Are you hearing from panicked clients during these financially volatile times? Here’s how RIAs and financial advisors can keep them focused on their long-term investment goals and results.
Market volatility is a normal part of investing. It usually occurs when something spooks clients: inflation, interest rates, falling GDP or some other factor. In the current environment, though, everything has investors on edge. The prospect of rising interest rates, mounting inflation, commodity prices hikes and uncertain economic forecasts for the third year of a global pandemic has led to volatility in the prices of stocks, bonds and other financial instruments.
As if those threats weren’t enough, Russia’s invasion of Ukraine has led to oil shortages and dramatic price increases. Since the world economy runs on energy, uncertainty in that market has investors everywhere on edge.
“The volatility of everything is spiking,” said Jason Goepfert in a research note from Sundial Capital Research. “That’s an incredible bout of cross-asset concern that we’ve rarely seen in the past 30 years.”
After war broke out in Ukraine, the S&P 500 posted its largest decline since 2020. The Nasdaq Composite Index fell more than 20% from its record level, officially entering bear territory. Not surprisingly, multiple volatility indices have been screaming, “Danger, Will Robinson!” for weeks.
No wonder so many clients are anxious. They worry that a major energy-market shock could zap the global economy and take their investment portfolios—and retirement security—down with it. Rather than see that happen, many are contemplating rotating out of stocks and bonds into cash or cash equivalents—“de-risking” their holdings in the face of unprecedented geopolitical, market and other risks.
Calming Your Clients’ Fears
Are you hearing from clients wanting to know if their money is safe and what you’re doing to protect it? If so, you’re not alone. RIAs across America are taking a high volume of calls and answering more emails since geopolitical tensions exploded in Eastern Europe. How should you respond to their frantic queries?
The first thing to remember is that panic is a normal response. It’s important to dial down your emotions so you help your clients deal with theirs. Don’t be angry or frustrated that your customers want to abandon your carefully devised investment plan. Pay close attention to your composure; responding condescendingly to their ill-informed questions about what’s happening in global financial markets will not result in desired reactions. Most importantly, don’t dismiss their wishes to move their assets to a safer harbor.
What should you say, exactly? First, speak from a place of informed objectivity. Review client risk profiles and portfolio allocations so you can speak knowledgeably about their current status. Then encourage them to breathe deeply and slow their thoughts down. As Bob Doll, chief investment officer at Crossmark Global Investments told Financial Advisor magazine, “…the world is facing massive uncertainty now.” That calls for measured actions from advisors and clients, not over-reacting, he said.
A tried-and-true approach is reminding clients of the long-term investment plan you and they created. By design, it should be counteracting short-term asset price declines through diversification. But they must not flee to cash. Remind them that cashing out during periods of high inflation may be counteractive to their long-term goals.
Another option is to discuss the difference between risk tolerance and risk perception. The former is a long-term personality trait that defines a person’s ability to withstand portfolio losses psychologically. Unless someone has a life-altering experience, risk tolerance is usually fixed over time. However, the latter term—risk perception—is an emotional judgment about the nature and severity of risk during a specific period.
In effect, risk perception is ephemeral and context-specific. Thus, when markets are high, people will perceive the risk to be minimal and be more willing to invest aggressively. When markets tank, they will perceive the risk to be high and want to move their money to safety. Your goal is to help them understand that widespread panic over market volatility is most often a temporary issue. For this reason, they should avoid making significant portfolio changes until their risk perceptions—and emotions—“revert to the mean.”
The Power of Distraction
When clients contact you overwhelmed with fear, acknowledge their emotions. Then focus on draining it of energy. For example, recommend they stop watching the news or reading financial websites during the current crisis. Or suggest they pursue a hobby that gets them outside where they can exercise and think calm thoughts. Providing positive distractions show that you are empathetic to their worries but want the best for them by offering suggestions that will help them control their fear.
Some advisors share financial exhibits showing how markets have rebounded after past volatile periods. This might work for some highly analytical clients, but it won’t work for most. When people stress about their investments, their emotions are what got them there. Using a chart to pull them back from the abyss is an intellectual bandage to an emotional wound. It doesn’t always help. Instead, you want to help clients process their emotions to sort out what’s important from what’s noise.
It’s often helpful to fight emotions with other emotions. So when stressed-out clients call you, acknowledge their feelings. Then offer a countervailing, yet equally strong, emotion. For example, you might explain how a client who gave in to panic ended up wrecking his portfolio and could not retire. Then compare that with a client who rode out the storm and had more assets once markets stabilized and resumed their growth trajectory.
Finally, always stress your willingness to support your clients during tumultuous times. Remind them that you’ve supported them for many years and during many market cycles. Through it all, you’ve assisted them in making prudent decisions that served their families well. Then explain that even though you can’t predict the future, you have no reason to believe today’s volatility will have a permanent negative impact on their portfolios, as long as they stick to their investment plan. Remind them that they hired you for exactly this type of economic environment. You are, after all, the advisor they chose during the ups and downs of an everchanging economic ecosystem.
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