Chris looked me in the eye and asked, “Mr. Hummel, what do you do for a living?”
At the time I was part of the consulting world, so I told him, “Well, Chris, I’m a consultant.” He smiled at me and asked, “Do you expect your clients to listen to you?”
“Of course,” I said. He laughed and said, “Well, sir, this is what I do for a living, so it would be nice if you would listen to me.”
We were standing on the second green at Whistling Straits golf course in Kohler, Wisconsin, one of the country’s premier courses. The guy giving me grief was my caddie. On the second green I went to hit a long putt, and didn’t ask for his guidance. He stopped me before I putted (which caddies don’t normally do) because of where I was aiming. I thought I had aimed correctly, but he disagreed. Luckily, I listened, as my aim was so poor that it would have been embarrassing to putt the ball off the green and into the lakefront of an important client’s house.
I tell that story a lot because, ironically enough, being a caddie, a consultant or a financial advisor really isn’t that different. They all get paid to give advice and make recommendations. They also encourage clients to follow their suggestions and, by doing so, often achieve a high level of success. However, with the wild ride caused by Brexit, the rough start for this year’s U.S. equity markets and market experts calling for continued volatility, it’s certainly easier said than done.
Are advisors helping their clients stay the course in 2016? We analyzed thousands of advisors managing client money themselves (rather than those outsourcing to third-party managers) during the period of 2008 through 2015. In almost every period of volatility, when the equity markets suffered a severe decline, we saw advisors moving to cash. We then compared their capture ratios, a tool used to measure investment performance, against a suitable benchmark.
Ironically, many of these advisors explained they moved to cash to protect clients, but they actually ended up capturing 92% of the downward moves. Meanwhile, in positive markets, they gave up 13% against the benchmark, with an upside capture ratio of 87%. This subset of advisors moving to cash often got there too late.
What’s more, they missed the subsequent market rally because they got back in too late. These statistics prove these advisors weren’t that successful at getting their clients to stay the course. So what does an advisor need to do during volatile times to keep clients invested? (Please refer to Envestat, June 2016, “Are Advisors Staying the Course Amid Market Volatility?” at envestnetinstitute.com)
Given what happened in the markets over the last couple of weeks, I know thousands of advisors are making and receiving hundreds of calls to give reassuring advice to their clients along the lines of, “Stay the course.”
Those conversations are tough and can be stressful. However, they also elevate the human advisor’s value proposition over that of digital-only providers.
I believe the Brexit volatility, in the long run, is good for many advisors, as it will provide an opportunity to demonstrate their value by having important conversations to keep clients on target. But what happens if a client won’t listen?
Here are three suggestions:
- Listen to What Clients are Thinking
Oftentimes, clients talk themselves into doing irrational things because they haven’t thought them through. Allowing clients to voice their ideas can help them see the error of their ways.
- Tone Matters
Clients aren’t “wrong” when their initial reaction is to ignore good advice—they are simply letting their emotions misguide them. My caddie kept a very steady tone that conveyed “been there, done that.” His tone, ironically, was what made him believable. Some clients are no-nonsense, requiring you to tell it like it is and be firm, while others might need a more gentle approach.
- Remind Clients About Your Track Record of Being Right
Nobody likes the person who says, “I told you so,” but experience and a track record of being right are important things to review when speaking to clients. During the Brexit meltdown a few weeks ago, I was in an advisor’s office and overhead a call with a client. The advisor listened and then responded, “Dan, we’ve been through this before. We looked at your plan and you are fine. You felt the same way when the dot-com bubble burst, and again in 2008-2009. But we stayed the course, and it worked out.”
The client calmed down quickly after being reminded that the past decisions they made together were the right ones.
In the end, market volatility gives financial advisors the opportunity to demonstrate their value. But that value comes from having the client feel good about following the advice that their advisor delivers.
If your client doesn’t listen when you’re telling them to stay the course, don’t panic—just listen and, in an authoritative and calm tone, remind them that the decisions you’ve decided on together in the past have often worked out for the best.