“We’re part of a culture,” says Phil Pearlman, executive editor at the financial communications platform StockTwits, “that has been through the wringer for the past 14 or 15 years. With all that’s happened, we’re dealing with very high levels of emotional volatility that are also predictive of post-traumatic stress, so if we’re looking at the market as human, as the sum of collective sentiments, then we are at a point where we’re extremely sensitive to any kind of stimulus.”
That’s why now more than ever, financial advisors need to have nerves of steel if they’re going to reason with overwrought investors and help them circumvent excesses of behavior such as that demonstrated in reaction to the recent news about the state of Cyprus’ banks.
It’s an approach that Pearlman—who holds a doctorate in clinical psychology and who has in the past managed a long-short equity hedge fund focused on behavioral strategies—says calls for advisors to gather their wits about them and stay the course in order to stick with the fundamentals and get their clients back on track as soon as possible.
“As an advisor, you have to have had a plan laid out with your client, you have to have a strategy in place and at times like these, you’ve got to sit them down and get them to understand the rationale of that plan, its goals and why it was set up in the first place,” he says.
Doing that not only requires levelheadedness on the part of an advisor, it also calls for empathy, Pearlman says. If clients are to buy back into the rationale of their financial plan at times of extreme stress when their rationality is thrown off balance, then advisors need to have formed a good relationship with them, one that is based on trust, understanding and responsibility that has been cultivated through time.
“A financial advisor has to know and feel who his or her client is, how they think, how they feel, how they’re going to react; being able to do that depends on the relationship that the advisor has been able to develop with a client,” Pearlman says. “So both of these, the importance of the fundamentals as well as the empathy element of the relationship, should be preparatory, and neither of them should be reactive. Advisors who find they have been able to emphasize the rationale through empathy beforehand will find they’re on good grounds in acute crisis periods.”