Banking

When Clients Resist Owning Global Stocks, Advisors Build Their Case

When an advisor recommends an investment strategy, many clients readily agree. Occasionally, however, they push back.




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Take global investing. Some clients resist when advisors urge them to add international stocks into the mix.

They may accept their advisor’s reasoning that going global makes sense. But other concerns can fuel their reluctance to follow through.

Investors may balk at owning foreign equities because they prioritize domestic holdings. They may also object on political or moral grounds to purchasing stocks in a certain country or region — or they’ll argue that buying U.S. stocks such as Apple (AAPL), Coca-Cola (KO) and Starbucks (SBUX) gives them sufficient global exposure.

Even if they’re receptive to an advisor’s suggestion to include at least some global assets in their portfolio, the last decade may have soured them on venturing outside America. U.S. stocks have outperformed their international peers for much of this period.

“Given the recent performance of international markets, people aren’t necessarily thrilled about international diversification,” said David Schneider, a New York City-based certified financial planner. “But I tell clients that a substantial part of the world’s wealth is outside the U.S.”

He also educates clients about the role that global stocks serve in diversifying a portfolio, noting how the S&P 500 lost money from 2000 to 2009.

“To avoid the risk of a lost decade, it’s important to have international diversification,” he said.

Navigate Client Concerns About Overseas Investing

Some investors form strong opinions about where they want to put their money. The growth of socially responsible investing has highlighted how our investment decisions impact the greater world — and that leads some individuals to be more intentional in deploying their assets abroad.

For example, clients may tell their advisor that they prefer to avoid investing in countries such as China or Russia. Their reasons can range from objections to a nation’s human rights record or foreign policy to more mundane concerns or outright biases.

“If a client wants to exclude a certain country, I may reply that I don’t particularly like that country either,” Schneider said. “But successful investing isn’t about whether I’m personally enthusiastic about a country or region. It’s about adhering to a disciplined process and gaining exposure to areas” that enhance the overall portfolio.

Some sectors entice investors because of promising trends. As global online sales surge in Asia, Latin America and the Middle East, for instance, advisors might propose owning more foreign e-commerce companies.

For individuals who are adamant about avoiding foreign holdings, advisors may decide to accommodate these clients. Arguing can backfire.

“You can’t push too hard,” said Randy Farina, a senior portfolio manager at Exencial Wealth Advisors. “You can only advise and give them the facts.”

There’s a difference between someone who’s determined to avoid any international stocks and an investor who’s reluctant, Farina adds. For those who are queasy but willing to consider it, an advisor might say, “I’m not trying to move you from zero international exposure to 50% today. Let’s do it gradually.”

Asset Allocation Models Call For More Global Exposure

Clients may hesitate to invest in companies in certain countries that have opaque financial reporting rules. A perceived lack of transparency can lead individuals to conclude that it’s too risky to put their money in some foreign markets.

“I think there’s a little reluctance to trust the accounting standards out of emerging markets, especially China,” Farina said. “But that shouldn’t be an issue. Globally, the incidence of fraud is much lower than we think.”

He relies on audited financial statements when evaluating companies around the world. And he calls the IFRS — the international financial reporting standards used in more than 120 countries — “a very robust framework.”

Experienced investors may recall that in the 1990s, asset allocation models typically set aside a relatively small slice of the pie for owning foreign stocks. The slice keeps getting bigger — and that can stoke anxiety.

“When I started as an advisor in 1994 and 1995, international was usually in the 10%-to-15% range,” said Fritz Glasser, an advisor in Austin, Tex. “Over time, that base allocation has come up.”

Glasser says that most clients accept his recommendation to earmark a bit more of their portfolio to international stocks. But for those who prioritize sustainable investing, questions remain.

“If a client has ESG (environmental, social and governance) concerns, it can be harder to include international stocks,” he said. “ESG reporting doesn’t exist in some countries” or lacks the detailed disclosure to satisfy investors seeking to vet their holdings.

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