Advisers scramble to head off sticker shock from clients over ugly August account statements

Many turn to behavioral finance tools such as proactive communication and keeping market swings in perspective

Sep 4, 2015 @ 1:13 pm

By Jeff Benjamin

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Even if they might appear calm on the outside, financial advisers are scrambling to pre-empt all manner of client sticker shock that is expected with August performance statements on the way.

“I've already had many of those conversations with clients to try and get them to focus on long-term goals, but it's always difficult because people are nervous and afraid,” said Larry Luxenberg, a financial adviser at Lexington Avenue Capital Management.

With stock market volatility spiking during the second half of August, the S&P 500 registered a 6.03% one-month drop. And the volatility hasn't let up.

Friday, leading into the extended Labor Day weekend, the S&P fell 1.5%, putting its loss for the week at 3.4%, its second-worst performance since December. The Dow Jones Industrial Average lost 1.7%.

“It's not just the negative returns from August, but investors also are afraid of how much worse it can get,” Mr. Luxenberg added. “We just remind them that if you're investing in the stock market you have to think long-term.”

Blair duQuesnay, chief investment officer of ThirtyNorth Investments, is learning that big market moves can have a big psychological impact on clients, who need to be managed accordingly.


“A lot of times, the clients focus on the change in the dollar amount, and we have to put it into percentage terms for a better perspective,” she said. “We spend a lot of time speaking to clients about the realm of possibilities, and on the Saturday before the big [Aug. 24]d market drop, we had sent out an email explaining that we had noticed an uptick in volatility and that they shouldn't panic.”

Communication is always a solid business practice, but especially so in times of extreme investor anxiety, according to Daniel Crosby, a behavioral finance expert who is president of IncBlot Behavioral Finance.

He recommends putting big market swings into historical context.

“The average intrayear drawdown over the past 35 years has been just over 14%, and the market ended higher 27 of those 35 years,” he said. “Volatility is the norm, but the last six or so years have obscured that fact.”

Mr. Crosby also discourages what he calls “action bias,” which means not checking your portfolio status all day every day, especially during times of higher volatility.

“A daily look at your portfolio means you experience a paper loss 46.7% of the time, whereas a yearly look shows a loss a mere 27.6% of the time,” he said. “Investing is one of the few areas where less effort tends to get you more results.”

Chris Chen, a wealth strategist at Insight Financial Strategists, is well in tune with the way his clients respond to down periods, and he has embraced a humbling acceptance of the responsibility.

“I try to prepare them every time, but our clients really hate the negative numbers,” he said. “When their portfolio goes up, sometimes it's because the client is really smart, and when it goes down it's because the adviser isn't doing his job.”


Mr. Chen half-jokingly accepts his plight as the bearer of bad news in the wake of months like August.

And regardless of who takes responsibility, he wants his clients to know it helps to just relax and stick to the plan.

“In general, clients will recall that there is a reason they are invested the way they are, and if they don't recall, then it's time for a deeper discussion,” he said.

It's never a bad time for a deeper discussion, because sometimes investors need a reminder of how markets work, according to Mr. Crosby.

“There is a reason that equities outperform by 3% to 5% on a risk-adjusted basis, and scary times like right now are why,” he explained. “You can have psychological discomfort and increased wealth or increased comfort and lower returns, but you can't have both.”

For David Haraway, president of Substantial Financial, that kind of message has been the steady drumbeat to his clients ever since the Federal Reserve pushed interest rates to the floor six years ago.

“Anything you do to mitigate volatility reduces returns,” he said, justifying his extreme distaste for fixed-income investments.


“We are only invested in stocks and cash, and I tell my clients that on a yearly basis, two-thirds of the time you're going to be between -7% and +27%,” he said. “The asset class we're in has ups and down, and that's why it returns so well.”

Managing expectations and then proactively reaching out to clients during periods of stress can go a long way toward building and maintaining relationships, according to Mr. Crosby.

“There's plenty of research that shows working with an adviser can yield performance benefits of 2% to 3% a year, and that those benefits are derived primarily from behavioral management,” he said. “This is where you provide the greatest value to your clients, so be proactive in reaching out, listening and providing support.”

Tim Holsworth, president of AHP Financial Services, views the behavioral finance part of his job as among his most difficult and most valuable responsibilities as an adviser.

“The psychology of the whole process is everything, and it's what makes this whole thing so difficult,” he said. “I already know that the biggest reactions from the August performance is going to come from those folks who don't watch their accounts online on a regular basis.”


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