Client communication and education are important components of practice management advisors must undertake to ensure clients understand how their portfolios are serving their overall financial goals. In particular, it is vital for advisors to proactively communicate with clients about market volatility or increasingly down markets.
On any given day, clients are exposed to news about potential market volatility. They often hear about specific companies or commodities dropping in value and think it impacts them, although it may not have any effect on their investments. Preempt confusion, questions and panic with a smart strategy designed to set clients at ease.
Hedge Against Volatility With Diverse Investments
Investment diversification is an important first step to prepare clients for potential market volatility. The total value of a client’s portfolio is less likely to be impacted when the investment is spread out across multiple assets. If clients are diversified in a variety of appropriate funds from the start, there should be no reason for them to panic when the market experiences volatility.
Mutual funds and exchange-traded funds offer a variety of opportunities and methods to protect portfolios against common types of volatility that may threaten portfolios. Some funds hedge against the U.S. dollar, which is one way to diversify and alleviate volatility. Other funds shift their focus more toward cash investments when the market turns.
Advisors also can diversify tax strategies by using various products and investments – such as a Roth IRA, insurance products, or investment and savings accounts. Work with clients to build an investment portfolio that suits their needs and spreads across a few key investments in order to protect them in the event of downward movement in the market.
Build Flexible Proactive And Reactive Communication Strategies
Clients need to know how movement in the market does or does not affect their portfolio, and they need to understand their advisor is a partner and resource. It’s reassuring for clients when their advisor proactively reaches out during periods of volatility to educate and help them adjust if needed, instead of avoiding it and hoping the market will correct itself automatically.
A recent study conducted by the Million Dollar Round Table found that 74 percent of consumers with advisors indicated their advisor shared best practices for responding to market volatility. As a result, more than half of survey respondents with financial advisors expressed the relationship increased their understanding of appropriate actions to take when the market is volatile.
Right now is the ideal time to update and educate clients. It’s best to prepare them while the market is performing well and the outlook is positive. This way, if and when volatility occurs, clients are prepared with a solid foundation and understanding of what is happening when the market slips. Help clients understand where they are in the market and how much risk they can expect as part of this education.
Leverage visual aids and other tools to deepen clients’ comprehension. A scatterplot graph that shows risk and return on a chart is particularly helpful for clients to see how much risk they have in their holdings.
Client Communication Frequency
Advisors can use education to put clients at ease and explain the portfolio’s performance as it relates to movement in the market. Your communication plan should include both proactive and reactive strategies to establish a strong baseline understanding at the outset that clients can draw on when volatility occurs.
You can start small with your communication plan and operate alongside existing client communication initiatives. Take advantage of already scheduled annual meetings or ongoing review periods to educate and prepare clients for what they may see in the coming year and how their portfolios should perform. Then reach out to clients with a simple phone call when big events take place in the market to let them know how they might impact them.
If you know your clients well on an individual basis, tailor the message to suit their risk tolerance. Clients who are more skittish and risk-averse may react negatively to the news, so be prepared with strategies and additional information about how they are directly impacted.
This approach worked well for my practice during the financial crisis in 2008 and has evolved over time to become a larger segment of my ongoing client service strategy.
I called each employee of one of our larger corporate retirement planning clients when the market got bad to answer questions about the crisis and their company-sponsored 401(k) accounts. Clients appreciated my ability and willingness to answer questions and provide recommendations to help carry their portfolios through the storm. As a result, 30 percent of those employees now have individual business with my practice outside the company’s retirement plan.
Set The Stage: Context Is Key
Give clients context for where we are in the market cycle when you start educational conversations about volatility. Right now, we are nine years into an upmarket. Given the average bull market lasts about six years, clients should expect a little bit of volatility in the near future. After clients understand what to look for, use analogies and storytelling to contextualize what happens in the market during volatility.
One effective analogy to give clients added context is a comparison of market movement to sale prices. When clients are shopping and see an item marked down 20 percent, they are inclined to make a purchase and do not believe the item is any less valuable despite the lower price. However, if an investment goes down 20 percent in the market, their instinct is to distance themselves from it. This analogy helps people understand that maybe there’s a better way to look at variations in investment prices. “Buying low” is hard to do!
A proactive approach to client education about the market’s impact on their investments and financial well-being lays the groundwork for productive, rational conversations when volatility inevitably occurs. It may also strengthen client relationships with deeper trust and appreciation in the long run. Advisors will do well to take advantage of the current market to implement their strategies to prepare clients — and their practices — for any upcoming changes.