How to provide the most appropriate financial advice in tough economic times

Being a financial planner in tough economic times is a big responsibility. Clients are often under extreme stress – with bad news, hiking prices and declining spending power having a big impact on their sentiment and finances. According to Jacques Coetzer, general manager of Broker Distribution at Sanlam Personal Finance, a financial planner can play a valuable role in assisting clients to take stock and review their financial planning in a holistic way.

“In fact, consumers tend to make wise financial decisions in tough economic times. If they behaved this sensibly all the time, there may be no tough times! Our job is to guide them in the right direction.”

Coetzer offers the following tips for financial planners to provide the most appropriate advice to clients in the current economic downturn:

1. View the economic contraction as an opportunity to add value to clients’ lives. In reviewing clients’ financial plans, financial planners may be in a position to provide advice on general financial behaviour which will assist clients in the long run. “For example, their exposure to loans or credit, or expenditure in certain areas may be too high, which could lead to financial hardship down the line. Too much credit exposure is a slippery slope, which can have a negative impact on liquidity.Very few households are able to live within their means these days – it is a case of managing the available credit and preventing over-gearing. Financial planners can help their clients manage this. This is really giving advice, as opposed to just selling a product,” he says.

1. Understand the difference between consumer perception and sentiment, and reality. “Consumer sentiment in a down market is always worse than reality, and people are making decisions based on unduly negative perceptions. The South African economy is certainly currently in contraction, but people are approaching financial planning as if we are in a recession,” Coetzer says. Financial planners need to have a good understanding of the macro-economic environment to ensure they can help their clients distinguish between perception and reality and assist them in making the right financial decisions.

1. Advise clients about the need to approach their financial planning in a holistic way. In a downturn, it’s a good idea to review decisions made in better economic times – are they still relevant? Do they still fit the client’s risk profile? “With reassessment, clients are likely to make the decisions they should have made in the good times. But they need to have the full picture and understand why decisions made then may no longer be appropriate. Holistic planning is also the only way to capitalise on possible tax benefits,” Coetzer says.

1. Encourage clients to continue taking a long-term view on financial planning. It may be tempting to focus on short-term needs during tough times, but long-term investments, especially those relating to retirement and estate planning, should remain paramount. “This long-term view should not be overly conservative, for example selling off equities out of fear of possible stock market corrections. As always, the economic cycle will continue and clients should be advised that their investments will eventually pick up again.”

1. Know what clients’ options are, and advise them accordingly. Unfortunately, during tough times the focus is often on liquidity rather than long-term financial viability. But there are many ways to solve short-term liquidity problems without cashing in on investments or lapsing policies – for example, premium holidays. Financial planners need to give clients all the options, and explain the possible impact of hasty decisions made on the back foot. Decision-making should balance the desire for liquidity now against the need for long-term financial growth.

1. Re-evaluate and nurture relationships with clients. Coetzer says the difference between financial planners interested in cultivating long-term relationships with their clients, and those only interested in making money over the short term, is most prominent during challenging economic times. “This is a good time for financial planners to take stock and reaffirm that the advice they are giving is really in the client’s best interests. Besides the moral obligation on financial planners in this regard, this will ensure that they are well positioned for growth when the market turns again.”

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