Clients look to their advisors for steady, predictable market behaviors…
by Gregory B. Gagne, ChFCMr. Gagne is a 19-year MDRT member. He is the founder of Affinity Investment Group LLC in Exeter, New Hampshire, which specializes in wealth management and distribution planning services for retirees. Gagne is also the co-Author of four books on Estate and Financial Planning. Visit affinityinvestmentgroup.com
With a constant flow of stock market activity reports in the news, market volatility is a topic on the top of consumers’ minds this year. There is an opportunity for advisors to engage in conversations with their increasingly informed clients to remind them of appropriate reactions and best practices in periods of volatility. Individuals close to or in retirement are particularly vested in the market due to the amount of stability needed in their lives to uphold a comfortable lifestyle without regular employment. The role of advisors must involve strategic communications and proactive financial planning to diffuse the effects of market volatility.
Market volatility can have a substantial effect on the financial stability of the majority of my clients who are five years away from or already in retirement. These clients are in need of steady and predictable market behaviors that will not negatively impact their source of income for post-retirement needs. If advisors can encourage appropriate client behavior during market volatility, they can withstand turbulent market conditions and maintain a strong portfolio. Clients have worked hard to secure necessary financial assets for use in retirement, and it is your responsibility as an advisor to ensure unpredictable market activity does not undermine their efforts.
Implement communication strategies to engage clients
With the unpredictable nature of the market, you cannot wait for substantial fluctuations to establish a communication strategy. Determine how you will engage with clients during inevitable market volatility, so that clients will not feel unsettled by the news. I suggest an ongoing, continuous process of outbound communication with your clients to keep them informed, educated and understanding that you are aware of the state of the economy. If you can effectively communicate this, it reassures your clients that you are monitoring the shifts for them and gives them financial confidence.
To achieve open communication with clients, experiment with tactics such as distribution of quarterly market commentary videos with a written market report. The video should detail past market behaviors and the current state of the market. Additionally, include predictions for any future volatility to keep clients informed, but ensure they do not try to time the markets. Incorporate general advice and reminders to encourage clients to wait for the market to rebalance should drastic losses or gains occur.
If you invest three minutes of your time upfront to record the video, you will save yourself time in the long-run. Your clients will be well informed, and you will not receive a high volume of panicked emails and calls that require your response. A video makes your clients aware of your active observation of the market and intent to reach out if needed. I have great success with this technique as our phone almost never rings when the market is volatile, and the emails we send to clients with links to videos receive high open rates.
In between each quarterly report, we also send newsletters to our clients. This closes any gaps in contact with clients that would damage our previous outreach efforts. The newsletters are another touch point with clients that continue to shape an informed client base.
Educate clients to respond appropriately, and emphasize logic over emotion
While transparency of the stock market is an important aspect of client education, you must also coach clients on appropriate responses to market volatility based on their individual retirement plans. Even the most informed client can panic when they hear of a significant drop or upswing in the market and may sell or buy without much thought of the long-term impact.
Your efforts should encourage clients to remove emotions from the decision-making process whenever possible. Actions should be based on logic because emotions and investments do not mix well. Clients who are motivated by emotions tend to sell low and buy high, which makes it difficult to profit long-term. One of the biggest mistakes a client can make is allowing a current event to interfere with their thought process, which can cause a short-term, emotional response to the market and a long-lasting negative result.
When clients are tempted to deviate from advice, I use analogies to increase their understanding. I ask, “When is the last time you went to the beach and the tide went out and did not come back?” It never happens – just like the stock market eventually bounces back from losses and gains. The stock market is going to have storms, but you have to stay on the boat and sail it out. The last thing you want to do is jump ship in the middle of the storm. Your portfolio is your all-weather boat that you have to stay in to rise and fall with the tide. If you leave and the tide rushes back in, you will get lost in the storm. This analogy helps clients recognize the need to wait the market out during turbulent conditions. While these conversations help dissuade most clients, there will be those who we cannot always guide in the right direction. We can’t change their behavior, but it is our responsibility to give them our expert recommendations for their best interests.
Remember that impulsive decisions can also occur during market growth. People want to invest in a stock that is performing well before it’s too late. Many advisors observed this at the end of last year and into January. Those who made rash decisions to buy high felt remorse as soon as the market shifted in February. Our low incident rates, despite the turbulent market, can be attributed to our proactive communication efforts to deter quick, emotional decisions.
Construct a well-diversified portfolio… and establish contingency plans
If a client has constructed a well-diversified portfolio and investment policy statement, they are more likely to be confident when confronted with market volatility. Establish metrics that govern the portfolio over a long period of time. Create these boundaries during a stable market to keep clients more comfortable during times of volatility.
We recommend our clients maintain 12-24 months of their expenses in cash in an FDIC insured account at the bank. They can reserve this fund for unexpected life events or in the market at the same time that requires them to tap into their portfolio. For the same reason, clients should maintain a cash position and cash equivalent to plan for a sustained market downfall. This allows clients to pull money out of the portfolio and maintain the portfolio’s structure.
We never want clients to be in the position of needing to sell something they don’t want to sell at a time they don’t want to sell it. This unfortunate situation creates a lifetime portfolio consequence. Through basic principles and contingency plans, advisors can maintain discipline, allocation and cash flow for clients to withstand market volatility. My practice used these strategies during the 2008-2010 financial crisis while we waited for the market to recover. Well-rounded portfolios and contingency plans enable simple maintenance while the market recovers in contrast to a need for drastic changes to salvage losses.
Understand Your Client
According to a recent study conducted by MDRT during a period of volatility, 74 percent of consumers with advisors indicate their advisor shared best practices for responding to market volatility.1 In addition, 48 percent of consumers with financial advisors would consult their advisor before they make portfolio adjustments to prepare for future volatility.i It is important to understand consumer reactions to market volatility to ensure your guidance suits their needs. If clients plan to consult you to prepare for future volatility, make sure you have a presentation or report readily available to give them something tangible to walk away with.
The study also revealed that more than half of respondents with financial advisors expressed the relationship increased their understanding of appropriate actions to take when the market is volatile.i This finding is a positive sign that your presence as an advisor positively impacts clients’ financial knowledge. Consumers with advisors were more likely to follow news of volatility than those without; 51 percent versus 31 percent respectively indicated they very or somewhat closely followed the news.i Quarterly market videos, newsletters and frequent meetings with topical discussions are effective ways to encourage clients to stay informed and on top of current financial events.
Develop additional strategies from other top professionals
Advisors must have the ability to tell stories the right way to keep clients calm during market volatility. If clients appreciate your guidance, they are more likely to accept and implement your suggestions into their behavior patterns. I attribute my success in proactive client communication to my interactions as a part of MDRT over the last 20 years and the lessons I learned from those who came before me. Through networking with top financial service professionals and use of the extensive resources available to members, I have learned new strategies to enhance my daily practices and strengthen my relationships with clients. ◊
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1. MDRT Study, 74 Percent of Consumers with Advisors Indicate their Advisor Shared Best Practices for Responding to Market Volatility