I fly a lot—averaging about three times a week. Recently, though, I had the rare experience of being a passenger on four flights in a single day.
I’m not afraid to fly, but one of the four flights was extremely bumpy. Even a seasoned traveler can get a little freaked out during heavy turbulence, and the guy next to me looked really scared. So I asked him, “Are you okay? Are you afraid to fly?” His reply was one of the funniest comments I’ve ever heard: “My friends always make fun of me when we fly. However, I tell them, ‘I’m not afraid of flying. I’m afraid of crashing!’” Classic.
This exchange led to a very interesting conversation about why people are afraid to fly. We decided it comes down to a lack of control. Sitting in that seat on the plane, passengers have no control over what is going on. However, we made an important observation—neither one of us had any desire (or ability) to hop into the cockpit and fly the plane, but nevertheless, we still want to be able to know whether or not there is an actual problem.
One key tip for those who don’t fly very often is not to get scared until the flight attendants look scared. When they sit down and buckle up, you might have a problem. My seatmate and I came to the conclusion that it’s not actually lack of control that makes people afraid to fly, but the lack of information.
That’s when it dawned on me that this is a great metaphor for why investors need advisors, and why most investors shouldn’t invest alone. My lack of control over the plane doesn’t make me want to fly the plane, and much like volatile markets worry clients, most of them don’t react by saying, “I think I should invest my money by myself.”
End investors likely retreat into the state we experienced on the plane. They want to know what is going on, but don’t necessarily want to assume control themselves. Rather, they want to know that someone with experience is in control and can handle things for them. Similarly, I don’t expect a plane’s captain to give me a play-by-play—I just want to be sure he or she knows what they are doing and gets me to my destination safely.
In many instances, the problem for end investors isn’t a lack of information, but information overload. At a time when the end investor is overwhelmed with information, it’s easy to see why some choose to do nothing—and choosing to do nothing, while psychologically comforting, is likely a surefire way to miss out on reaching their financial goals.
I believe most clients fall into one of three categories:
- “Leave me alone. I don’t want to hear from you.”
- “Make the decisions. But tell me what you did.”
- “Check with me before you make decisions on my behalf.”
Two of the three categories above don’t have anything to do with a fear of control, but come down to effective communication.
Just like the white-knuckled guy sitting next to me on the plane, most clients aren’t afraid of their investments experiencing some turbulence—they are afraid of the market crashing.
This is a concern most investors have, and as a result, effective and proactive advisor communication is all advisors may need to differentiate themselves during a very competitive time in their industry. Most investors don’t want to fly the plane themselves; they just want the pilot to assure them they will safely get to their destinations.
The present calendar year has been a wild one for the markets, and with Election Day fast approaching, volatility is likely to continue. With that in mind, advisors should ask themselves how effective they were at talking clients out of putting on parachutes and jumping out of the market during periods of market volatility earlier this year.
Now, I’m well aware that some advisors make decisions on their own for clients who leave them alone (and fit into the first category mentioned above), and some analysis of advisor behavior may be skewed by the fact that advisors, in the end, are obligated to follow client directives. However, we reviewed the first quarter of 2016, which was marked by extreme volatility, to see what percentage of advisors on the Envestnet platform succeeded in getting their clients to stay the course.
Based on our research, an overwhelming percentage of advisors on Envestnet’s platform stayed the course, with 90% of advisors not increasing their cash allocation during this time period. According to the Envestat report “When the Market Swings, Advisors Who Hold Steady Outperform,” when comparing the 90% staying the course to the 10% who tried to time the market, the group staying the course outperformed by 1.3% for the quarter.
It would have been easy during the first quarter of this year for an investor to give into emotion and leave the market, but doing so would have been a mistake, and advisors who helped clients avoid the temptation to parachute out of the market ended up procuring better investment outcomes.
In the end, advisors provide an immense amount of value by not only making the right decisions for clients, but also by communicating those decisions to them in a way that provides comfort and helps them tune out market chatter. Airplane pilots can put passengers at ease during turbulence by providing information and reassurance over the intercom—and advisors can differentiate themselves for investors by doing the same during volatile market conditions.