In a tough market, experienced advisers don’t wait to hear from their anxious clients; they reach out first.
“Our goal is to call them before they call us,” said Harold Evensky, a certified financial planner and president of Evensky & Katz Wealth Management, a Coral Gables, Fla.-based adviser.
That thought was echoed by Richard B. Freeman, a certified financial planner who is a principal at Round Table Services LLP, a wealth advisory firm in Westfield, N.J.
“Reach out to everybody but give extra care to the newest clients and to those who are recently retired,” Mr. Freeman said. “They’re the ones most likely to be upset.”
For advisers who are new to the challenge of reassuring frightened investors in a gyrating market, the experienced planners have three recommendations:
*Put yourself in the client’s place. Your job is to explain how they are personally affected by what’s happening, Mr. Freeman said. You may want to illustrate your reassuring words with very conservative scenarios that show the client they’ll be OK even if it takes a while for the market to recover.
*Avoid defending yourself. Don’t take it personally when scared clients are angry, advised Ross Levin, a certified financial planner and the president of Accredited Investors Inc. in Edina, Minn. Listen to them patiently. If a client is down less than the market, it’s natural to feel he doesn’t appreciate the great job you’re doing for him. But keep the thought to yourself. Remember, he’s still down. He can’t spend relative returns.
*Don’t say the market has hit bottom and will start climbing very soon, even if you believe it. “You can’t tell clients it won’t get worse,” Mr. Evensky said. “We say, ‘We’re modestly optimistic. Eventually, it will get better, but it might not be soon.’”
MANAGING EXPECTATIONS
You should lay the groundwork for this conversation at the beginning of the relationship.
“We always have a written investment policy that specifically states the worst one-year and the worst five-year returns for the client’s plan, using historical numbers,” Mr. Levin said. Now is the time to remind him of those projections.
According to Mr. Freeman, if the client’s portfolio is diversified and matches their risk profile, you should be able to show them that their investments are doing just what they’re supposed to do in a market decline.
Of course, not all advisers are paid to reduce risk through diversification. But even if your job is to manage money in a specific style, you still have to make it clear, going in, what your role is. It’s essential to cultivate reasonable expectations, Mr. Evensky said. If you’re a large-cap-domestic-growth manager, for example, it’s shortsighted to measure yourself against the broad market. In good times, you may look brilliant, but in bad times, you risk looking terrible.
What about clients who want to sell?
Invariably, some retirees panic and want to get out of the stock market. It’s important for the adviser to explain the consequences, Mr. Evensky said. He tells clients that they can’t invest only in short-term, high-quality fixed-income investments and expect the same returns as they’d get in a balanced portfolio.
“You must show them what it will mean to their lifestyle over the next 20 years,” Mr. Evensky said. “You really can’t eliminate risk. It’s a choice between risk to purchasing power and risk of volatility.”
Most people mistakenly believe that they can time the market — selling in bad times and then returning for the recovery. “But the markets don’t send you an e-mail saying, ‘Starting next week, we’re going back up. It’s time to get back in!’” Mr. Evensky said. Timing the market requires correctly predicting both when to exit and when to re-enter, he said. “Factoring in the cost of trading, a timer needs to be correct at least 70% of the time; it’s a standard no one has ever successfully accomplished.”
PORTFOLIO ADJUSTMENT
Normally, it’s a bad idea to sell in this kind of market, agrees Mr. Levin. Nevertheless, there are situations where a client would be better-served by a more conservative allocation, he added.
“You have to ask yourself how much pain a client can take. If he’s this nervous now, what if the market falls a lot more? If he stays invested as he is, will he sell at the bottom?” Mr. Levin said.
A portfolio adjustment may make sense for some clients, Mr. Freeman said. But there’s a difference between trimming your portfolio’s stock allocation and selling everything to stuff your money in a mattress, he said. Ultimately, however, it’s the client’s money and his decision.
“If you can’t talk them out of selling everything, you do what they want,” Mr. Freeman said. “But I would explain that you’ll be sending them a letter reviewing your conversations with them and re-stating that you think the decision to sell is inappropriate.”
