When markets began plummeting in March, a panicked client reached out to financial advisor Andrew Crowell.
“He emailed me at 8:30 p.m., with instructions to sell everything and go to cash,” says the vice chairman of wealth management at D.A. Davidson & Co. in Los Angeles.
Crowell’s client is in his 70s and has been retired for about two years.
“I phoned him back early the following morning to discuss his email and the rationale behind it. He admitted that the uncertainty of the coronavirus had him very worried, and he felt that he’d just be safer on the sidelines,” Crowell says.
Crowell had already done a comprehensive plan for his client, and he reminded the man of its underlying assumptions.
“First, he already had three years of anticipated living expenses out of the stock market in a reserve account,” Crowell says. “Second, I reminded him that his portfolio was generating about 70% of his annual living expenses through dividend and interest income, so his reserves were ‘replenishing’ each year as well. Due to the frenetic news he was hearing and watching, he had forgotten about these facts. Realizing that we had planned ahead for inevitable volatility, he was comforted and decided not to act impulsively on the headlines.”
Panicked Calls From Clients
Advisors throughout the U.S. and the world are receiving similar emails and calls. Even in the best of times, advisors help clients manage emotions around investments. In the current environment, that role is even more important.
“Clients are just not used to seeing velocity of these markets unfold as they have, and they’re nervous. Some are panicked, but I don’t allow them to stay in that place psychologically,” says Paul Feinstein, managing partner at NexGen Global Asset Management in Los Angeles.
“I tell my clients to stay the course, and now is not the time to sell or sit on the sidelines,” he says. “We need to be thoughtful with their allocations and look for opportunities in stocks they want to own, as valuations on many of these names are very attractive. Most clients intuitively realize when they’re having an irrational response to an event like this, and we work through it. An advisor’s job is to be the voice of reason and to communicate with their clients to help them separate fact from fiction.”
It’s understandable that investors become nervous, or even panic when they see their market gains evaporate almost overnight, after patiently investing for years. Clients who work with advisors tend to have specific goals in mind, usually retirement . These clients are not generally interested in day trading or playing the market, but even the most disciplined investors become rattled during times of high downside volatility. That feeling is compounded by the current uncertainty over the impact of the coronavirus pandemic on the broader economy.
With strong market volatility, advisors would be wise to take a more proactive stance, says Mark Wilson, founder and president of MILE Wealth Management in Irvine, California.
“Waiting for clients to call is too late. Sending generic messages [is] not comforting. I've found that every client has a different take on how the virus will impact them personally" and the stock markets , Wilson says. “Asking for, and listening to, their thoughts is my first step. Acknowledging how they are feeling/thinking is important.”
Although financial planning, done properly, accounts for market downturns, it’s a different matter for clients to see hard, dispassionate data during a bull market, versus steep portfolio losses during a crisis.
Initiate a Planning Process
The planning process should include projections of the income clients need, along with an evaluation of income sources, such as investments, work and rental properties. Of course, some of those projections may be inaccurate now, as many employees are out of work, and renters may not be able to pay promptly. However, clients often forget that market projections do not assume big gains every year; these projections are made on an annualized basis and assume yearly declines, as well as advances.
“I remind clients of the initial work we did to determine how risky their portfolio should be. I remind clients that their portfolio is diversified with stocks, bonds and alternatives, so these stock declines do not impact the whole portfolio,” Wilson says. “I let them know that bonds and alternatives are acting as expected and, for clients living on their assets, their next 12-plus months of cash needs have been protected well before all of this drama.”
“I also share several of the items I'm doing behind the scenes, especially tax harvesting . I believe clients want to know that I'm proactively looking for opportunities and not wildly trading or sitting on my hands,” he adds.
Continue to Be a Financial Coach
On an ongoing basis, advisors should continue their role as coaches, reminding clients that plans include projections for rapid declines, and urging clients to either stay the course or make recommended changes.
“As someone who has worked with high-net-worth clients in both the Great Recession and the current coronavirus crisis, it's important to be coaching clients before a pullback occurs. Consistent messaging on strategy in both bull and bear markets is key. Most investors want to be guided by a rational voice,” says Megan Gorman, managing partner at Chequers Financial Management in San Francisco.
“That being said, when volatility hits, it is important to walk clients through why things are happening the way they are. In providing context for political, social and economic turmoil, you are pulling the client back to rational decision-making. Then it's time to give them options to navigate,” she says.
During this crisis, she’s been giving clients a few recommendations: “Either stay put, reallocate your overweight to fixed income back into equities or deploy new cash in a tranche plan based on your asset allocation targets,” Gorman says. “But it's key to have a consistent message with clients regardless of markets.”