Practice Management

Scars from past downturns resurface

Investing during periods of heightened market volatility is one thing, but dealing with investor emotions is another thing…

Investing during periods of heightened market volatility is one thing, but dealing with investor emotions is another thing altogether.

Doing both at the same time takes a modern-day financial adviser.

“I think people are seeing this new market turbulence as 2008 all over again,” said Timothy Watters, principal at Watters Financial Services.

Citing the stock market volatility that kicked into high gear in September, Mr. Watters said his job as a financial adviser also kicked into high gear, moving above and beyond asset allocation and investment strategies.

Like a lot of advisers who have tuned into the concept of behavioral finance since the carnage of the 2008 financial crisis, Mr. Watters is all about proactive outreach to clients in good times and bad, but especially in bad.

“I set up a webinar on volatility and the lessons that can be learned, because the purpose is to be in touch and it’s important for clients to be able to hear your voice,” he said.

On the asset allocation side, since 2008 Mr. Watters has placed clients into more active bond funds and some market-neutral funds, but the core portfolios have not changed much at all.

Even advisers who have made no or minimal changes to how they invest and build portfolios since the wake-up call of 2008, when the S&P 500 lost more than 33%, have pressed forward with tangible strategies for managing client emotions.

“EMOTIONAL CREATURES’

“We’re emotional creatures and it’s so easy to get caught up in everything going on around us,” said Kenneth Robinson, president of KCR Wealth Management.

“I get nervous when clients don’t come in for a review meeting or I don’t hear from them in a while, because that’s when they tend to get into bad habits and end up being influenced by the news cycle,” he said.

Hans-Christian Winkler, co-owner of Claraphi Advisory Networks, said part of his strategy in working with nervous clients is to remind them often about the market cycle of 2008, which hit bottom in March 2009.

“It all comes down to really talking with clients and explaining to them that a truly diversified portfolio will not go down to zero,” he said. “Sometimes clients just want to vent and I make them understand they’re still on track with their long-term goals.”

RISK TOLERANCE

Mr. Winkler, who has a master’s degree in counseling psychology, has become familiar with the difference between a client’s perceived risk tolerance and the actual tolerance for seeing an investment decline in value.

“Times like these are great for truly understanding what’s going on with your clients,” he said. “When markets are normal and smooth, clients will say they can live with 15% downside, but when the markets get volatile, that truly shows what’s going on.”

Chuck Widger, executive chairman at Brinker Capital, has co-authored a book on the subject of investor emotions with behavioral finance expert Daniel Crosby.

Since 2008, Mr. Widger has steered Brinker beyond the mindset of beating benchmarks and toward a focus on investment goals.

The book, “Personal Benchmark: Integrating Behavioral Finance and Investment Management” (Wiley, 2014), makes investor emotions a central theme.

CHANGE CONVERSATION

“We need to change the conversation between advisers and investors to the point where it is framed around mental accounts with positive and secure commitments,” Mr. Widger said. “It’s a very different conversation than what most advisers and investors are used to.”

If it sounds a little soft, it essentially boils down to finding new ways to keep investors from hurting themselves by acting on emotions. Part of that is employing techniques as basic as automated investing inside 529 college savings plans.

“People tend to stick to goals, once those goals are clearly outlined,” Mr. Widger said.

For Brian Power, founder and chief operating officer of Gateway Advisory, the volatility of 2008 was a turning point for him as an adviser and for his clients.

“Before 2008, we used to be buy-and-hold, but we completely changed our investment discipline,” he said.

That change, which involved applying a relative-value ap-proach and the use of circuit breakers to trigger sell signals, has left him now fielding calls from clients itching to buy into the latest market turmoil.

“Our clients know they don’t have to call us to tell us to get out of the market, because they know we’ve already done it,” he said. “Now we have clients calling us because they’re looking at the market volatility as a buying opportunity.”