3 Things Advisors Can Do to Help Clients Avoid Panic

2. Construct Portfolios for Good Times and Bad. Once you have gained a better understanding of your clients’ risk tolerance, construct portfolios that they can emotionally stomach under duress. The ability of your clients to take risk is determined by their financial circumstances: the expected returns required to achieve their goals in combination with their risk capacity. However, do not lose sight of their emotions. A suitable asset allocation is one that also considers risk tolerance. Your clients have to be emotionally and financially committed to the plan in order to get where they want to go. Appropriate tools will provide the methodology to help balance those considerations and enable you to communicate the trade-offs.

3. Manage Expectations. Everyone enjoys rewards, but financial losses can be emotionally devastating. Prepare your clients for market turmoil and make certain that they understand the risks involved. Historical risk and return data provides a good frame of reference. By educating clients about worst case scenarios you can help set expectations from the get-go and better prepare them to weather the storm. Of course, projecting future returns from past performance is a dangerous game, so the point is to use historical data as a point of discussion – not as an investment strategy.     

Following this advice will help you fulfill your compliance obligations and lower your potential legal liabilities. After all, the majority of complaints filed by investors relate to unsuitable investment advice. “Taking too much risk” is an often cited as a leading cause. More importantly, adhering to these principles will help you guide your clients through the market’s ups and downs. Keeping your clients focused on the long term will enable them to achieve their financial and life goals. As investment professionals, isn’t that what our jobs are really about.