How can advisors avoid disappointment if returns are more 'normal' in 2025?
Two straight years of 20+ per cent returns on the S&P 500 present advisors with what might be called a ‘very good problem.’ Clients who had US equity exposures did very well. Looking at 2024, even those with just Canadian equity exposure saw the TSX 60 rise over 20 per cent. Even clients minimal equity holdings did relatively well last year as falling rates put a bit of lift back into fixed income markets.
The ’good problem’ emerges because we know that human beings have a powerful recency bias. We tend to think that the thing that happened most recently will continue to happen, and we’re surprised when it doesn’t. So if markets revert to their mean and offer single digit or lower returns in 2025, clients may feel a more acute sense of disappointment given the highs they’ve just experienced. In this environment, how can advisors level set with clients and ensure their expectations aren’t divorced from reality.
“With our clients, we always say that every year is fresh and new, but we have had a lot that we have built upon over the last year,” says Laurel Marie Hickey, Senior Wealth Advisor & Senior Portfolio Manager at Wellington-Altus Private Wealth in Calgary. “We always want to make the most of the opportunities that lie ahead but we also have to show resilience in the face of changes and challenges. Because we’re discretionary portfolio managers we are prepared to navigate those twists and turns.”
In wiping the slate for a new year, Hickey and her team prefer to focus on clients’ goals, dreams, and desires rather than the number they expect their equity holdings to return over the next 12 months. If they have a new goal, she can factor that into the plan and show how different returns scenarios may impact its feasibility. If they aren’t deviating from their stated goals, then their existing plan can function as a touchstone. The plan is based around a set return number, always set at a relatively conservative level, so the kind of outsized returns that clients may have experienced last year are taken as a bumper crop and protection against a downturn.
Looking at the market this year, Hickey says she still sees potential for growth with a few caveats of uncertainty ahead. In her conversations with clients she sets aside time to talk about headwinds, performance, returns, and fees, all in the context of that financial plan.
John De Goey has held a more bearish position through 2024 and into 2025. The Portfolio Manager with Designed Wealth Management largely avoided equity allocations for his clients through 2024, citing what he saw as too expensive valuations in much of the market. Keeping his clients in lower risk securities offering single-digit returns, he says, has kept them content and on track in their plans. When clients come to him now, asking about participating in equity markets this year, he offers an outlook that readies them for potential disappointment.
“There have been six instances in the past 100-odd years where the S&P 500 has been up by 25 per cent in back to back years, and there are zero instances where you have those kinds of returns for three years in a row,” De Goey says. “If people have now recalibrated their expectations to thinking that high double-digit returns will be the norm, they are very much in for a rude awakening.”
As he examines the market, De Goey argues that possible headwinds are being understated. He believes that the US Federal Reserve is entering a position where it can no longer cut rates as easily. He notes, as well, that the incoming administration of Donald Trump might restart US inflation with proposed protectionist policies like tariffs against Mexico, China, and Canada. He expects that the Canadian economy will enter a recession this year, and there is a chance that the US does as well. Given that markets are forward looking, De Goey expects that likelihood to get priced in. He’ll outline that view to his clients in arguing for a more defensive stance and more conservative expectations.
De Goey is also known for his outspoken views about the financial services industry, arguing that many stakeholders promote positive outlooks in order to keep clients invested. It’s a view he articulates in his book Bullshift and one that informs his decision to keep his clients out of equities. He admits that last year he was “too early” but argues that for other advisors this is a moment where rebalancing and taking some equity gains off the table may be advantageous to clients.
For her part, Hickey reiterates the importance of the clearly articulated plan as a touchstone for clients. The plan can inform expectations about returns and show clients that they’re on track.
“Everything is based on a single number, so knowing what that number is helps clients continue on the path of their wealth journey,” Hickey says. “It’s about doing all the things that you need to do, no matter the direction markets take.”
