When both stock and bond prices are falling in great chunks month-by-month, advisory clients will want to know how their plans are being affected, when this is going to end, and whether they should change their investment allocation. It’s up to the advisor to have answers. Meanwhile, each client may relate well to some modes of explanation, and not well to others. So, in addition to knowing what to say, the advisor must know how to say it.
Our experience has provided a few answers, though we are always learning. Here are some techniques we use:
Tap into History
Providing stories about how similar periods evolved is a great way to assure clients things will ultimately be OK. This time around, we are using the twelve years leading into and out of the 1970s, when the Baby Boomer generation surprised consumer markets with strong demand at the same time that the economy’s productive capacity was limited. While inflation was nasty during that time frame and no asset was generating real returns, at least stocks mustered a positive return despite a nasty bear market from 1973 to 1974. But be honest about what is unknown. While this period rhymes with the 1970s, it is not alike in every detail.
Redirect and muster excitement
Every portfolio has problems. Perhaps the advisor is struggling to generate enough cash flow, or an outstanding concentration in a single stock has persisted for tax reasons, or the allocation is tilted too far toward growth. Volatility and higher rates are opportunities to fix these imbalances. Hopefully, the client is aware that the advisor has been working on outstanding issues over time. The advisor then can muster excitement at finally being able to make real headway against these issues. Excitement is much better than fear. Producing “before” and “after” charts showing a portfolio’s profile as the advisor rebalances in the desired direction can help clients see that this bear market may have value.
Use visuals
Speaking of charts, some clients relate to words, but most relate to visuals. Simple charts can remind clients that while assets have declined in value, portfolios are still up over five years; that the asset base is now generating more dividends and interest income than ever before; or that the Roth conversion that’s been waiting in the wings now makes sense. In our shop, we keep a record of the total income generated historically for every single account as well as household accounts and we make that a part of most investment reviews. Our reviews are also mostly conducted in charts.
Blend realism and empathy
One of the most difficult lines to draw is how realistic to be — particularly if the truth sounds depressing. We’ve been guilty of “overpreparing” clients for downturns and using negative verbiage to describe outcomes. At the outset of this bear market, for instance, we raised a fair amount of cash and mentioned that the host of problems facing stocks would be daunting. (Now, we are more constructive, but valuations are more reasonable.)
Clients will feel bad enough about evaporating values without being reminded of the factors leading to the declines. Others actually want the worst news up front – it gives some assurance that the advisor has experience with bear markets and can navigate the outcomes. We’re still trying to strike the right balance here, but a blend of realism and empathy is probably best.
Ignore doomsday news
Avoid parroting journalists or market pundits; in fact, provide research that opposes whatever negative spin is being sold by the media. Inevitably we will be asked what we think about the latest dire prediction from a celebrity strategist. We remind the client that that celebrity is not managing money and can say whatever sells, and probably does not publish a record of prior market calls. We suggest that doomsday news is of limited value so should probably be ignored.
When changes must be made
We don’t believe that “stay the course” is the right advice for everyone. Fear may overwhelm clients who are new to the investment process, lose their job as a result of the economic downturn, or have children moving back home for a variety of reasons. The result can be a forced shift away from an established investment plan at a bad time.
Additional Reading: When Dementia Affects Your Clients
During these extreme-stress moments, inviting the client to the process is ideal. Set a goal for the outcome and reveal the advisory dilemmas directly to the client. These may include selling at lower-than-ideal prices, incurring taxable gains and the trials of timing.
Recognize where another professional might be useful if the adjustment requires selling the home, budgeting, or some other service the advisor does not provide; find and connect the client with that service. If the client can find a modicum of interest in the process the advisor is embarking upon, and the follow-up contains a celebration of reaching the goal, the course correction can be a better experience.
Among these suggestions, at least a few will likely resonate with most advisory clients. Above all, communication calibrated in the right way to each client is key.
Michelle Rand is the founder and CEO of Cascade Investment Advisors, Inc., located in Oregon City, Oregon. The firm is a service-first, investment management firm.
