Financial advisors should be a rock in the storm.
Clients seek professional financial advice because they recognize that it is already challenging to achieve long-term goals in good times, but even more of an uphill climb when the markets become more volatile. A financial advisor can start this conversation long before difficult days become obvious. By counseling clients to approach the planning process with both bull and bear markets in mind, they tend to become less rattled when the media headlines turn dour. There have been many recessions in the U.S. since the first one in 1797, after the Treasury expanded the money supply to fuel land speculation. Early recessions were especially challenging as the federal government had few tools at hand. The Federal Reserve was created in 1913 to decentralize competing interests and create different avenues for the government to attempt to avoid these financial upheavals. Advisors, too, have a wide variety of options to help a client weather the cyclical nature of the markets. Here are seven areas that every client and their advisor should discuss to be better prepared.
Enhance communication.
Many financial advisors find themselves looking like turtles when a bear market is approaching. Instead of confidently communicating with their clients, they often hesitate and begin avoiding their telephone. When investment account values are falling, emotions can run high and advisors are not always ready to deal with these intense conversations. Financial Advisor magazine continually lists poor communication as the No. 1 reason clients will fire their advisors. The best time for an advisor to communicate with their client is long before there is a problem. Having a regular review enables an advisor to continually assess a client’s ability to weather different market conditions and ensures that they have a path to make adjustments as needed. The second-best time for an advisor to communicate is today.
Create a variety of options for each portfolio.
We have all heard the adage to not put all of one’s eggs in a single basket. The same holds true for a durable financial plan. One way to manage risk is to construct a portfolio that assigns investments to buckets, each addressing a different need. For example, a client may have one bucket that is designated for growth, while a separate bucket provides capital preservation. Buckets can be allocated for short-, medium- and long-term time horizons. They may also be delineated by their tax status, so that taxes continue to be minimized. This practice can help a client understand that changing market conditions simply mean that they re-sort the buckets they depend on first. This can help them feel comfortable to stay invested in the market and be positioned to capitalize when the market cycle shifts from a bear market to bull again. Not only does the bucket system work well for clients to stay focused on their goals, but it can also make the initial communication from advisor to client less confrontational.
Rethink budgeting.
One often-overlooked component of a strong financial plan is reviewing household cash flow. Far too many clients spend more than their monthly net income, and some may not even truly be aware of how much after-tax funds they have in their paycheck. Inflation has already driven up prices of fuel, food and other necessities, so clients are understandably nervous about being able to pay their mortgage. They will welcome an opportunity for professional eyes to help them find ways to conserve funds. But a recession typically results in a significant reduction of jobs in the economy, so it is also wise to explore options to drastically reduce expenses should your client be affected by a layoff. Remember, too, that budgeting is for all clients. High-net-worth clients can experience the same angst as middle- and lower-income clients when the economy shifts abruptly. Finally, pay close attention to your oldest clients, who may be supporting adult children, as they may feel more challenged to reduce spending for them.
Eliminate debt.
Helping a client ease into a lifestyle that allows them to live well within their means and without debt can have the biggest impact on the the success of their financial plan over time. Often, dramatic economic events are the catalyst for a client being willing to accept new changes in their lifestyle. The residential housing market is still strong, and some clients are receiving above-market prices for their homes. Married couples who are considering downsizing may be able to take advantage of a $500,000 capital gains tax exemption that can be used to pay off the mortgage on the next home, as well as other consumer debt. In doing so, they may be open to relocating to a state where their cost of living is lower, continuing to free up more resources that can be set aside as an emergency economic backstop.
Enhance cash positions.
Many advisors are loath to place funds into cash accounts for a variety of reasons. However, in volatile economic times, cash can become not only an emotional solace, but also position the client for opportunity. Another long-time adage in investing is to “buy low, sell high.” Accumulating cash can not only position clients to pay off burdensome debt, but also enable them to pick up quality investments at a much lower price. While an advisor wants to avoid a client attempting to time the market, they can use dips in the market to continually rebalance portfolios and enhance growth opportunity over time. An emergency fund is also soothing to an anxious client, as are enhanced communication efforts that a good advisor employs to address the emotional challenges at hand.
Address the human side of investing.
No matter how well an advisor has attempted to properly evaluate a client’s risk profile, sudden market changes can be unsettling to clients. Market swings can bring up emotional responses that cloud their ability to make decisions. Challenging times also do not always present themselves at ideal moments, so a client may already be in duress regarding their job and family relationships. Money affects literally everything in our society, so major market changes can be extra impactful. Additionally, people are still coping with the mental hurdles presented by the pandemic, including a return to an office environment, longer commutes and renewed time away from their families. All these stressors are magnified when people are worried about the ability to weather a recession.
Understand your own relationship to money.
Advisors often fail to grasp that they bring their own bias and experiences regarding money into each conversation. This can harm their ability to convey recommendations that a client will not only accept, but also immediately implement. Behavioral analytics is a growing field that advisors can use to understand their own relationship to money and how to best communicate with people who think similarly and those who think differently. Once advisors arm themselves with this knowledge, they can approach client communication more assuredly, no matter the market headlines.
Key things to remember.
A recession is a natural part of the market cycle. Clients who approach a recession proactively can come out of it in a stronger economic position than before. Communication is the single most important action that an advisor can take for a client when the markets become volatile. By following these seven steps, clients can respond to their advisor’s overtures confidently and with renewed enthusiasm for the economic opportunities that will ultimately follow.
7 ways to prepare your clients for recession:
— Enhance communication.
— Create a variety of options for each portfolio.
— Rethink budgeting.
— Eliminate debt.
— Enhance cash positions.
— Address the human side of investing.
— Understand your own relationship to money.
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7 Ways to Prepare Your Clients for Recession originally appeared on usnews.com
Update 06/13/22: This story was published at an earlier date and has been updated with new information.
