How did your clients do during this year's early volatility? I'm not talking about their portfolios — how did they handle it, as people? Did it surprise and rattle them? Did they want to react? Go to cash?
Such responses are common, as markets' swings frequently test investors' resolve. But volatility isn't just trying for investors — it also tests advisers' ability to keep clients informed and calm when the going gets tough.
With the right approach, however, it is possible to use turbulent times to strengthen relationships with clients and better prepare them for the next time volatility (inevitably) strikes. The strategy I like for this is the 3 Es: empathize, educate — then evaluate.
While advisers are often anesthetized to short-term volatility thanks to years of experience, many individual investors aren't. February's downdraft may have been especially jarring because it broke a long calm stretch with a bang.
On Feb. 2, the S&P 500 broke a streak of 353 days without a decline of 2% or greater. The very next trading day was the index's worst (-4.1%) since August 2011. That is a pretty big jolt! And if that wasn't enough to spark worry, headlines can do the rest. The scary stories usually associated with market corrections are calculated to stir emotions and could lead to clients wanting to sell at the wrong time.
In these situations, don't wave off worries — being dismissive never works, but it is especially counterproductive when investors are frightened or nervous. Similarly, if you try to address clients' fears with cold logic, you may end up talking past them. For your message to resonate, you must be on their side.
So if a client talks about wanting to bail on stocks during a correction, first take time to understand what worries them. Do they need the money soon? Or is it a general sleep-at-night thing? As you explore, you may discover their goals or needs have changed to the extent that they might need a different asset allocation. But even if nothing has changed, the effort isn't wasted. Understanding the root of their fear will help you discern the best way to approach it.
There are longer-term benefits, too. You might learn what sort of ongoing counseling they might need to be more comfortable in their present strategy. Perhaps some folks would appreciate more frequent contact or opportunities to learn about basic investment strategy or financial planning. Whatever approach benefits them most, listening and asking questions can help you find it.
Once you empathize, you will have a better foundation to discuss the best response. Don't just give them the "what." Explain why, in as much detail as is necessary. Talk them through the risks and trade-offs of reacting to volatility: Since corrections come suddenly and reverse without warning, reacting at all often means reacting late — then getting whipsawed when markets rebound before you can reinvest. Not to mention transaction costs, tax implications and the other big decision — when to get back in. Remind them there is no "all clear" signal. By the time they are emotionally ready to reinvest, they may have missed a significant rally.
I also recommend reviewing why their portfolios are built as they are — a simple, effective way to encourage longer-term thinking. Providing materials that show short-term volatility is normal and doesn't prevent disciplined investors from reaching their long-term goals can also give valuable perspective and incentivize staying disciplined. Help them see the risks associated with getting out could easily outweigh those of staying in.
Don't stop there, though — check in again once the volatile period is past. This lets you reinforce lessons that might not have stuck at first when emotions were running high. Give clients a chance to compare how they feel now to how they felt before, and discuss what they gleaned from the experience. The most memorable lessons are those people teach themselves. A big part of an adviser's job is helping clients do just that.
Not every conversation will go swimmingly, and not every client will follow your advice. That is a sad truth but also an opportunity for you to learn and improve.
Try to determine why: Was it something you said? How you said it? Something you failed to address? What could you have changed in your emotional or educational appeal to resonate with them more? Assessing who reacted to volatility and how they did so can help you better tailor your service in the future. You can continue educating those needing it most over time when they are calm. Remember: Changing behavior is hard. One discussion may not do it.
Reflect on the conversations you think went well, too: Did clients take away what you think they needed, or not? A client who says they are fine with everything and hurries you off the phone might have needs you didn't uncover. Or you might not have been able to share valuable perspectives that could help them later. Being able to open clients up and engage them is key to having a productive long-term relationship and meeting their needs.
In my view, a good adviser never stops learning from and about his or her clients — and volatile times are one of the best opportunities to do so. By striving to empathize with and educate your clients — and taking stock of your successes and failures along the way — you can improve your service and boost the odds your clients reach their goals.
Damian Ornani is CEO of Fisher Investments.