What ebbing markets may mean for advisers

Whether the stock market technically has entered bear territory — usually defined as a decline of 20% — by now is a moot point. After weeks of steady losses, investors have the bear market blues. At the end of April, the American Association of Individual Investors’ sentiment survey showed that only 16% of investors were bullish while 59% were bearish — indications of extreme pessimism by historical standards.

While sentiment has improved slightly in May, odds are that inflation, the war in Europe and our nation’s political fractiousness are powerful enough depressants to keep investors glum for quite some time, especially if the market continues to decline. In the past, when investors soured on the stock market, trading declined, which cut commission revenue and led to tougher times for brokers. In today’s largely fee-based business, trading volume has less direct impact, but declining asset values also result in lower revenue and profitability as assets under management decline in value.

In short, a market slump hits the industry’s wallet. It also changes investor psychology. To meet the challenges of serving gloomier investors, here are some questions to ask yourself:

Did you prepare your clients for a downturn? Like the fable about the ant and the grasshopper, many advisers used the bull market to prepare their clients for a market downturn by diligently reminding them that good times don’t last and by discussing what they would do if the market were to decline. Now that we’re here, it’s even more important to communicate. Calls, emails, videoconferences and newsletters all should be employed in a continuous process of reaching out. As client anxiety mounts, simply telling them to hang in there and repeating the mantra that the market has always resumed its long-term upward course probably won’t cut it. Investors want specific information and guidance about what they should do now, even if that means taking some unpleasant steps like cutting their spending.

When performance is the only yardstick, fees charged may be perceived as being excessive.

Do your clients have a plan? Study after study has shown that clients with a written financial plan, preferably one that’s regularly reviewed and updated, feel more confident and less anxious about their future. Now is the time to review those plans and revise them if necessary. If a client doesn’t have a plan, strongly urge them to work with you to develop one.

ADVISER VALUE

Do clients understand your value? Clients who perceive their adviser mainly as an investment manager are likely to view adviser value largely in terms of performance. When value is viewed through that lens, less-than-average market performance is bad enough; losses may lead to questioning whether the relationship is worth keeping. Especially for clients in fee-based accounts, what services and value other than investment performance do you provide? Do you offer Social Security planning, for example, or help with long-term care, college funding, taxes or divorce? Do you help make your clients’ lives better in ways that have nothing to do with whether the stock market goes up or down? When performance is the only yardstick, fees charged may be perceived as being excessive for the value received. Now is the time to make sure you are delivering true adviser value, and that your clients understand what that is.