Pandemic & Planning

The Advisor As Financial Therapist

Helping investors get back on track… and stay focused on the long-view

by Craig Hawley

Mr. Hawley is Head of Nationwide’s Annuity Distribution, responsible for distributing commission-based and fee-based annuities across all channels, including broker/dealers, wires, banks, IMOs, registered investment advisors, technology platforms and other partners. Visit www.nationwide.com

Americans have been sideswiped by the COVID-19 pandemic—and they’re looking for ways to get back on track. According the Nationwide Retirement Institute’s most recent survey conducted in April, 85% of U.S. investors with investable assets of $100,00 or more say the COVID-19 pandemic has made them realize that they could do everything right and still be blindsided by outside events.

With over a third of investors relying on an advisor more than ever due to the impact of COVID-19—and more than one in four engaging an advisor for the very first time—it is clear that investors are seeking your expertise to guide them through these turbulent times.

No Place to Hide

As investors struggle with the impact of COVID-19—concerned about their financial security, worried about their health and safety, and fearful for their loved ones—the vast majority feel a lack of control and an urgent need for more guidance. More than half (52%) say they need help managing their finances and investments to succeed in the future.

The economy has hit the brakes as GDP declined at an annual rate of 4.8% in the first quarter of 2020. The April jobs report showed that unemployment spiked to 14.7% and 20.5 million nonfarm payroll jobs were lost. Among those still working, many have seen their salaries cut and bonuses slashed. To assist tens of millions of American households, Congress in March signed its largest bipartisan $2 trillion economic relief plan. But even as a fourth aide bill of $484 billion recently passed, bringing the total amount of COVID-19 related stimulus to $3 trillion, many believe that more help is needed.

Investors’ stock portfolios and retirement savings have been pummeled. In early March, the Dow plummeted from record highs to its steepest decline since Black Monday, followed by losses of more than 35% near the end of the first quarter. Despite recent rebounds, helped by the Federal Reserve’s interest rate cuts to near zero percent, combined with $700 billion in quantitative easing, and the above mentioned stimulus package, volatility persists. It may be months before we emerge from bear market territory.

Trust Comes First

As a financial advisor, you have an important job. In fact, according to our latest survey, more than half of investors say that during this pandemic, financial advisors (55%) top their list of trusted sources, with friends and family a distant second (26%), followed by online investment management/financial planning tools (25%) and their employer sponsored retirement plan (24%).

This trust puts you in the unique position to serve as a “financial therapist” for your clients. You can help them cut through the noise and understand what’s driving these complex dynamics. More importantly, you can counsel them against the kind of emotional responses and headline-driven investment decisions that could take them further off track and cause them to lock in losses for years.

Right now, investors feel cautious (41%) and uncertain (28%) about the impact of COVID-19 on their personal finances. Their top three financial concerns related to the pandemic are losing their life’s savings (41%), being unable to pay bills or meet their financial obligations (34%) and being unable to afford healthcare (28%) tied with being unable to retire as planned (28%). It is clear clients need short-term solutions to stop the bleeding, at the same time they need a long-term plan and your guidance to stick with it, for example:

  • Help clients build holistic financial plans to tackle their challenges right now and stay on track with their long-term financial goals.
  • Give them a view across all three stages of the financial lifecycle—from accumulation, to generating retirement income, to leaving a lasting legacy.

While it is essential for them to have a well-diversified portfolio, structured to help protect against falling markets, a stalling economy and ongoing volatility, your job goes well beyond asset management, including risk management, tax optimization and planning for their most important decisions. This includes a strategy to manage their current financial obligations, finance their children’s education and care for their aging parents, while helping them invest for the future, prepare for and live in retirement and create an appropriate estate plan.

Protection Against Market Risk

Ongoing volatility stemming from the coronavirus is dominating the headlines, eroding your clients’ confidence—and their portfolios. Concerns about volatility were already running high in the years leading up to the pandemic, according to Nationwide’s 2019 Advisor Authority study of nearly 1,600 financial advisors and individual investors. Volatility was rated among the top three macro factors with the most adverse impact on investors’ portfolios last year.

At the same time, over half of investors said market volatility was the leading scenario driving them to seek financial advice in 2019. Investors said that the top three benefits of working with an advisor when markets are volatile is to keep them focused on long-term goals, help them make more informed decisions and protect their assets against market risk. In fact, 88% of advisors said they had a strategy in place to protect their clients’ assets against market risk, compared to only 65% of investors.

Advisors and investors alike managed market risk through diversification and safe haven solutions, including high quality fixed income and non-correlated assets such as gold and real estate. Last year, roughly half of advisors, compared to less than one-third of investors, were using solutions such as fixed annuities, fixed index annuities and registered indexed-linked annuities (RILAs), to preserve upside potential and provide downside protection. Now, according to our most recent survey, more than half of investors (51%) say the COVID-19 pandemic has made them recognize the need for annuities to protect their investments against market risk.

