Investor emotions change with the markets, and being able to understand how your clients feel at each step of an economic cycle will allow you to connect better with them, suggests Peter Drake, vice president, retirement and economic research, at Fidelity Investments Canada Ltd.

Drake, who spoke at the Canadian Institute of Financial Planners’ conference in Halifax on Monday about the emotional cycles that clients go through — and how advisors can take this opportunity to better connect with them, says there are 15 emotions clients experience throughout market cycles.

During the good times, investors can move from optimism, to excitement and euphoria — the last being the point at which clients would take on the most financial risk, he says. Then, emotions can drop along with the markets until clients hit despondency, which is a point of opportunity for advisors.

And after a tumultuous year during which clients’ emotions bounced from panic and depression to capitulation, Drake says, we are finally into a stage at which clients are starting to feel hope. This is a step toward clients feeling relief.

“Clients can spend various amounts of time within each cycle, depending on the events that are occurring at that time,” Drake says. “They also can move from a very negative emotion to a very positive emotion quite quickly. If you think of the months of January and February, that was still a terrible period in which people were feeling very negative. And then you saw March and April, during which the markets turned up very distinctly. I think that moved investors’ emotions along very sharply.”

Clients tend to feel financial losses much more emotionally than when they experience financial gains, Drake points out. In addition, clients always perceive financial losses to be worse than what they actually are, which is why communicating with clients is essential during economic downturns.

“It is important to remind clients that, historically, markets go up a lot more than they go down,” he says. “It’s important to help clients understand what they own and remind them that this is not the 1930s.”

Drake recommends using conference calls, websites and newspaper archives to communicate with clients — and he suggests that now may be the best time to rely on such tools: “Clients are more than willing to listen during tough times as well when returns are down clients start thinking about change, which opens up opportunity for discussions.”

It will be just a matter of time before clients regain their optimism, Drake says. However, he adds, “This is going to take a little bit of time because the underlying fundamentals and basic economics, which will support the markets, are going to take a few months still [to recover]. So, we will probably stay in the hope and relief stages for a bit. Once we begin to see some economic growth, I think emotions will quickly turn to optimism.”

IE