Emotions will rule client decisions. Here’s what advisors can do

Clients must be reminded to focus on what’s important — staying the course for the long haul, avoiding emotional decisions and maintaining long-term plans through portfolio rebalancing.

We’ve all seen the heart-stopping headlines flooding our newsfeeds during recent years as we navigate a digital environment of constant information overload. The financial industry is not immune to the effects, but financial advisors can help ease client worries by deploying smart tactics that manage risk while decreasing volatility, particularly when clients are easily influenced by sudden market downturns or bad news. It’s when investors worry about whether the floor could still fall out of the market that advisors must talk to their clients about uncertainty and focus on what’s important — staying the course for the long haul, avoiding emotional decisions, and maintaining long-term plans through portfolio rebalancing.

SETTING GOALS IS KEY

During bull and bear markets, advisors will encounter clients whose emotions drive decisions. Emotional investing is a common mistake whether prices rise or fall, and it can lead to long-term underperformance. To combat this issue, advisors must coach their clients to stay the course, setting clear, realistic long-term goals, enabling them to rebalance their portfolio. Advisors must educate their clients about volatility, helping them understand the importance of remaining disciplined in upturns and down.

Advisors must also marshal their clients to keep investing, regardless of market fluctuations. This tactic mitigates the risks of reacting to short-term volatility in the markets. Active investment solutions that include dollar-cost averaging, adjusting stops and targets, and portfolio rebalancing are strategies that can help. Clients shouldn’t put all their eggs in one basket, so diversification is key to long-term success.

KEEP IN TOUCH

Advisors can put headlines and other market information into perspective, revisiting their client’s “dynamic” financial plan to help weather market conditions. If advisors learn that their clients are experiencing heightened anxiety, they should significantly increase interaction so that cooler heads prevail on important decisions.

This means outreach should occur on a regular basis, whether that’s a phone conversation, or a personalized email message “checking in” with the client so advisors are there at key inflection points and not foregoing vital relationship-building opportunities. Conversely, clients are more prone to reaching out to advisors during bear markets — a SmartAsset survey of financial advisors showed the most common reason clients reached out to advisors in early 2022 was stock market volatility.

Financial advisors who pursue consistent active investment solutions are laying the groundwork for effective service, enabling their clients to reach their goals better and faster during periods of prolonged uncertainty. When advisors have laid the foundation from this behavioral finance perspective, they will be enabling their clients to better reach their objectives. Investing time with clients now, so that they break past limiting beliefs and emotionally driven decisions, will keep them focused on long-term financial goals as they build trust with their financial advisor.

CHALLENGES AND OPPORTUNITIES

There’s no question rollercoaster markets can cause investors to lose courage and confidence, particularly at the very moment when they should stay the course and look beyond performance. Disciplined steps toward retirement goals also can be challenging when no clear answers are on the horizon.

Challenges, however, also point to opportunities. It’s when we don’t know what’s next that advisors can step up and use uncertainty as a ladder to bring a clearer focus on the evergreen financial goals of their clients. Economic factors may affect investments, but each client is unique and charting a personalized journey is the solution to overcoming any market cycle. Advisors become indispensable when clients commit themselves to a longer time horizon. Together, they can work to successfully adapt to changing conditions.

Patrick Hynes is head of field sales at Prudential Advisors.