* Five years after crash, investors still spooked
* Advisers focus on planning and goals, rather than asset allocation
* Cash investments will not allow clients to meet needs
By Andrea Hopkins
TORONTO, July 23 (Reuters) - When financial adviser Lee Helkie sits down with clients who are afraid to invest their money, she walks the same uphill path her peers have faced since 2009: how to get investors off the sidelines before it is too late.
“People aren’t aware that markets have rallied, and the fear is still there because the news of the economy is so prevalent,” said Helkie, an 18-year industry veteran at Helkie Financial & Insurance Services in Toronto.
When the financial crisis rocked markets in 2008 and 2009, many investors yanked their money out of stocks and never returned. Awaiting a better time to re-invest, they kept their funds in cash or money market investments.
But nearly five years later, global stock markets have regained strength, interest rates are at rock bottom, and clients whose money remains on the sidelines are running out of time to increase their retirement funds and recoup losses.
The problem is huge. Some $5.9 trillion is sidelined in the United States and another C$975 billion ($943 billion) in Canada, according to global investment manager Franklin Templeton, which includes liquid products like Guaranteed Investment Certificates and money-market funds as cash.
“People are stuck in crisis mode and disconnected from what is actually happening,” Franklin Templeton consultant Kevin Jeffries told a group of financial advisers trying to help clients get back on track toward their financial goals.
Will Britton has seen the same thing in his practice in Kingston, Ontario. People have been sitting on cash for four or five years and realizing they must do something to build their nest eggs. But the confidence they had in 2006 is gone, and clients no longer aim for a magic number.
“When I‘m talking objectives, it’s not about an annual return anymore, it is about what they want to do in retirement,” said Britton, who has been a financial planner for seven years, just long enough to have weathered the financial crisis.
With risk aversion persisting far longer than many advisers had expected, they are scrambling to come up with products and strategies to lure investors back into the market.
The first step is telling clients that leaving money in cash will mean losses over the long term, since inflation will keep a dollar from buying as much after retirement as it does today.
“There is actually a great deal of risk in staying in a very low rate of return,” said BMO Nesbitt Burns Managing Director Bill Brown. “People will see they are not going to meet their financial goals, and that means they will have to work a lot longer and survive on a lot less” in retirement.
But rather than urge clients to take on more equities before they are ready, advisers should focus on financial goals and work backward from there to ease investors into higher returns.
One strategy is to invest gradually, leaving the bulk of a portfolio in cash while contributing a little bit each month into a balanced fund that has some exposure to stocks and evaluating regularly to see which investment is doing better.
“Maybe they’ll gain some confidence as a result,” said BMO’s Brown.
An index-linked note, whose rate of return is tied to a particular index and which protects the principal for a certain maturity, may also work for some risk-averse clients.
Sadiq Adatia, chief investment officer of Sun Life Global Investments, said asset managers had come up with a raft of new products that both limit the upside of market gains and protect on the downside, a conservative product rarely considered 10 years ago.
“I don’t think people’s risk aversion has necessarily changed,” Adatia said. “They just didn’t know what their risk tolerance was until they went through an event (like the financial crisis).”
Helkie and Britton both say they will focus on finding conservative solutions for risk-averse clients, looking at old-fashioned products like segregated funds, which offer the growth potential of a mutual fund with the security of a life insurance policy, or annuities, even if the fees that come with those investments would have made them unattractive before.
“Before, people would have said: ‘Why would I pay an extra fee and forego growth?'” Britton said. “That whole mindset that I can’t lose over 10 years, that is just gone.”
Helkie said she accepted that some clients would simply stay in cash.
“That flies in the face of what any analyst would ever tell you, but it’s still their money,” she said. “If I kept them up at night, am I really doing my job?”