Managing a Client’s Emotional Response to Declining Markets

As advisors responsible for managing client assets, we should always strive to do our best. However, when markets appear to be on the verge of collapsing, this can be challenging. For example, do you try to minimize losses or simply let it ride? Many advisors experience internal conflicts over this issue when stocks are declining.

If advisors feel this way even with their extensive knowledge of the financial markets, how do clients feel? Moreover, what do you do when a client calls after the market has fallen 10% and they want out? Do you comply or do you try to educate them, hoping it will increase their perspective and result in a more rational decision? That is the subject of this week’s blog. 

Across the advisor spectrum, there are a number of similarities as well as differences. For example, with a few exceptions, most advisors have access to the same investment universe. Beyond that, there are numerous differences. One difference is the degree of discretion an advisor has over a client’s account. There are also many different investment philosophies. Because of the human element, and the fact that investment management is part science and part art, some of our decisions result in a favorable outcome while others do not.

As advisors, we realize that clients tend to be more risk adverse than risk seeking. How do you help them stay the course when the markets are in turmoil? Although simplistic, these points may help.

• Markets always rise and fall
• Markets always hit a bottom
• Markets always rebound

Emotions are the root cause of most poor investment decisions. Fear rises when markets decline and clients tend to want out. Conversely, when markets rise, especially after a long and significant rise, clients want in.

It is up to us to help them fully understand and stay true to the notion “buy low-sell high.”