After a year of solid stock market returns with little volatility, 2018 is off to a different start. The S&P 500 index lost just under one percent in the first quarter after gaining almost 22 percent in 2017. After the index hit an all-time high in January, the remainder of the quarter was marked by sharp daily swings and steep drops.
Recent percentage declines are nowhere near record levels, but it's likely they may be unnerving to clients used to market calm. This is the time to be proactive and talk to your clients about market volatility.
- As an advisor, there will undoubtedly be times when the markets turn sour and your clients lose money.
- Market volatility can be hard for clients to reckon with, so it is crucial that you be a good listener and communicator and keep emotions in check.
- Encouraging clients to stick with their financial plan and to understand that short-term blips will often smooth out over longer time horizons can keep everybody with a level head and reasonable expectations.
Be a Good Listener
While it's important to reach out to all of your clients during times like these, you should also be able to identify who is more at risk—or worried—about market swings. Let your clients know that you're available to talk if they have any concerns. This is also a good time to schedule meetings to review their portfolio and their situation.
This is not the time to wax on about asset allocation and standard deviation or fall back on technical descriptions of recent market gyrations. While those are important (and part of the reason your clients hire you), conversations during periods of volatility are about your people skills.
Let yourself be surprised. Don’t assume that you know what your clients will say or how they are feeling, even if they have invested with you for years. What your clients fear most is the unknown, according to Mia Kitner, an investment advisor representative. "People are afraid of what they don't know. At Northstar Financial Planners, Inc., we believe our role is to educate in the face of market volatility. We teach clients how markets work and about volatility—that it's inevitable—so they don't react emotionally to short-term fluctuations."
This is the time to be a good listener. Let your clients tell you how they feel. What fears or concerns do they have? Sometimes what you hear may surprise you. That client who always seems cool and calm about the markets may not feel that way this time.
Take a Long-Term View
Periods of market volatility are a good time to remind your clients of the benefits of thinking long-term and the potential pitfalls of making investment decisions based on emotions. The news was full of sad stories of investors who sold at the bottom of the market during the financial crisis of 2008-09, only to miss out on one of the strongest bull markets in history.
A good question to ask a client looking to reduce their exposure to stocks is, "If we sell now, when will you get back in?” While most clients understand that it's nearly impossible to time the market, most have trouble squaring the data with their emotions.
Keep Things in Perspective
While recent declines in the Dow Jones Industrial Average topped 1,000 points, they lack real significance on a percentage basis. Helping clients to keep the current market news in perspective is important, especially during periods of volatility.
Focus on Their Plan
Periods of volatility are a good time to meet with clients to review their overall situation. Show them how the current swings were factored into the planning that you have done with them. Provided that it is true, show them how they are still on track towards their financial goals and that their asset allocation is still appropriate.
Being a good advisor isn’t about reacting to the changing stock market conditions. It's about reassuring your clients that they are on track and that you are on top of their situation.
For clients who are naturally jittery about the markets, scheduling a meeting during times of volatility might be just what they need to calm their nerves. Bob Rall CFP® is the principal at Rall Capital Management. He says that he takes advantage of periods of market uncertainty to strengthen his relationships with clients through overcommunication: "We are proactive in maintaining close contact with our clients by sending several messages, making more than one call, and by writing several articles on the topic. These articles can act as resources for our clients in the future." Clients should know that while they can't control the markets, they can control their financial plan, and a strong plan can withstand volatility.
Your review should focus on how their portfolios are positioned and reassure them that their allocation is still appropriate. Many of your clients have experienced some nice gains over the past few years. But it's possible that now is the time to scale back some of the risk in their portfolio, especially if they are on, or ahead, of where they need to be in relation to their financial goals. However, it's important to frame this decision within the scope of maintaining their overall financial plan, so it doesn't look like you're trying to time the markets.
The Bottom Line
Periods of volatility are really when you earn your money as an advisor. Sometimes providing advice is as much about managing client behavior as it is about asset allocation and retirement projections.
If your clients are fearful, it's because you haven't communicated with them enough, and you haven't done your job of educating them properly about market fluctuations and volatility. Lawrence Sprung CFP®, president of Mitlin Financial, Inc., says that clients start looking for new advisors when they haven't heard from their current advisor. As president of Mitlin Financial, Lawrence sends emails about short-term events to assure his clients at Mitlin that they are paying attention during these periods of volatility. Even if your clients understand that there are inevitable risks that cannot be mitigated, they want to be reassured. If you don't reach out to them, someone else will, and you may lose a client in the process.