In explaining the conflicting findings of a recent survey of advisors and investors who have—and don’t have—advisors, John Diehl of Hartford Funds didn’t hesitate to address the elephant in the room: Are we in the early stages of a significant market pullback? Should advisors merely send palliative messages to clients on how markets can go up or down, if they communicate at all with their clients?
“Now is the time to take advantage” of all the publicity around the year-end, year-start market volatility, Diehl said, for advisors to talk to their clients about the prospects of a bear market and how client portfolios have been built to ameliorate market drawdowns.
The senior VP of Strategic Markets for Hartford Funds said in an interview that one of the most interesting survey findings was that while 89% of advisors reported they had discussed bear market preparations with their clients, less than half (43%) of advisor clients said they had done so. The Hartford consumer survey was conducted online with 1,005 adults, while its survey of 121 advisors was conducted in person during October 2018.
“It’s a classic example of advisors not being on the same page as their clients,” Diehl said. While he doesn’t doubt that advisors did have that bear market conversation with their clients, the data shows that the client “never heard it!”
That’s a reminder that advisors “always have to be in tune with what’s on the client’s radar,” Diehl suggests. Sometimes (like now) that radar might include the behavior of the markets and how their portfolios are affected by the markets.
“It’s not their fault” that clients didn’t recall the bear market conversation they had with their advisors, considering “all the distractions clients have,” Diehl says.
But it is the responsibility of advisors, he says, to initiate conversations with clients that address the concerns they have at that very moment. Is that too short-term a focus for a conversation with clients? Maybe, but advisors need to “address what’s bothering clients today,” Diehl argued. They can then turn that short-term focus into a longer-term planning conversation.
Another survey finding that should cause concern among advisors is that while 70% of Americans can’t correctly define a bear market, that’s also the case for 56% of investors who do have an advisor. Diehl suggests this troubling finding also presents an opportunity for advisors, who can focus more on educating clients to help them be prepared for market volatility (and stay invested).
It also allows advisors to show the value they provide clients by discussing why their portfolios include investments, like fixed income, that can soften the impact of a stock market downturn. That value might be particularly obvious for advisors who still practice active management, unlike robo-advisor portfolios.
There’s a business-building opportunity in educating clients about the markets and showing the value of carefully constructed portfolios in volatile times: advisors are more likely to get word-of-mouth referrals from their existing clients, the best kind of referrals to receive.
Diehl makes another point about the lack of markets knowledge among investors. “There’s a whole generation of clients that have never experienced a bear market” since stocks began their recovery in March 2009. That presents an opportunity for advisors to highlight the perspective and experience they bring to the client relationship.
“Once we lend perspective, we give the client confidence” that their portfolio is constructed with the understanding that bear markets can happen, he said, so proactively “communicating that strategy provides confidence, which is what people need during uncertain times.”
That’s why Hartford provides to advisors a tool to help show clients how even a perceived negative like market volatility can actually present investing opportunities for clients.
As for keeping clients invested according to their financial plans during a down market, Diehl said simple anecdotes can help clients frame how to put volatile market periods into perspective.
Such an anecdote highlights one of the primary benefits (and drawbacks) of the public markets: their transparency, which allows an investor to know the exact value of their portfolio at any given time. Diehl frames the anecdote this way. “What if a client was told that the value of their home declined 25% in a single day. Would their first inclination be to sell the house immediately?”
Of course the client wouldn’t take that dramatic step, since most people consider their home a longer-term “investment.” By the same token, they shouldn’t abandon a long-term investment portfolio that’s built to withstand declines and to achieve the client’s individual goals.
That’s not to say that there “may be signals” in a market decline that an advisor should discern to consider reallocating a portfolio, Diehl admits, but any such decision should not be based on an emotional reaction to the markets’ gyrations.
Diehl concludes with the reminder that “we’re humans with strong fight or flight emotions,” and that the flight emotion can be heightened during difficult times like a bear market. “What we need during those times,” he said, referring to advisors, “is having someone to walk us back” from that primal fear.