Managing client expectations when the markets are going up and everything is going well is easy. The ability to manage client expectations when this isn’t happening is often what separates successful advisors from those who struggle in the business. Good advisors know that client communications during periods of market volatility can help to preserve their businesses and strengthen their relationships with their customers.
But continued volatility in the stock and bond markets has left many advisors scrambling to help their clients build realistic expectations about the returns that they will earn and the amount of risk that they will have to take to achieve them. (For related reading, see: What Advisors, Clients Should Expect from a Low-Return Future.)
Several key issues have contributed to the recent swings in the markets. Concerns about China’s economy, Brexit and a decline in oil prices have all served to roil the markets in 2016. Uncertainty about the upcoming Presidential election has also been a factor. And while the markets may calm down by the end of the year, advisors are having to deal with clients who are hearing constant voices in the media telling them that now is the time to buy or sell certain assets or perform other actions with their money.
Of course, advisors know better than to pay much attention to what the financial media produces, but getting their clients to ignore these prognosticators can be difficult at times, especially when the market is dropping. Advisors need to make sure that they are truly on the same page with their clients during times like these. (For related reading, see: What Your Clients Must Know About ETFs.)
Darlene Murphy, president of Wellesley Investment Advisers told Investment News, "I counsel my clients to stay away from CNBC." Ric Edelman, Chief Executive of Edelman Financial Services also gave a similar view. "We are doing massive amounts of outreach to clients to keep us their sole focus. If we don't reach out to our clients, someone else will."
Many advisors are pursuing educational campaigns aimed at helping clients to stomach the latest financial doomsayer interviewed by CNBC or other market channels. They can do this by showing clients what the markets have done over longer periods of time so that they don’t worry as much about what it did today, or this week or month. (For related reading, see: What the Future Holds for ETFs.)
“If you turn on the media today when markets are going nuts, they are reporting on market movements, there's red all over the screen and lots of movement," said Jay Mooreland, a financial planner and behavioral economist. "The mind's natural reaction when things aren't turning out well is to do something about it.”
How to Prepare, Communicate with Clients
Many clients watch financial news on a regular basis because they think that it will better help them to manage their money and know when to get in and out of their investments. But many of these sources of information are focused solely on the short term, and can often lead clients to try and micro manage their portfolios, which can in turn lead to them buy high and sell low. Advisors can help clients to defend themselves against the barrage of recommendations and opinions that they hear every day by teaching them how to evaluate what they’re hearing and weigh this information against their own financial plan. (For related reading, see: Crowdfunding: What Advisors and Clients Must Know.)
For example, they can learn to recognize when someone is more concerned with “being” right than whether their analysis or opinion is correct or makes real sense. A genuine source of information or opinion will change when new information comes to light, whereas a talking head may simply try to defend himself by saying that he would have been right if only such-and-such had happened. Clients should be told that specific, definite predictions about what the markets will do in the short term should always be viewed with suspicion, as the markets can behave very unpredictably on a short-term basis.
Above all else, advisors need to be reaching out to their clients on a regular basis to get a feel for what their clients are thinking about their money and to make sure that their clients know that their advisor is looking out for them. Clients who feel ignored are often inclined to move their money elsewhere where they will receive more attention. Regular outreach efforts can strengthen relationships with clients and bring in new business. (For related, reading, see: Smart Beta ETFs: Latest Trends and a Look Ahead.)
Randy Conner, president of Churchill Management Group, admitted to Investment News that his firm failed to adequately prepare their clients for the volatility that came in 2008, and that experience taught them to maintain more regular communications with their clients. The firm now hosts regular “Seinfeld Hours” where they hold meetings, often over lunch, where clients can voice their thoughts and opinions and ask questions about the markets and their money. The open format has helped many clients to receive answers to questions that they didn’t realize that they had.
Conner reflected that, "Even just being invited to these meetings has had a positive impact on clients because it shows they're being thought about." (For related reading, see: Smart Beta: Set Up for a Fall?)
Ross Levin, founding principal of Accredited Advisers, echoed the lesson that Conner’s firm. “The best time to prepare clients for volatility is before it happens. Even so, advisors have to deal with the feelings many people have when they see their portfolios falling.”
Another way that advisors can help their clients to deal with volatility is by giving them specific actions that they can take, such as investing more in the indexes when the markets drop. This can help to fight their inclination to act on emotions when they see their portfolios dropping. (For related reading, see: Alternatives for Low-Yielding Bonds.)
The Bottom Line
Managing client expectations during periods of market volatility is one of the most challenging aspects of financial planning. Advisors need to be proactive in this area in order to keep their clients from making mistakes with their money that can prevent them from achieving their objectives. Creating a plan for clients to follow when the markets drop can give them a sense of empowerment and help them to think clearly about what they are doing. (For related reading, see: Income vs. Total Return: Withdrawals Reconsidered.)