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
This document has been prepared by Milliman Pty Ltd ABN 51 093 828 418 AFSL 340679 (Milliman AU) for provision to Australian financial services (AFS) licensees and their representatives, [and for other persons who are wholesale clients under section 761G of the Corporations Act].
To the extent that this document may contain financial product advice, it is general advice only as it does not take into account the objectives, financial situation or needs of any particular person. Further, any such general advice does not relate to any particular financial product and is not intended to influence any person in making a decision in relation to a particular financial product. No remuneration (including a commission) or other benefit is received by Milliman AU or its associates in relation to any advice in this document apart from that which it would receive without giving such advice. No recommendation, opinion, offer, solicitation or advertisement to buy or sell any financial products or acquire any services of the type referred to or to adopt any particular investment strategy is made in this document to any person.
The information in relation to the types of financial products or services referred to in this document reflects the opinions of Milliman AU at the time the information is prepared and may not be representative of the views of Milliman, Inc., Milliman Financial Risk Management LLC, or any other company in the Milliman group (Milliman group). If AFS licensees or their representatives give any advice to their clients based on the information in this document they must take full responsibility for that advice having satisfied themselves as to the accuracy of the information and opinions expressed and must not expressly or impliedly attribute the advice or any part of it to Milliman AU or any other company in the Milliman group. Further, any person making an investment decision taking into account the information in this document must satisfy themselves as to the accuracy of the information and opinions expressed. Many of the types of products and services described or referred to in this document involve significant risks and may not be suitable for all investors. No advice in relation to products or services of the type referred to should be given or any decision made or transaction entered into based on the information in this document. Any disclosure document for particular financial products should be obtained from the provider of those products and read and all relevant risks must be fully understood and an independent determination made, after obtaining any required professional advice, that such financial products, services or transactions are appropriate having regard to the investor's objectives, financial situation or needs.
All investment involves risks. Any discussion of risks contained in this document with respect to any type of product or service should not be considered to be a disclosure of all risks or a complete discussion of the risks involved. There are also risks associated with futures contracts. Futures contract positions may not provide an effective hedge because changes in futures contract prices may not track those of the securities they are intended to hedge. Futures create leverage, which can magnify the potential for gain or loss and, therefore, amplify the effects of market, which can significantly impact performance.
An investment in an underlying portfolio, whether with or without Milliman Managed Risk Strategy (MMRS) is subject to market and other risks and no guarantee or assurance is given by Milliman AU or any company in the Milliman group that the use of MMRS in connection with an underlying portfolio will not give rise to losses or that the performance of the MMRS in relation to the underlying portfolio will remove volatility completely or to the extent depicted in an illustration or fully replace losses in the underlying portfolio or to the extent depicted. While generally assets used in connection with the MMRS are liquid, this may not be the case in all circumstances. Further, during periods of sustained market growth, the return to clients from the combination of an underlying portfolio and MMRS should be less than if a client had no MMRS.
Past performance information provided in this document is not indicative of future results and the illustrations are not intended to project or predict future investment returns.