Protection for Retirement Income

Last year, roughly half of advisors, compared to less than one-third of investors, were using solutions such as fixed annuities, fixed index annuities and registered indexed-linked annuities (RILAs), to preserve upside potential and provide downside protection. Now, more than half of investors recognize the need for annuities to protect their investments against market risk..

In many cases, volatility is also forcing clients to re-think their retirement plans. This could mean delaying retirement and working longer, until the market regains lost ground. It could mean cutting back on expenses, moving in with their family or taking less income from their portfolio in the coming months to preserve principal and ensure they can still fund a retirement that could last two to three decades—or more.

In 2019, Advisor Authority showed that 87% of advisors had a strategy to protect their clients against outliving their savings, while only 70% of investors had a strategy. Advisors and investors were equally likely to build a foundation for their retirement income strategy using Social Security and dividend yielding stocks, while advisors were much more likely to also use fixed income ladders/bond ladders and yield generating ETFs.

More than half of advisors, compared to less than one-third of investors, were using variable annuities with living benefit riders, to preserve growth potential, provide downside protection and mitigate longevity risk. Advisors were more than twice as likely as investors to use a range of different income generating annuities including Deferred Income Annuities (DIAs), Single Premium Immediate Annuities (SPIAs) and Qualifying Longevity Annuity Contract (QLACs). But now, more than half of investors (51%) say the COVID-19 pandemic has also made them recognize the need for annuities to protect against outliving their retirement savings.

Show That You Care

While investors are challenged to take care of their own financial needs, our survey reveals that caring for others is also among their leading concerns. Four in ten investors are worried the pandemic will impact their ability to fulfill potential caregiving responsibilities for others due to financial strain (41%) or due to their own illness caused by COVID-19 (40%). More than half of investors (57%) say that the pandemic has made them recognize the need for long-term care insurance for themselves and the people they care about. More than half of investors (55%) also say the pandemic has made them recognize the need for life insurance.

This is also a time for you to show that you care about your clients. Another soon to be published Nationwide Retirement Institute study reveals some of the most effective ways to build and maintain strong relationships with clients. We looked at two forms of trust, cognitive trust and affective trust, and asked which type of trust is more likely to drive a client to do more business with an advisor in the future. Cognitive trust, or “trust from the head,” is driven by factors like product performance and service experience. Affective trust, which comes from emotional connections, is driven by factors like empathy and perceived similarity.

Our new study reveals that affective trust is a much larger predictor than cognitive trust—and that empathy is the most significant driver of affective trust. The fact that these results were consistent across gender and a wide range of age and asset levels, shows the importance of prioritizing empathy—alongside your expertise—in your everyday practice. This focus on building affective trust has been so important in recent months as you and your clients have had your lives upended by an historic and challenging experience of “sheltering in place.” Creating this emotional connection and empathy will be even more critical as the economy begins to re-open. Both of these experiences represent the range of fear and anxiety your clients are likely to feel in the months ahead.

When was the last time you called your clients? If not recently, reach out to them today. Invest the time to understand what they’re facing, get to the heart of their concerns and help them move forward to a solution. It’s important to show them you care and you’re here to support them through these challenging times.

Time is on Their Side

Finally, to help clients stay on track with their plan and stay focused on the long-term, remind them that time is on their side. Timing the market has proven nearly impossible, and staying invested in the market, even through times of volatility, has shown historically to produce the best long-term results. In the six months following the Swine Flu outbreak in 2009, global markets rallied by 40%. In the six months following the SARS outbreak in 2003, there was a 23% rally. Even after the Crash of 2008, markets recovered in just four and one-half years.

In response to the COVID-19 pandemic, half of investors said they would stay the course and make no changes to their qualified plans, including their 401(k)s and IRAs. Only 42% of investors said they will stay the course and make no changes to their non-qualified investment portfolios, including stocks, bonds and funds.

Some are taking money out of the market altogether out of fear, while others are selling shares to meet financial obligations. Be sure clients exhaust all other options before making moves that will lock in losses. And take note that for some investors, there may be a silver lining. In fact, 22% of investors said they are optimistic about COVID-19’s impact on their personal finances, and 71% of investors agree that the pandemic will create an opportunity to buy more stock at a lower price.

While today’s challenges are very real, investors know they need help, and that’s the first step. They are seeking your guidance to meet their most urgent needs—protecting their assets, protecting their retirement, and protecting their loved ones. They’re looking to you for both expertise and empathy to help them stay on track through these challenges and prepare for the time when this crisis has passed.