By Clifford P. Ryan
Discretionary investment management involves a high level of trust between the advisor and clients. When the market experiences volatility, the majority of clients are confident that their advisor can monitor and manage their portfolio if a healthy foundation has been established in their relationship. Advisors can build this rapport with yearly reviews and proactive conversations to address the topic throughout their client interactions. Once established, clients are more comfortable in a volatile market and respond logically rather than emotionally.
How to Time Proactive Conversations
According to a recent study conducted by MDRT, 74 percent of consumers with advisors indicate their advisor shared best practices for responding to market volatility. Proactive communication allows advisors to minimize their roles during turbulent conditions since clients feel prepared to wait for the market to rebalance.
It is most effective to share advice about volatility when the market is in a period of growth. I suggest advisors share strategies and reminders with clients during a market upswing so they are not overwhelmed by negative reports, can commit your recommendations to memory and can recall it at a later date. Remind them that the situation can and will change because the market cannot always perform well.
When the market experiences a downfall, remind clients that some years are better than others, and the market will not remain static. Soft reinforcement throughout your relationship is more effective and enables clients to heed your advice when needed rather than feel overwhelmed with constant communication about market activity. Proactive conversations help you stay ahead of the news your clients may see and increases the chance that they will not react to volatility in a negative manner. Your management of their assets is an additional layer of protection that prevents clients from emotionally-fueled decisions that will hurt their financial situation in the long-run.
Evaluate Risk Tolerance to Withstand Volatility
The effects of volatility can be avoided almost entirely with a well-rounded financial plan tailored to the risk tolerance of each client. One of the most important financial conversations in which to engage with clients is their desired level of risk and reward for investments.
Discretionary investment management
Under discretionary investment management, we sort clients into different categories such as conservative or moderate according to their risk tolerance. This is determined by a number of factors such as age and current financial status. You must establish their risk tolerance based on the client’s comfort in addition to your professional advice.
Once these parameters are established, advisors can take greater control over the investments. With this business model, it is important to revisit the client’s risk profile if anything changes in their life. Every client’s needs are different and should be reevaluated year after year. For example, if income needs are higher, their risk tolerance most likely needs to be lowered. Frequent conversations with clients as they experience change allows for proactive portfolio adjustments according to risk tolerance instead of in reaction to market volatility.
Open channel of communication
In a discretionary investment management situation, it is vital to reinforce that clients must communicate any changes to their advisor in case these changes occur during a gap in consultations and portfolio reviews. This way, advisors can help clients determine if anything needs to be adjusted short or long-term to stay ahead of the market and investment performance. If their portfolio is built to withstand volatility, you will not be subject to panicked calls and communications from clients when instability of the stock market is newsworthy.
The Role of Advisors During Market Volatility
Advisors often have different approaches for overall client engagement and interact based on what is most effective for their business model and individual clients. For instance, my business manages investments on behalf of my clients, so we require fewer meetings throughout the year for this specific aspect of financial planning. Other business models may warrant more frequent communication to deter clients from short-term decisions that will have long-term effects.
Advisors typically take one of two approaches to communicate market activity with clients. Some prefer to send their clients newsletters with overarching market news or quarterly performance reports for them to monitor themselves. This method often leads to information overload and can adversely cause clients to watch the market too carefully with news that may not relate to their individual investments. Others, like me, prefer to take a laid back and more tailored approach. Clients will continue to receive statements, but we typically sit down once a year to review their investments, evaluate risk tolerance and make adjustments, unless drastic changes are needed at another time. Instead of wary clients, this method establishes trust and conveys that we actively watch the market on their behalf.
Reduced client concerns
Our method results in a low volume of calls or emails when the market takes a dip and proves extremely effective for diminishing client concerns. We’ve had face-to-face conversations along the way that diffuse the situation before it occurs. Our proactive approach allows us to find and maintain a financial balance for the client without the need for reactive adjustments.
I suggest other advisors who may take the alternate approach and encourage clients to stay informed make sure they do not overemphasize the investment portion of their planning. If you train your clients to watch the market, they may become unnecessarily concerned with minor fluctuations. Rather than showing clients you are on top of the market through frequent communication, reinforce this idea year over year and establish trust that you always look out for their best interests. My observation is that clients will be happy as long as their checks arrive and they see the values perform as expected in the long-run. Of course, there are always exceptions to the rule, and some clients feel more secure with additional knowledge of the stock market’s effect on their personal investments.
Holistic Planning to Endure Market Volatility
While investment portfolios are a large portion of financial planning, it is important to take a holistic approach and secure clients’ assets in different buckets to balance out the stock market. Clients hope to earn positive returns on variable or investment portions of their plan. On the opposite end, help clients reserve emergency funds that can serve as cash for a variety of situations they may face.
Financial safety nets
As a secondary protection layer, I encourage clients who own a home to establish a home equity line that lets them access cash and enables short-term borrowing. Another strategy to balance out the market’s effect on investments is to use fixed and fixed-indexed annuities. While these assets have a lower rate of return compared to some investments, they have a higher guarantee and level of safety. With a well-balanced portfolio and a holistic approach to financial planning, client confidence levels will increase.
While market volatility is a news topic that weighs heavily on consumers’ minds this year due to the impact of several policy changes, there are strategies advisors can utilize to diffuse negative impact on clients’ portfolios and financial confidence. Incorporate conversations about the market into your frequent client communications and annual reviews. If you can establish a healthy outlook on the role of the market, you will reassure clients that their investments are handled and will perform long-term.
Cliff Ryan is a personal financial advisor specializing in assisting those in or near retirement with financial and investment planning. He began his career in financial services in 1983 and had been affiliated with several firms prior to establishing his own practice in 1988. After moving to Maine in 1990 he focused specifically on the needs of retirees and pre-retirees. In 1996 he founded Elder Planning Advisors of Maine, Inc. to further this practice specialty.