(AAMA) Uncertainty in the investment world can be defined in many ways. You can look at standard deviation trends, the VIX, media headlines and pundit warnings, economic indicators, and even consumer sentiment ratings.
Or a more readily available indicator – questions from your clients.
There’s little doubt that we are currently managing through uncertain times. And in investing, uncertainty goes hand-in-hand with investor fear. But how do you assuage that fear when, by nature, uncertain markets tend to come with a lack of clear-cut answers?
By leaning on four simple talking points, we think advisors can easily soothe even the shakiest of investors. We’ve outlined them below. Feel free to take them, make them your own, and implement them in your next client conversations to reduce fear, improve clarity, and create focus in the investment process.
Talking Point 1: Demonstrate How We've Been Here Before
Volatile markets can feel scary to clients. And who can blame them? To an investor, a 15% correction isn’t a market event. It feels like a reduction in quality of life, a setback in their retirement plans, or even a roadblock to major life events, such as a home purchase.
The problem here is myopia. Recency bias causes investors to focus on short-term trends over longer prevailing market patterns. The solution is to help your clients refocus on the broader picture.
Zoom out and show a more comprehensive history of the market in your next client meeting. In perspective, volatile markets tend to look more like a blip than a catastrophic event.
Take some time here to educate your shakier investors on the nature of the market. Corrections are normal (and healthy) and downturns happen. But history shows us that these events are typically nothing more than a speed bump – one that checks the pace of growth but then fades in the distance.
Talking Point 2: Replace Fear With Facts
Fear is rooted in the unknown. When money is involved, it’s amplified. Investing checks both boxes. Left unmanaged, this fear can create a tailspin of irrational decision making that can derail a positive advisor-client relationship.
The problem here isn’t the initial panic. It’s the recovery. To level out the tailspin, we recommend rooting conversations in rational statistics. Dig into the fundamentals to show where there’s opportunity and weakness in the market.
Even if the analysis is overwhelmingly negative, the simple demonstration that your firm has a solid grasp on the situation alleviates a lot of the fear that comes with uncertainty.
For example, let’s look at current sector valuations (as of November 5, 2021). Most of the market is overvalued. But we can pinpoint areas of opportunity, whether relative affordability, a strong earnings forecast, or both.
The black and white statistics of market pricing and sector valuation have been around for decades. They’ll be around for decades to come. And what’s more, the fundamentals are something your clients can all understand. This is a great focal point to ground your conversations.
Talking Point 3: Show Your Depth
One of the greatest misconceptions in the financial advice industry is that a financial advisor’s core value is found in investment management.
Investment management is just one piece of a much broader investment experience puzzle. In a study by Spectrem Group, investors indicated an equal or greater desire for financial planning, wealth transfer advice, and estate settlement advice. Estate planning advice, tax planning advice, trust services, and charitable/philanthropic planning follow within a few percentage points.
The point is investors seek a more comprehensive experience from their financial advisors. And with that in mind, it’s simply impractical to expect a financial advisor to design a financial plan, run a business, and manage individual investment portfolios – from top to bottom. Investors either do, or will, understand that outsourced money management is a value-add service. You gain the time to focus on helping them reach their financial goals while their portfolio receives increased focus and experience in the form of carefully selected investment strategists.
As a value-add, it’s important to not hide your strategist partners behind a curtain. Get them involved in the client conversation. Tout their experience and expertise, and show the client that you’ve built a robust team of professionals that are working diligently, under your playbook, to fulfill specific needs within the portfolio.
Your strategist partners should relish the opportunity to help you create positive client experiences. If not, it might be time to find partners that will jump at the opportunity to collaborate. After all, portfolios are common. The real value of these relationships is in the partnership.
Talking Point 4: Revisit The Time Horizon To Establish Perspective
Volatile markets, where emotions run high, are probably the worst time to re-evaluate an investor’s risk appetite. But they’re the perfect time to re-enforce an existing investment strategy.
When clients are worried, they’re engaged. Use that attention productively. Have a conversation to remind them that their portfolio is designed around a strategy – a risk profile, a time horizon, and a set of clearly defined investment objectives.
In the heat of the moment it’s easy for an investor to forget the legwork that goes into their portfolio design. Help them remember that process, and demonstrate how their investments are in line with an investment strategy that’s built around their specific time horizon – and that there’s ample time to achieve their goals (as mentioned in talking point 1 – with he right perspective, volatility looks more like a blip than a focal point in the long run).
Use Uncertainty To Demonstrate Value
We may be managing through uncertainty, but that might not be as negative as it sounds. Uncertain markets, while undoubtedly tense, tend to emphasize the importance of financial advice. And with the right talking points, rooted in fundamentals, you can soothe even the shakiest of investors without having to have all the answers (because no one eve has all the answers)!
Of course, we feel these conversations are easier to hold when your portfolios include a healthy dose of fundamental market pricing and sector valuation strategy (what we like to call Tactical Beta). For more information about our Tactical Beta process, click here.
Or if you’d like to learn more about our fundamental investment strategies and where you can find them, send us a message at engage@aamamail.com. We’d love to meet you.
