The significant number of older Canadian investors who are keeping their money on the sidelines represents a tremendous opportunity for financial advisors.

A recent study by Ipsos-Reid Corp., conducted for Russell Investments Canada Ltd., found that Canadians aged 50 and up are holding about 25% of their portfolios — an estimated $300 billion — in guaranteed investment certificates and high-interest savings accounts.

It’s an understandable strategy, given all the market turmoil of the past 18 months. But the problem with it is twofold: not only did these investors miss out on the 2009 rally, but their current, low-return holdings won’t even keep pace with long-term inflation expectations.

“This situation poses a huge threat to those in their retirement years,” says Fred Pinto, Russell Canada’s managing director of distribution services. “The greatest risk retirees face is outliving their money.”

But despite growing evidence of an economic recovery, many investors remain fearful and skeptical, says Don Reed, president and CEO of Franklin Templeton Investments Corp. in Toronto. What’s more, investors are woefully uninformed.

In January, Franklin Templeton conducted its latest investor sentiment poll. Pollster Angus Reid Public Opinion found that only 14% of those surveyed knew that the S&P/TSX composite index rose by more than 30% last year. Furthermore, 10% thought the index had lost value, 6% thought it remained flat and the remainder didn’t know how it had fared.

“There’s deep reluctance to get back in the markets any time soon,” Reed says. “Only 9% of survey respondents were thinking about stocks, while 16% were considering a more balanced approach … a mix of equities, fixed-income and balanced mutual funds. Fifty-eight per cent weren’t planning to make new investments in 2010 or simply don’t know what to do.”

Therein lies the opportunity, he says: “Education and knowledge, the stock-in-trade of financial advisors, are the most meaningful tools at your disposal. And 70% of investors expect to maintain the status quo in their advisor relationship or [to] be more reliant on their advisor in 2010. It’s now up to [advisors] to get investors off the sidelines and back into the game.”

For starters, Reed suggests, review your client’s investment policy statement to make sure it still reflects the client’s needs: “It should be re-evaluated to determine if recent market activity has had an impact on the client’s plans. Then, eliminate any holdings that no longer meet the objectives.”

As knowledge of the investment climate lends itself to action, Reed also recommends you point out the specific changes that have occurred in the markets in the past year.

“It’s remarkable to see what has happened to the major indices,” Reed says. “The S&P 500 in the U.S. lost 55% from peak to trough and has since regained about 50% of that loss. However, it still has a long way to go to reach its earlier high, and that means there are plenty of buying opportunities for investors.”

For those clients who are still reluctant, Reed suggests a balanced mutual fund that contains both fixed-income securities and equities: “That will give them the opportunity to participate in any upward movement; at the same time, if markets fall, they’ll have a bit of a backstop, thanks to the fixed-income component.”

The nervousness of older investors is understandable, given that they also lived through the bursting of the technology bubble a decade ago, says Bev Moir, senior wealth advisor with ScotiaMcLeod Inc. in Toronto. “There’s a lot of disappointment and cynicism out there, based on the turmoil of the past decade,” she says, “and that presents an additional challenge.”

With clients invested heavily in securities paying low interest, Moir discusses the impact of taxes and inflation: “I explain that they can’t survive on 1%-3% interest. If someone is holding a one- or two-year GIC at 1%-2% in their RRSP or RRIF, they’ll lose half of the interest to taxes when they withdraw it. If they lose another 2% to inflation, which is a reasonable figure, they’ll be worse off than before they invested.”

Money market instruments and daily interest savings accounts, she adds, will also lose money to taxes and inflation.

Moir suggests that reluctant clients re-enter the market gradually, staggering their investments over the rest of the year and taking a dollar-cost averaging approach. For those who want to completely avoid equities because they fear the market will fall again, she recommends dividend-paying stocks or mutual funds.

@page_break@Although clients complain about the market turmoil of the past decade, Mike Watkins, a financial advisor with Edward Jones in Duncan, B.C., points out that even “pure-vanilla mutual funds” averaged returns of about 6% during that period.

“Even in the worst markets, you can make money,” says Watkins. “The problem is that people jump in and out, and their returns suffer as a result.”

The solution, he says, is to stay close to middle of the road, in a well-balanced portfolio, for the long term.

Watkins agrees with Reed in strongly recommending you review your clients’ IPSes in the wake of the financial crisis. “This situation has given investors a gut check about what they’re really comfortable with,” says Watkins. “They’ll probably have many different answers to questions than they did when they originally completed the IPS. For instance, they may realize that they’re more risk-averse than they first thought.”

Reviewing your clients’ goals and objectives will help maintain investment discipline, he says: “You can tell them, ‘You can’t stay in cash and accomplish your goal of retiring at age 65,’ for instance. And you can point out that they can’t meet their objectives without assuming some risk.”

If a client won’t invest in equities, Watkins suggests you consider segregated funds: “You can buy a portfolio of them and, if you hold them to maturity, you’ll get at least 75% of your investment back.”

On the other hand, he’s not a big fan of preferred shares: “You might as well buy the company’s regular stock, which often has a good dividend. Bank of Nova Scotia pays 4.5% on dividends right now, which is a decent return even if it does nothing else.” IE