President Trump, trade wars and the threat of global recession are hot topics in the media and on Wall Street leading to global economic uncertainty on a level we haven’t seen since the Covid-19 pandemic.

It’s a perfect storm that’s likely to cause investors anxiety and with that comes an increased risk of claims against their financial advisers, often held responsible for economic volatility beyond their control.

So, is there anything financial advisers can do to avoid claims? I believe so: it’s all about good communication.

Managing client expectations

This is easier said than done. In recent years, people investing in equities have seen their portfolios boom. Economic slow-downs, interest rate shocks and even Covid-19 still couldn’t stop the values of investments and pensions increasing.

In some cases, clients have seen growth of over 10% year-on-year and it’s easy to understand why some have become bullish.

During a stock market crash however, many will see significant losses, leading to frustration and dissatisfaction targeted at their financial advisers. They might expect their adviser to have foreseen what was coming or protected them from substantial losses but considering even Trump’s closest advisers don’t know what he’ll do next, how can a financial adviser?

What that means for financial advisers

Regardless of how well you try to manage your client’s expectations, some will question your competence and advice.

Some clients who feel their advisers failed to act in their best interests or didn’t manage the portfolio in a way that minimised the risk will file complaints.

Since clients of Financial Conduct Authority-regulated advisers can take their case to the Financial Ombudsman Service, many will feel more empowered to challenge the adviser’s actions, particularly if they believe there was a breach of duty.

Why Trump’s timing matters

The timing of Trump’s actions couldn’t be worse.

The end of the tax year is often when clients top up their pensions and ISAs. If funds aren’t invested swiftly, it’s possible to miss out on market gains – particularly important where fund switches are concerned and funds are erroneously left in cash.

Timing in this instance has been awful for the independent financial adviser (IFA) community. Acting on client instructions, they may have already invested an ISA allowance (£20,000) and pension allowance (£60,000) shortly before the crash only to see an immediate 10-15% loss.

Whilst many clients will reiterate the importance of “pound cost averaging”, in reality most assess their financials and invest ad hoc.

Suitability of advice

Under Financial Conduct Authority rules, financial advisers must ensure their advice is suitable for the client’s individual needs, goals and risk tolerance but a market crash can expose recommendations not aligned with the client’s risk profile or investment objectives.

Clients often feel they can tolerate losses of 10-20% before they see the losses in black and white affecting their investments and pensions.

Bullish investors insisting upon high-risk equities that have experienced significant losses during the crash may claim their adviser did not properly assess their risk tolerance. Similarly, if an adviser recommended investments that were unsuitable for a client’s long-term goals or financial situation, a claim for unsuitable advice could arise.

What we can learn from history

Like most markets, professional indemnity insurance markets ebb and flow, and so do claims.

At the time of writing, we are seeing premiums for IFA professional indemnity falling but there are two forces working against each other that cause uncertainty:

  1. Professional indemnity rates are softening due a recent lack of claims that insurers thought would have materialised by now.
  2. A recession is on the horizon and history tells us that recessions equal an increase in professional claims.

Economic downturns lead to financial strain and clients naturally feel more pressure to recover losses. They are simply more likely to seek legal action or file a claim when they lose money during a recession or market crash, especially if they think a professional’s actions were negligent, misrepresented or caused them financial harm.

The inter-connectedness of our economy means it’s not just financial advisers at risk. Accountants, lawyers and architects could see more claims too.

What can financial advisers do?

I can’t tell you how to do your job and you know your clients better than anyone. What I do know is that good communication can save the day.

Insurance is about relationships and relationships thrive when there is good communication.

Don’t bury your head in the sand, now is the time to communicate more than ever,

Reassure your clients that markets have always risen and fallen. Reiterate that the history of the equities market is the best indicator of the future.

Keep calm and carry on.