Sometimes you think: “I should have stuck with insurance.”
You embraced wealth management as part of your business. You’ve got clients who own equity mutual funds, ETFs, managed money accounts and actual stocks. Everything was going smoothly, the stock market was setting new highs, the economy was humming along and unemployment was at historically low levels. The Federal Reserve was raising interest rates, but only a little at a time. They were giving plenty of advance warning. What could possibly go wrong?
Then the market started behaving like that calving glacier you saw on that Alaska cruise a few years ago. Huge chunks seemed to be falling off the Dow, S&P 500 and Nasdaq. No one seemed to have any plausible explanations. It looked like “more sellers than buyers.” This made the news, although earthquakes, tsunamis and hurricanes remain the lead stories.
So, What Do You Tell Clients?
Clients are paying for advice. They want some answers, although they logically reason there don’t seem to be any. All that’s obvious is some people somewhere are taking money off the table. Logically, they will put it back again or move it somewhere else.
Here are a few conversations to have:
- Do you own stocks or managed money? If they have mutual funds or separately managed accounts, there’s an entire team of money managers at each one. They are being paid to do the worrying for the client. If they own individual stocks or ETFs, there’s no one else driving the bus. It’s either you or the client calling the shots there.
Approach: If they have money managers, do some research on their backgrounds. How long have they been at this? Probably decades. How have they weathered previous market downturns? They probably did OK. The past doesn’t predict the future, but it implies these guys have seen this movie before.
If your client owns individual stocks or ETFs, they want to be pretty confident these are quality companies, or underlying securities. Let’s assume you wouldn’t have let them take any big risks and that they own quality.
- Turn off the TV. Not literally, but avoid the financial news channels. You are their advisor. The people on TV tend to sensationalize things. Your clients probably didn’t act on anything when the market was going up. Would they really take their advice when the market was going down?
Approach: Explain watching won’t help. It will only get them upset. If the market turned on a dime and headed back up, some people on TV would probably behave as if this never happened. You are their advisor.
- Share the firm’s viewpoint. They are a client of the firm. There are people smarter then you, probably buried in windowless rooms who look over charts and analyze data all day. They’ve likely been at this a long time. Someone takes what they say and turns it into plain English.
Strategy: Share the firm’s viewpoint. Let them know where they can see and read it firsthand.
- Confirm they are in it for the long term. This isn’t blackjack, where you walk away from the table if luck turns against you. This is investing. You go into it for the long term. You buy into concepts like an expanding economy or the growing influence of technology, then make investments that should benefit from those trends. You let the people in those companies do their jobs. You have the confidence to leave your money in their hands, by owning shares of their company.
Approach: Show the chart showing performance of the stock market over a 70-plus year period. It had its ups and downs. It went through far bigger periods of upheaval (say, World War II). As long as the economy did well, the market did well in the long term. You can’t predict the future, but you try to learn from the past.
- Do you believe there’s a connection between company earnings and stock prices? Hopefully you do. Price-to-earnings ratios can change, but it makes sense if a company keeps making more and more money, the stock will go up. You trust the managers at a company to make this happen. They will lay off people to get expenses down, if that means they can support earnings in times of declining product sales. Are we in a period of declining product sales? Probably not. If anything, the economy is continuing to grow.
Strategy: Talk about the near term and the long term. Near term, the market might be declining. Long term, the companies reporting earnings are generally delivering better results in year-over-year comparisons. This should be good news for their stock prices.
- There’s good news somewhere. Keep an eye on sector performance year to date. Investors might be taking money out of some sectors, but its likely going into others. That’s sector rotation. Overall, that should be good for the market because the index is the combined sum of the sectors. Maybe your client should be doing something with cash on the sidelines.
Strategy: You’ll likely sit tight and try to ride out the storm, but look to see if sector leadership is changing. Keep looking. Let your client know what you are doing and what you are finding.
As an advisor, you are in a tough position. Your clients feel even worse, because their money is at risk. They are looking to you for advice. You are doing six things: Determining if managers are in place, trying to get them to avoid getting worked up over minute-by-minute cable news, sharing the firm’s viewpoint, confirming they have a long term focus, reinforcing the relationship between earnings and stock prices. Finally you are looking for changes in sector leadership.
You will have been proactive. You aren’t promising, guessing or sidestepping. They know you don’t know. You are trying to apply logic during a time when logic doesn’t seem to be working, at least temporarily. You are working with both the training and the information you have.
Bryce Sanders is president of Perceptive Business Solutions Inc. He Provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” can be found on Amazon.