Most advisors will remember March 9th 2009 as one of the scariest days they’d ever faced in their careers. No doubt everyone was worried about how their clients would react to the market falling to its lowest point in 13 years; their portfolios just lost tens of thousands of dollars in a day and they were looking to their advisor for answers.
The fact is advisors don’t have just their client’s portfolio to manage; advisors have their client’s emotions to manage as well. Advisors face the constant risk of clients overreacting to “danger” in the market, making poor decisions in their financial planning, or even firing their advisors because they don’t understand market swings.
Countless studies on the brain’s response to stress, and Financial Finesse’s own findings on the behavior of retirement plan participants, show that intense acute stress (which hits, for example, when there is news of an extreme market drop) temporarily damages our brain’s hippocampus and causes us to experience hampered short-term memory and affects our ability to learn and to concentrate, i.e. our brain screeches to a halt and goes into survival mode.
Possibly even more harmful to our ability to make rational decisions than acute stress is ongoing financial stress. Our recent research on trends in employees’ financial stress revealed that even with the stock market rebound and more people out of financial hot water, 86% of employees say they have some sort of financial stress. Where else can you find 86% of people agreeing on something?
It wasn’t just among lower-income or even middle-income Americans where we saw financial stress. Eighty-one percent of employees in the highest income bracket indicated they had financial stress. What is a surprise are those that say they have no financial stress actually have major flaws in their financial plans: not saving enough for retirement, having inadequate estate plans, and improperly allocating investments. Employees’ overconfidence in their financial security showed they were in a state of complacency based on false perceptions that could put them at risk of major financial problems and significant financial stress down the road.
For advisors, this means virtually every client has or will have financial stress while working with them, thus
making them ticking time bombs set to go off the next time anything goes wrong in the market. The only way advisors can truly combat the risk of losing clients to emotional impulse is to help them avoid financial stress and react to market volatility rationally. Here’s how: