranteed minimum withdrawal benefit or the “target-click” funds offered by IA Clarington Investments Inc. of Toronto.

As Joe Canavan, chairman of Toronto-based Assante Wealth Management, says: “Guarantees are hot right now and people are attracted to what they deem to be safe and secure.”

Dave Richardson, vice president of RBC Asset Management Inc. in Toronto, agrees. “There’s no doubt that investors are worried about where markets are going,” he says. “Some fear further losses. Many recognize the buying opportunity created by the drop in equities prices, but it’s not translating into action. Even if investors see attractive opportunities, it’s difficult to pull the trigger.”

A handful of companies, including AGF, Manulife Financial Corp. and Invesco Trimark Ltd. , have introduced dollar-cost-averaging funds in the hopes of easing frightened clients back into the market. Typically, these DCA funds offer a healthy rate of interest for up to 12 months while gradually deploying cash into mutual funds that offer potential for greater growth.

“The question of when to get back into the market is one that plagues investors,” Ambrosie says. “DCA products take the guesswork out of it. Investors can take advantage of attractive prices without having to take the ‘polar bear plunge’.”

Toronto-based Hartford Invest-ments Canada Corp. had pioneered the DCA product in the 2007-08 RRSP season and is seeing strong sales again this year. Hartford’s DCA Advantage product allows clients to invest automatically in the funds they choose on a DCA basis over a period of either six or 12 months. The six-month plan pays 5% interest on an annualized basis on any cash that’s waiting to be invested, while the 12-month plan pays 4%.

“It’s impossible to time the market, but DCA helps clients invest in a sensible, systematic way without having to determine the low point,” says Hartford senior vice president Mary Taylor. “If stock prices fall further, clients are averaging down as they buy in.”

Some clients are turning to more aggressive strategies to regain lost ground, knowing that low-risk money market funds and GICs are not going to get them far in today’s low-interest environment. Toronto-based BetaPro Management Inc.’ s family of exchange-traded funds has seen assets under management soar to almost $2 billion from $500 million a year ago.

The BetaPro ETFs provide leveraged exposure to various financial markets, including equities, fixed-income, currencies and commodities. Investors can play both up- and downtrends by choosing between Bull Plus and Bear Plus versions that allow either short or long exposure by providing twice the gain or loss of the underlying index, respectively. Howard Atkinson, BetaPro’s president, says the asset mix has shifted to 80% “bull” in January from two-thirds “bear” this past fall as investor sentiment has become more positive. The most popular ETF is the bull version of the global gold stock index, followed by bull versions of the NYMEX crude oil index and the S&P/TSX 60.

@page_break@Other investors are seeking out equity managers who have proven their mettle in difficult markets in the past. Taylor reports that Hartford’s top sellers are a global equity fund and a global balanced fund managed by Toronto-based Black Creek Investment Management Inc. and skilled stock-pickers Bill Kanko and Richard Jenkins. At Mackenzie Financial Services Inc., president David Feather reports popular sellers are Cundill Value and Ivy Foreign Equity funds, both of which boast long-term stable track records under veteran managers.

“People are turning to core products that they believe will fare well in a difficult environment,” Feather says. “While we are in a complicated economic environment and the picture is cloudy for the market overall, a handful of experienced managers have demonstrated an ability to find attractive opportunities in specific companies.”

Another product offering exposure to equities but with a safety net is IA Clarington’s “target-click” fund family. Senior vice president Eric Frape says sales have almost quadrupled this RRSP season. The funds provide a guarantee, not on the principal but on the highest value ever reached by the fund — even if clients buy in after those peaks were achieved. Funds come with varying maturity dates and hold a mix of stocks and bonds, although portfolios become more conservative as their maturity date approaches.

For example, IA Clarington Target Click 2025 Fund is trading at a 27% discount to its peak value. Clients who put in $100,000 on Jan. 1 would have seen the market value drop to about $95,000 by Jan. 30 because of losses during the month but could sleep peacefully, knowing they are guaranteed to receive $130,192 in 2025, based on the fund’s previous highest monthly close. And if the fund rises to even higher levels, the guarantee will be reset to match.

The most popular seller for Mackenzie this year, says Feather, has been Sentinel Corporate Bond Fund. Corporate bonds offer returns superior to those of government bonds, although corporates can be riskier due to business challenges faced by issuers. The yield advantage is typically about 4% on corporates relative to government bonds, and corporate bonds tend to be more stable than stocks.

Also offering attractive yields are preferred shares and high-quality, dividend-paying common stocks. Andrew Pyle, an investment advisor with ScotiaMcLeod Inc. in Peterborough, Ont., is encouraging clients to follow the normal rebalancing process to bring portfolios back to target asset allocations after the fluctuations of the past year. In many cases, this is leading clients to beef up the equities component of their RRSPs with any new contributions.

“There are some stocks and sectors that offer good value and make sense,” Pyle says. “We are seeking truly valuable securities, in terms of risk profile and where they are priced right now. Canadian bank stocks, for example offer generous dividends, which means they provide an income component as well as a good opportunity for price appreciation over the next five years.”

Another result of the market’s decline is that some clients are realizing they are less risk-tolerant than originally thought, Pyle says. As such, they are raising the fixed-income component in their portfolios while cutting back on stocks.

This observation is validated by a Bank of Nova Scotia survey that shows one in four Canadians are taking a more conservative approach to investing as a result of economic uncertainty and market volatility.

In terms of fixed-income, Pyle is recommending corporate bonds and short maturities, not wanting to commit for the long term in case interest rates rise.

Portfolio products that offer built-in asset allocation through a mix of funds continue to be strong sellers and have proven their value during the market turmoil. Multi-fund portfolios run the gamut from conservative to aggressive. The fund’s manager takes care of asset allocation and regular rebalancing, lessening clients’ tendency to try to time the market.

RBCAM’s Richardson says fourth-quarter 2008 results indicate the benefits of the portfolio approach. Although the S&P/TSX composite index was down by 22.7% in the quarter, RBCAM’s Portfolio Solutions’ conservative portfolio was down by only 4.5%. Its balanced portfolio was down by 8%; its growth portfolio, down by 11%.

“People are learning that asset allocation does matter,” Richardson says, “and balanced portfolios have fallen significantly less than the market.” IE