Risk management answers the call

When a client doesn’t answer your phone call, it’s usually a bad sign. For Fairway Financial’s Glenn Dibley, it means he’s doing something right.

“If I know market volatility is going to feature on the six o'clock news, I'll call clients before that happens and reassure them,” he says. “But when market volatility spiked after Brexit and Trump’s election, a lot of clients wouldn't even return my call… they were fine with it.”

Dibley puts it down to two factors: educating clients about the nature of markets and constructing portfolios that have a strong element of risk protection.

“For us, it's all about managing risk,” he says. “If we can manage the risk side for a client’s portfolio then frankly, I think the performance will look after itself. Retirees are definitely thinking about risk a lot, but they want growth as well so that's always a bit of a juggling act.”

Dibley says he’s particularly aware of new clients’ exposure to sequencing risk. If markets are fully valued or even overvalued when they first invest – and then a severe downturn strikes – it can take years to break even. Even dollar-cost averaging into the market may not help much if markets continue to trend up because assets are getting more expensive.

“As advisers, we've got to be really wary. It's not about the money, it's about the people and their emotions, and how we work with that. I always say to clients 'I don't get to choose where the market is the day you come and see me’. Milliman’s protection overlay gives them an element of reassurance: it can compensate them a little if there’s volatility ahead.”

Milliman’s risk management process provides a cost-effective way to dampen volatility and cushion the impact of prolonged market downturns, while allowing investors to still benefit from the majority of share price gains. It achieves this by using a small portion of the portfolio to hedge positions using exchange-traded futures. This is the same process relied on for decades by major corporations such as insurers to manage their portfolio risk.

In recent years, as central banks have propped up markets and the global financial crisis has faded into the distance, investors have enjoyed strong returns. True risk management is more akin to a type of insurance, and insurance always comes with a cost that can erode returns when markets are strong. However, Dibley says Milliman’s dynamic approach (the risk protection increases when volatility is high and decreases when it is low) keeps costs low.

“People have a very short-term mindset and advisers a very long-term focused and so trying to manage a short-term mentality with a long-term risk overlay is quite a trick.

“Each person will sit down before they become a client and go ‘we can handle this, we can handle that' but when they actually go through it, it's completely different. So as an adviser, you've got to have that experience to really know what the client wants without them knowing it, so to speak.”

It often comes back to education and reinforcing why they have set up a risk management strategy in the first place. “I've always found that they'll be a lot more emotional to a loss than missing out on a potential higher gain.”

Dibley often uses a core-satellite approach to portfolio construction: low-cost index funds employing Milliman’s risk management overlay form part of the core while select active managers form the satellite. Investments are regularly rebalanced so that clients take profits from assets performing strongly and buy assets cheaply from those not performing as well.

“There's a bit of a running joke with my clients: I've said there's got to be a good pullback in financial markets every year for the past three years – and very year I've been wrong. So they like it when I'm wrong and they don't like it when I'm right.”

But if things do go wrong, then Dibley’s clients are set up to weather the storm, whether they answer his calls or not.

Milliman recently launched the SmartShield range of Managed Accounts’, designed to provide direct protection against market downturns.

For more information go to: https://advice.milliman.com/en/smartshield

Disclaimer

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