Many investors usually consider unprecedented disasters, political events and stock market booms and busts as cause for alarm, but such events are far more common than our memories recall. So, at a time when unpredictable events appear to be increasingly frequent, advisors occupy a critical role in dispelling clients’ concerns about their portfolio’s performance.
This means you could expect to do little more handholding during such times to remind clients that the markets are “more resilient than we give them credit for,” says Evan Thompson, founder and business coach at Evan Thompson and Associates in Toronto.
When major, usually unforeseen, movements in the stock markets top headlines, you can take page from history to reassure clients that market meltdowns don’t spell the end, Thompson suggests.
Consider these recent events: In the wake of the Sept. 11, 2001, terrorist attacks in the U.S., the S&P 500 composite index plummeted, losing 11% five days after it reopened. However, a month later, the S&P 500 returned more or less to the levels seen before the attacks. Then, there was Hurricane Katrina, billed as the costliest natural disaster in the U.S., which was met with a 3% rally for eight straight days. And more recently, the Brexit referendum sent markets into a panic, wiping $2 trillion off the global stock markets, but a week later, stock averages rebounded.
Even as investors brace for the worst, eventually, the markets have rebounded or rallied in the aftermath of unexpected developments.
“It’s a good time for advisors to show empathy by acknowledging, and then reassuring, clients that although we can’t read the future, we have seen this before,” Thompson says.
However, you should be cautious of speculating about the immediate impact of potential market disruptions as that only opens the door for mistrust, says Ben Felix, associate portfolio manager with PWL Capital in Ottawa.
“Clients look to advisors with the expectation that they’re going to have predictive advice,” Felix says. “It’s the inclination of the advisors to give the type of answers clients are looking for. But if you’re wrong, you’re going to lose their trust.”
Instead of dispensing advice based on analysts’ expectations, advisors should stick to the investment strategy that reflects their philosophy and clients’ long-term goals.
For Felix, that means designing portfolios composed of globally diversified, low-cost index funds. When clients question whether today’s uncertain political climate demands a change in approach, he reminds them that their portfolios are positioned for the long term.
Knee-jerk reactions by investors can have costly and disastrous implications, Thompson says, and clients may need to be reminded of that as they’re being bombarded by information at all hours of the day — including tweets by new U.S. President Donald Trump that often get interpreted as policy.
Consider sending out a “special edition” of a newsletter or phoning clients you feel would be most anxious about unforeseen developments, Thompson suggests.
It matters to clients that their advisors not only have a grip on what’s happening in the world, but that they don’t dismiss concerns, Thompson says. That’s why advisors have to temper clients’ anxieties, getting in front of issues before they become overblown.
For example, Felix sent out a newsletter after the U.S. presidential election this past November, acknowledging the outcome. He included graphs on the market’s performance across different political regimes to illustrate that their long-term effects have been minimal.
Whenever Felix reaches out to clients during volatile times, they often send notes back, expressing appreciation for acknowledging — and alleviating — their concerns.
Still, there can be a fine line between providing context and offering speculation based on what analysts are saying about specific events.
“When clients ask me about a political event, I am happy to say that I do not know how it will affect the market,” Felix says. “But it will not change what we are doing with your portfolio. If a political event causes market volatility, we will rebalance back to the target allocation.”
The best course for advisors to take amid uncertainty is to manage clients’ emotions and put their goals into perspective and focus on the long view.
If your clients are obsessively watching the rise and fall of stocks, it might be a sign that you haven’t done enough to communicate with them, Thompson says: “If [you’re] doing [your] job, there won’t be any anxious calls, because [you’ll] have [your] clients properly situated.”
This is the third article in a three-part series on improving your communication efforts in 2017.