As the COVID-19 pandemic disrupts business, the U.S. economy and global markets, financial advisors are under immense pressure to help their clients avoid making rash decisions based on fear, while staying focused on the long term.
The pandemic is ushering in significant changes in supply chains, industries, governments, global systems and human life globally. Some of these changes will be challenging, while others will provide opportunities to perform remarkable acts of invention, contribution and leadership. Regardless of how things unfold, as with economic crises of the past, this too shall pass.
As advisors coach clients through the market turmoil, they should use this moment as an opportunity to help clients discover their ultimate purpose for money, overcome the cognitive and emotional biases that may interfere with achieving that purpose, and stay true to the financial principles they need to employ to get there.
Coaching vs. Counseling
Helping clients stay calm as markets roil is an essential part of being a financial advisor, but the real way to differentiate your service is to give clients a framework in which to be calm. The COVID-19 situation is different from past crises because it touches not only investment portfolios, but all aspects of clients’ lives. The ground has shifted dramatically, so the advising model you’ve used in the past may be inadequate or counterproductive today.
Right now, many investors feel pressure to get out of the market entirely, a rash decision that will cost them dearly when the market recovers. At a time like this, addressing clients’ needs requires more work than simply telling them to “stay the course.” Clients must understand the unconscious biases that drive their decision-making, their reactions to fear and stress, and how what they think they know about investing can actually be detrimental to their long-term portfolio health.
Advisors who act merely as counselors are not doing enough; investors need coaches right now. Coaches guide and empower, giving clients the ability to understand themselves and the principles behind their investments. A good coach energizes their charges to go the distance — and this is our role as advisors. This is our Olympics, and it is our job to get our clients to the gold.
Looking Into the Human Psyche
In his book “Behavioral Finance: The Second Generation,” Professor Meir Statman discusses the cognitive and emotional shortcuts we make when investing, the reliance on which can “take normal people far from their best choices, solutions, and answers.”
During this uncertain time, investors are being bombarded with messages of Armageddon, both externally from the media and internally from their own natural instincts. Just look at what’s happened to the market over the past month and we can see Statman’s theory in devastating practice: With just a touch of fear, our deeply ingrained cognitive and emotional biases make us do impetuous, unpredictable things, which ultimately go against our better interests.
From hindsight bias, which makes otherwise sensible people feel that events in the past were more predictable than they actually were, to confirmation bias, which makes us pay attention only to news and information that confirms what we already believe to be true, investors’ natural instincts are currently pushing them to make the wrong decisions.