Predicting whether the latest waves of market volatility are a prelude to a broad-based market downturn is an exercise best left to either the talking heads on cable TV, or fortune tellers gazing into crystal balls.
Financial advisors, by contrast, only need to know that a prolonged market downturn is inevitable sooner or later, as part of any broader economic cycle, and that it’s more important to ensure clients are as protected as possible when a downturn hits.
Before the latest turmoil, the widespread perception among many pundits was that the financial markets were thriving, even though there was ample evidence that was not the case.
For instance, while the S&P 500 hasn’t experienced a major correction in a decade, the gains of the past few years largely have been powered by a small collection of tech companies.
In fact, many segments of the market have been flat or, in some cases, down for months. And while the S&P was up 11% through the first three quarters of 2018, global equities were down about 5%. Financials, consumer staples and retail stocks have all struggled as well.
With the Federal Reserve’s indication of further tightening and the trade spat with China showing few signs of subsiding, we could be entering an even choppier investing environment in the months ahead.
Whether that means a bear market is looming is anyone’s guess, but when that does happen, the fallout is typically severe, with the correction lasting a historical average of 15 months and producing average market losses of about 32%.
Here are three concrete ways for financial advisors to “bear-market proof” their businesses:
1. Actively provide a value proposition beyond that of asset manager.
If your value is tied to the performance of the markets — which you cannot control — you are at a potential disadvantage over the long run. Indeed, simply factoring in the role of automated technology and turnkey third-party services, it becomes clear that asset management has become significantly commoditized.
A better approach is to provide a much wider range of wealth management services. For starters, this means a focus on personalized planning — helping clients save for retirement or draw down assets carefully during retirement, conducting estate planning and looking after their insurance needs.
These days, it’s possible to go even further by using a technology suite of CRM, financial planning and risk analysis tools to make cogent insights and recommendations about how their financial situation can improve despite market volatility.
Moreover, if clients have young children, advisors can focus on the importance of educating the next generation on financial literacy and responsible spending habits.