Nothing breeds investor panic like volatility and bear markets. Part of a financial advisor’s role is to discuss bear market preparations with their clients, however in a recent survey, Hartford Funds found that only 43% of surveyed clients recall the conversation they had with their financial advisors.
It is vital for financial advisors to proactively communicate with their clients about market volatility and prepare themselves and their client for bearish time. Here are 9 tips to keep your clients from panicking in a bear market.
- Be proactive by calling clients before they call you.
Rich Guerrini, president and CEO of PNC Investments, can’t stress enough that “this is the time to be going above and beyond the call of duty by talking to each of your customers on a regular basis.” Your clients are looking for someone to tell them what’s going on. If they don’t hear from you, they might turn to someone else who won’t give the same level-headed guidance, Guerrini says. Don’t wait for clients to call you in a panic. Reach out to them first to show “you’re thinking of them and have your finger on the pulse,” says Chuck Cumello, president and CEO of Essex Financial.
- Craft outreach based on client interest rather than your business needs.
“One generic message doesn’t make sense for every client,” says John Anderson, managing director of Practice Management Solutions at Independent Advisor Solutions by SEI. Someone who is closer to retirement would have a different perception of volatility than someone just starting out. Likewise, a client who has been through bear markets before would have a vastly different experience than someone who just started investing in the last decade. Instead of segmenting your book of business by business needs, separate clients based on their interests or concerns, Anderson says. Instead of A tier/B tier, think about who’s nervous, who’s nearing retirement, who’s just starting to invest.
- Hear your clients out.
Take the time to hear your clients out before trying to shut down impending panic. Individual clients are going to weigh in where their investments are concerned, and you should want them to do so, especially during volatile markets, says Brian Briggs, head of NextGen, Practice Management Solutions, at Independent Advisor Solutions by SEI.
Understanding your client’s concerns “will help you evolve your business as an FA,” while also giving you the opportunity to continue “laying the foundation for why you’re working with them.” Remind them that you’re building a relationship, not providing a service. A financial advisor’s role isn’t just to help clients “grow their accounts, it’s helping them reach their goals.”
- Remind clients of their financial plan.
When bear markets loom, it’s the perfect time to remind your clients of their financial plan. Show them how you’ve planned for downturns like this. “Reinforce their long-term objectives and the return expectations” you used to reach them, says John Diehl, senior vice president of Strategic Markets for Hartford Funds. How will making a change today impact those return expectations and the client’s likelihood of meeting her financial goals? “If a client wants to make a shift, it’s certainly their decision, but they should realize that down the line, they may not be able to achieve their long-term goals if they do,” he says.
- Ask them what the buy signal will be if they sell.
If despite your best calming efforts, your client is still determined to sell, try this line from Cumello, “I professionally disagree that we should sell but it’s your money and if you want me to sell, I will. But I need you to tell me what the buy signal is going be. What is going to be the thing that you’ll wake up one morning and say, ‘Today is the day to get back in the market’?” What investors often fail to realize is “there’s never a bell that goes off and says, ‘Ding-ding-ding, it’s over. You can get back in now,’” Cumello says.
- Have a risk tolerance and fixed income conversation.
Volatile markets are the perfect time to have a risk tolerance conversation. Nothing demonstrates the true strength of your client’s stomach like choppy waters. If she’s losing sleep at night, it may indicate an improper allocation. Volatility can be an opportunity to “reintroduce the role of fixed income in a portfolio,” Diehl says. Clients often question why their returns don’t match the S&P 500 during bull markets; now is your chance to demonstrate how shaving a few percentage points at the top can shelter them from the bear bottom.
- Don’t just preach inaction.
No action isn’t always the right strategy with nervous investors. While the message for some clients may be to stay the course, others need to see more action from their advisors. Millennials in particular want to know what their advisor is actively doing for them, Briggs says. They want to know how you’re earning the fee they’re paying you. Show them what you have done and are doing to help them weather market storms. Or show them how you’ve turned the volatility into opportunity, such as through tax-loss harvesting.
- Find opportunities to turn a negative into a positive.
Clients seldom realize there can be tremendous opportunity in bear markets. Now is your chance to get into previously overpriced investments or add to current positions on sale. Hartford Funds’ report “Beyond Investment Illusions” illustrates how investors’ perceptions of volatility often differ from the reality. They show how the outcome would differ for an investor who added $2,000 to her portfolio every time the market dropped between the end of 1977 and 2017 versus someone who moved $2,000 into 30-day U.S. T-bills. The former had more than $1 million more than the latter by December 2017.
- Perspective is power.
Every bear market feels like the end of the world, but the reality is we’ve been here before and we’ll be here again. Essex Financial has found that giving clients “historical context can help calm things down and show them this current storm is not as bad or abnormal as the media may make it seem,” Cumello says. Diehl suggests using clients’ own histories for perspective. Ask them, “How did you feel during the last downturn? What did you want to do? What did you do? How did it all work out?” Diehl also uses a house analogy: If your home lost value overnight, would you sell it today?