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Keep Clients Focused on Goals During Turbulent Times
Communication is key, trust is critical; this is the time for advisers to offer clear guidance and demonstrate empathy for concerned clients.
Findings from our research into investor sentiment show where investors may be most vulnerable and advisors may be most helpful.
Behavioural economics is the basis for several tactics to help clients remain resilient in times of market stress and stay focused on the long term.
Life doesn’t come with a roadmap. That lesson has certainly been underscored by the global pandemic. Everyday life has changed for all of us, and change can be unsettling. Change can be
especially difficult when it comes with ongoing uncertainty and monetary losses, even if they are on paper. In times like these, it is critically important for advisers to help clients stay grounded, keep current events in perspective and remember that headlines shouldn’t drive portfolio decisions. Investment returns never follow a straight path, but investors who focus on the downturns may lose sight of the upturns.
Volatility tests investors’ resilience Volatility can test the resolve of the most steadfast investors. Even when markets are operating smoothly and the economy is robust, downside risk can stoke investor anxiety. This is evident from research we conducted in late 20191 that examined investor mindset.
Only 36% of investors overall “feel they’re prepared if the markets took a downturn and the value of their investments declined.” That figure is roughly the same for both Baby Boomers (35%) and the Silent Generation (42%).
“Top five financial concerns” for investors overall are the rising costs of healthcare, that the value of investments will decline, protecting current level of wealth, the rate of return in the stock market and rising inflation.
Only 29% of investors use their financial adviser as “encouragement to help me stay on track due to market volatility.” Silent Gen (43%) is most likely to do so, then Baby Boomers (28%), Gen X (30%) and Millennials (21%).
Advisers can be instrumental in helping investors stay focused on their true purpose for investing—to think about what it means to be resilient and to realise that they are probably more resilient than they thought they were. What does it mean to be truly resilient? According to the American Psychological Association, resilience is the process of “adapting well in the face of adversity, trauma, tragedy, threats or significant sources of stress.” It gives us the ability to pull through
difficult times and even achieve personal growth.2
We all have the capacity to be resilient. According to psychologist Meg Jay, “Resilience is not a trait. It’s not something you’re born with. It’s not something you just have.”3 This is good news: Through experience and self-reflection, we can develop resilience—both in life and in investing.
Balance emotion and logic to enhance decision-making The advisory community is in a unique position to help. Periods of extreme market stress can amplify the value of advice, not only through the benefits of holding a well-constructed portfolio but also in providing the structure and guidance to help make difficult choices. We must step up and provide the guidance that investors need to remain resilient in stressed
Advisers can help investors Behavioural economics can inform the tactics that advisers can use to help clients balance their IQ (objective reasoning) with their EQ (emotional responses):navigate these unprecedented and tumultuous times by acknowledging the emotional component of decision-making. Empathising with investors’ emotions likely promotes more productive conversations that can lead to healthier decision-making.
Maintain perspective: Loss aversion is a cognitive bias that can impact decision-making. Finding purpose in the choice and connecting that to the client’s financial life—the intersection between the things that matter and the things we can control—reinforces thoughtful decision-making.
Add guardrails: Risk is not just volatility. For clients focused on negative anchors, provide a structured process that focuses on making a decision with the information at hand. Staying on track and experiencing the positive aspects of making prudent decisions is a powerful incentive.
Align with goals: When channeled properly, emotion can be a force for action. But when volatility is high, availability bias can distort the investor’s perception and lead to decisions that run counter to long-term goals. Look for opportunities to tailor investment solutions to personal circumstances and align emotional constructs (such as family, security and independence). The investor’s life goals are the ultimate benchmark and should continue to fuel motivation and ground portfolio choices.
Fostering resilience Even though we know that market downturns are inevitable, most of us still need reminders that portfolios are not expected to climb incessantly. In the days ahead, we will be reminded not only that market downturns are inevitable, but of how the balance—of our portfolios and our lives—can so quickly and radically be altered. In this environment, advisers can help seasoned investors look to their experience in weathering past storms and coach new investors on sticking to the path toward long-term goals. Across all stages of the market cycle, this may be the most valuable financial advice.
1 State Street Global Advisors Individual Investors 2019 Study. A global survey on consumer sentiment, purpose and behavior in wealth management. 2 American Psychological Association, “Building your resilience.” February 1, 2020. Accessed at https://www.apa.org/topics/resilience. 3 Meg Jay, PhD, “8 tips to help you become more resilient.“ Ideas.ted.com, January 5, 2018. Accessed at https://ideas.ted.com/8-tips-to-help-you-become-more-resilient/.
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