Some clients are tempted to spend more when their portfolios outperform in a particular year, which may not fit their financial plan.Cristina Gaidau/iStockPhoto / Getty Images
Investors rarely consider double-digit returns to be a problem, but for advisors, the challenge is tempering expectations that clients could see the same results next year.
Stock markets have soared so far in 2024, driven by central banks lowering interest rates and, more recently, the re-election of Donald Trump in the U.S., which investors believe will boost the economy. The S&P 500 closed last week up 25 per cent year-to-date, the Dow Jones Industrial Average is up almost 17 per cent and the S&P/TSX Composite has increased by more than 18 per cent.
If markets stick to their current trajectory, advisors should expect happy clients in their year-end reviews. Still, many are careful to curb their enthusiasm given the chance that next year’s results won’t be as good. Another challenge for advisors is that strong returns mean higher benchmarks to beat next year.
“Obviously, as an advisor in this kind of market, you’re thinking, ‘I did pretty good for my clients.’ But at the same time, I don’t want them to get too excited. You need to balance expectations for yourself and your clients,” says Ryan Bushell, president and portfolio manager at Newhaven Asset Management Inc. in Toronto, whose portfolios are up by about 20 per cent so far this year.
His longer-term clients, who have been through more market ups and downs, understand that only some years will result in double-digit returns. It’s the newer clients who might need more coaching on performance expectations.
“It’s great to look back and do a bit of a victory lap, but it’s also bittersweet,” Mr. Bushell says.
“For a client who came in six months ago and saw their portfolio go up by about 15 per cent, we’ll say to them something like, ‘You’re getting a great head start, but be warned that it could come back the other way,’” says Mr. Bushell, whose target is an average annual return of about 6 to 10 per cent for clients over the long term.
To balance performance expectations, Mr. Bushell also points to dividends, which often generate income regardless of how markets fare in a given year.
“We try to focus on real-world dollars and cents and less on the shorter-term market ups and downs,” he says.
Jennifer Tozser, senior wealth advisor at National Bank Financial Wealth Management in Calgary, says some clients are tempted to spend more when their portfolios outperform in a particular year, which may not fit their financial plan.
“What some people forget is that just because it’s this number today, it doesn’t mean it’s going to be this number tomorrow,” she says. “Much of it depends on the time period you’re looking at.”
She worries higher returns will embolden some investors to borrow to invest, believing their returns will be higher than interest rates paid on the loan.
“That’s problematic, especially if you can’t afford it,” and the market drops, she says.
Ms. Tozser, whose portfolios are also up more than 20 per cent so far this year, encourages her clients to stick to their financial plans in both good and bad market environments. Her plans are based on a conservative 5 per cent return, which some question when her average annual returns are often much higher.
“I tell them it’s because I want a 95-per-cent probability of success, which we can get when we plan for 5 per cent,” she says. “I don’t change my projections because markets are strong.”
She points in part to the sequence of returns risk, which is when negative market returns late in a person’s working years or early retirement can impact their retirement income significantly.
“That’s when many people are most vulnerable,” Ms. Tozser says.
Some investors also forget that earning more investment income may mean paying more taxes on it, even with good tax planning – especially if they’re impacted by recent changes to the capital gains inclusion rate introduced in the federal budget earlier this year.
“I know you’re excited about your account balances, but please don’t forget your tax bill,” Ms. Tozser says she tells her clients.
Christine Poole, chief executive officer and managing director of Toronto-based GlobeInvest Capital Management Inc., says her team tries to temper client expectations from the beginning of their working relationship.
“When we meet a prospective client, we always discuss the long-run return expectations,” she says, which are about 8 to 10 per cent. So far this year, her all-equity portfolios are up by about 18 per cent.
Ms. Poole reiterates the long-term performance goals during every client meeting to put good and bad years into perspective.
“Most clients, especially ones who have been with us for a while, realize it’s highly unusual to have two consecutive years of pretty good returns as we did in 2023 and so far in 2024, especially given everything going on in the world,” she says.
“As advisors, we just try to be more realistic. History shows that, over the long term, we will have these cycles up and down. The key is to stay invested.”