Financial Advisor Do’s and Don’ts During Extreme Market Volatility
Financial advisors play a vital role in helping clients achieve their most important financial goals. But where they really earn their fees is during times like these, when helping clients navigate the choppy waters of extreme market volatility. Clients look to their advisors to guide them through scary times and reassure them that everything will be okay.
Emotions run high when the market turns volatile. When stressed, humans instinctively want to do something and take some kind of action to reduce or eliminate the threat. That’s when mistakes typically occur. The value of a financial advisor rises in direct proportion to the anxiety levels of their clients, who look at volatile market swings as a threat to their financial security. The critical role of financial advisors is to keep their clients from making costly behavioral mistakes. During periods of extreme market volatility, there are some things advisors must do and things they should avoid doing to maximize their value to their clients. Here are a few.
#1. Do fight fear with facts.
Extreme volatility can be scary. It increases uncertainty and anxiety. Advisors can alleviate client fears by educating them on what volatility is and its role in generating investment returns. Remind clients that market declines are only temporary interruptions in a more enduring market advance.
#2. Do remind clients that market volatility is baked into their long-term plans.
The rate of return assumptions used to project asset growth already account for market volatility. More importantly, that rate of return—whether it’s 5%, 6%, or 10%–wouldn’t be possible without periods of market volatility.
#3. Do keep your clients focused on what’s knowable.
No one can be certain how the market will move tomorrow, next week, or next year. What is knowable is that market volatility is normal and should be expected. Sometimes it’s worse than other times, but historically, the market has always recovered. Rather than focus on what’s unknowable, encourage your clients to focus on what’s knowable, which is their long-term objectives, how much they’re setting aside to achieve their goals, and where they are right now in relation to their goals.
#4. Do discuss strategies to better cope with or take advantage of market volatility.
When the markets turn volatile, it’s an opportunity to discuss how specific investment strategies can help improve their positions. For example, tax-loss harvesting can help lower their taxes and boost portfolio returns. Or how rebalancing will ensure they stay on track with their target asset allocation while maintaining their risk profile.
#5. Do reach out to all your clients.
You’ll want to contact your clients to reassure them and get ahead of their emotions. Have an email prepared to send out to all your clients explaining what’s happening and providing some context (i.e., normal market action, corrections are good for the market long-term, etc.), and recommending a course of action (i.e., relax and sit tight).
To ensure you’re conveying the right message to your clients, you should segment them based on their investment profile. For example, the message you may want to deliver to clients near or in retirement might differ from younger clients.
#6. Don’t avoid client calls.
During terrifying moments in the markets, advisors can be besieged with calls from concerned clients. There’s absolutely nothing else you need to be doing during these times other than talking with your clients. All client calls should be returned within 24 hours. If you have done a good job of educating your clients about how the markets work, you probably won’t receive as many calls. For the ones who do call, it’s an opportunity to follow the Dos listed above.
#7. Don’t give in to your clients’ fears.
Some clients can be more reactive than others. While it’s important to be empathetic to their feelings, you should avoid relinquishing control of the relationship and acquiescing to their desire “to fix the problem” in the short term at the expense of their long-term plan. Suddenly, the relationship is no longer guided by rational, objective advice; rather, the behavioral impulses advisors are supposed to prevent, such as selling into a steep market decline or abandoning the long-term strategy to alleviate the immediate suffering.
#8. Don’t miss the opportunity to demonstrate your value.
As I indicated at the top of this article, it’s times like these when advisors really earn their pay. When clients are distressed, they question everything, including the value of their advisor relationship and whether it’s meeting their expectations.
What clients are looking for during these times, though they may not realize it, is a coach—someone to reassure them, keep them focused on what’s important and knowable, and hold them accountable for decisions they are about to make. That’s what coaches do—without emotion or passing judgment. A good coach helps clients cope with situations while never wavering from their responsibility to keep their clients on track. That’s how you demonstrate your value.
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