In periods of market crisis, many individual investors tend to do the wrong thing at the wrong time. Those who sell stocks at the bottom of the market may lock in a loss and lose sight of their long-term goals. Those with cash to invest may be hesitant to buy stocks when prices are low and represent attractive values. For even the most successful insurance advisors, it can be a challenge during periods of volatility to keep clients engaged and invested in assets other than cash.
But for advisors who have been successful at keeping their clients’ financial plans on track over the past two years, it’s been common practice to communicate aggressively and proactively. Taking the time to increase client communication during a market crisis often requires extra hours at the office and can put an emotional and physical strain on advisors — but maintaining a robust communications program may also yield stronger client relationships and help agents position their businesses for growth as markets recover.
Taking a leadership role
Kelly Campbell, founder of Campbell Wealth Management in Fairfax, VA, said his increased communication helped clients avoid making rash decisions during the market crisis.
“Toward the end of 2008, we held four town-hall style meetings for our clients during a four-month period,” said Campbell. “And we continued to hold meetings into early 2009, when market volatility was still very high.”
In addition, Campbell said that he and his team sent regular email communications to investors, explaining any significant market events, including both spikes and drops in daily stock prices.
“We felt it was important for our clients to stay fully invested during the market crisis, provided that they were still working toward the same long-term goals” says Campbell.
The firm’s communication strategies appear to be highly effective. The company reports having a record year in production in 2008 and only a slight decline in production in 2009.
“As a result of our communication programs, most of our clients feel very comfortable with their portfolios and with staying invested in the market,” said Campbell. “In addition, many new clients we’ve brought on board tell us the major reason they left their former advisors was a lack of communication about what was going on in the market and their individual portfolios. Investors today expect a high level of communication and leadership.”
Understanding clients’ risk tolerance
Randy Bowker, an Edward Jones financial advisor working in Decatur, TX, noticed that some of his clients’ appetites for risk had changed dramatically since the market peak in October 2007.
“A client’s risk tolerance often reflects his or her feelings at the current time,” said Bowker.
Because every client brings different life experiences to the table, Bowker feels that insurance advisors need to use more than just a questionnaire to establish risk parameters for individual clients.
As a starting point, Bowker typically discusses different market performance scenarios with new clients, giving them a historical perspective about the market’s peaks and valleys over the past several decades.
“I like to illustrate to clients with their current portfolio what a potential market decline could mean in terms of dollars,” said Bowker. “This helps them frame the question of risk in a way that relates to their own portfolios. When you are talking about a percentage rather than a dollar amount, it can be hard for some investors to picture what that means. I want to help clients align their portfolios with their goals, time frames, and actual risk tolerance.”
With a clear understanding of his clients’ risk tolerance, Bowker said that most of his clients made relatively few changes in their portfolios during the recent bear market. He believes that communication played a big role in keeping his clients invested.
“Most people simply need to talk to somebody when markets are volatile,” he said. “They want to be reassured and reminded that they are doing the right thing.”
Anthony Parr, a partner in a Minneapolis-based advisory team at Wells Fargo Advisors, noted that during the most volatile periods of the market crisis, many investors were looking for ways to regain a sense of control.
“When the market kept going down in late 2008 and early 2009, ‘stay the course’ became an extremely unpopular phrase with investors,” he said. “So we really put ourselves in a position where the conversation centered on giving clients choices.”
For more aggressive investors, the choices included using the market decline as a buying opportunity to purchase securities that had gone on sale, as well as rebalancing their portfolios to maintain their target asset allocation to stocks. For more conservative investors, the choices included keeping their current, more conservative asset allocation, or selling down to their “sleep level” if they truly felt they could not handle the volatility.
The most successful individual investors, said Parr, are those who behave like institutional investors — and to help encourage their clients to think that way, Parr and his team create written asset allocation recommendations for all clients, which range from one to 10 pages in length, depending on the complexity of clients’ assets and goals.
“Getting individual investors to act like institutions involves a lot of listening and understanding their personal emotional makeup,” said Parr, while encouraging clients to be very methodical in their investment choices. “We can’t control the market, but clients can at least control the decisions they make. Knowing that they have choices can help clients gain more peace of mind.”
Sean Fitzpatrick, a partner in a Houston-based advisory team for Raymond James, said that his clients run the gamut from aggressive to conservative in terms of risk tolerance.
“One of the keys to our success has been our ability to customize portfolios for different investor objectives,” he said. “We don’t group everyone together, and I think our clients have appreciated that over the years.
For example, Fitzpatrick said that, in his experience, higher-net-worth clients often have a better understanding of risk and reward.
Meanwhile, other clients wanted to move to slightly more conservative portfolios.
“In 2008, some clients started to realize they didn’t have the same appetite for risk they once thought they did,” Fitzpatrick said. “On a scale of one to 10, with 10 being the most aggressive, clients who once saw themselves as an eight realized they are really more of a six.”
Working with a broad range of clients, Fitzpatrick’s team felt it was important to stay in regular communication with clients to assess their comfort level with their current investment strategies and to customize portfolios for each individual client’s risk tolerance and financial objectives.
As you can see, volatile markets do require more work from you if you expect to stay on top — but the result could be an even bigger book of business than when you started, more client loyalty, and the assurance that you’ve done the right thing for your client, at the right time.
Cathy Weatherford is the CEO and president of the Insured Retirement Institute. She can be reached at [email protected] or 202-469-3010.