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Portfolio > ETFs > Broad Market

3 Ways to 'Bear-Market Proof' Your Business

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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.

If they are business owners, advisors can demonstrate value by creating strategies to diversify some of their wealth away from the business or monitor how business issues may affect their overall financial picture.

2. Drill down extensively on hypothetical down market scenarios, on an up-front basis.

Far too often, advisors use only a plain vanilla risk tolerance questionnaire at the outset of a client engagement as the only tool for gauging how clients might react to a severe market downdraft. This simply isn’t acceptable.

Whether you call it acting with transparency and accountability, or label it as servant leadership, advisors have a heightened obligation when times appear to be flush to go above and beyond in discerning how clients would react if their portfolios lost 30% or more in a drawdown over the course of a few years.

Some of this can be addressed through a combination of behavioral finance coaching, together with diversification, rebalancing and tax-efficient asset location.

But at the most basic level, this means managing your clients’ assets with the same care you would manage your own assets, while making sure they know what you can and cannot control, and what a severe down market would look like.

3. Remind clients early and often of their progress toward broader goals, in good times as well as bad.

As your client’s financial quarterback, you should document for them on a regular  basis how well they are doing based on the written financial plan you’ve created together, and how their family stands to benefit from your leadership in the long-term.

This ought to include records of your coordinating with their accountants and attorneys, quantifying how much you’ve saved the client on capital gains or how much debt you’ve helped them reduce, getting documents such as their wills and powers of attorney updated, and guiding them through values-based goals like socially responsible investing or charitable endeavors.

If you take all these steps, when markets tank you can reset the dialogue by making portfolio swings less relevant to your client’s conception of your value.  You might be good at choosing specific investment vehicles, but that’s a game most reasonable advisors know they will not win 100% of the time.

To be sure, sophisticated risk diversification and hedging tools have their place. But if you want to “bear-market proof” your business, continually focus the client’s attention on what really matters.


Bradley Shepherd is President and CEO of Founders Financial, and a speaker at the 2018 Riskalyze Fearless Investing Summit.


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