Brexit 

What advisers can do to reassure concerned clients

This article is part of
Guide to the UK market post-Brexit

What advisers can do to reassure concerned clients

The range of questions and problems typically faced by financial advisers are usually measurable and recurring, but the decision by the UK voting population to exit the European Union poses questions that many advisers may feel are more difficult to answer. 

Many economists and market strategists have been wrong footed by the market reaction to the vote, with the FTSE 100 rising in value and, later, sterling regaining much of the value it lost in the days immediately after the vote.

But despite it being more than two years since the EU referendum and those market movements having taken place, advisers continue to be unable to offer their clients a greater level of certainty now than they could in the days after the referendum vote, with asset prices continuing to respond to each wafer of speculation about the progress being made by politicians.

Dan Kemp, chief investment officer for Europe at Morningstar, says advisers' clients who are worried about the issue of Brexit should be divided into two groups: those whose investment time horizon is short-term, and so are worried about the short-term impact on their portfolio of Brexit volatility; and those who are uncomfortable with the lack of control, or predictability, they have over the fate of their investments at a time of political unrest.

Mr Kemp observes that in such a circumstance the role of the adviser is to coach and educate their client in order for them to better appreciate the benefits of a long-term time horizon for investment. 

Unintended risk

Simon Gergel, who runs the £685m Merchants Investment Trust, adds: "I think in some cases, clients are less worried about Brexit than their advisers. But the advisers can remind clients how internationally exposed the UK stock market is.

"Remind clients of the very long-term returns that equities have delivered, compared to other asset classes, and also note the starting low level of government bonds, which offer only modest returns.”

James Beaumont, head of consulting and advisory services at Natixis Investment Management, explains he has not noticed a particular trend among the clients with whom he works to exit UK equities, but says advisers should be wary of the unintended risk in client portfolios.

He says many clients have tilted their UK equity exposure towards companies that derive the greater part of their earnings from overseas. 

Mr Beaumont suggests this poses a considerable risk that advisers should be ready to explain to clients.

He says if the outcome of the political wrangling is a “soft” Brexit, where there is relatively little disruption to the economy or markets, then sterling could rise in value. So clients who have tilted their portfolios to a position based on sterling being weak, then those advisers are in a position where if sterling appreciates, clients may be exposing themselves to considerable extra risk.