Advisors know that financial decisions must be arrived at detached from their emotions. But that doesn’t mean disregarding clients’ emotions of anxiety, if not fear, amid the fast-spreading coronavirus pandemic.
Yet many FAs “ignoring or dismissing” clients’ angst are likely setting them up for big losses if they ultimately “panic and sell at the wrong time,” Ric Edelman, founder of Edelman Financial Engines, tells ThinkAdvisor in an interview.
Rather than reflexively say “Stay the course,” FAs instead might well advise clients to take some risk off the table, says the veteran advisor and host of a weekly financial call-in radio show for nearly three decades.
On the program, the most prevalent question asked nowadays is: “Do I need to make changes” in my portfolio? In the interview, Edelman discusses how he replies.
He also pointedly opines on several other issues critical to advisors, including 401(k) rollovers, the SEC’s Regulation Best Interest, the Labor Department’s proposed new rule, President Donald Trump’s performance and the proliferation of FA podcasts (Don’t expect 5-star ratings.).
In 2018, Edelman merged the jumbo practice that he and wife Jean Edelman launched in 1987 with Financial Engines.
He remains the largest individual stockholder of America’s largest independent advisory, which manages more than $200 billion in assets, boasts 1.2 million clients and has about 350 FAs in 180 offices nationwide.
Though no longer overseeing the firm’s day-to-day business, he coordinates all financial planning strategies and personally advises several longtime clients of his own. Plus, together with or on behalf of other advisors in the firm, he communicates daily with additional clients.
ThinkAdvisor interviewed Edelman, speaking by phone from his base in Fairfax, Virginia, on July 20. The New York Times bestselling author of 10 personal finance books, including “The Truth About Your Future” (2017), discussed a hot new development in exponential technology due to debut in about a decade.
Those comments came after pointing to client worries that the stock market may suddenly plunge disastrously.
Here are highlights of our conversation:
THINKADVISOR: Do you have a sense of investors’ emotional state when they call in to your radio show?
RIC EDELMAN: Over the past several weeks, we’ve noticed an increase in anxiety, and I think it’s going to get worse in August and September as we approach the reopening of schools and the restart of sports, and then as we get closer to the election.
How is client anxiety affecting advisor-client interaction?
My concern is that many very experienced and classically trained financial advisors are either ignoring or dismissing their clients’ emotional state. When they call and say, “Should we reduce my risk?”, out of a knee-jerk reaction, the advisors are saying, “No, don’t worry about it. In the long run, it will be fine.”
What’s wrong with saying that?
They could be setting up the clients for significant losses if they end up panicking and selling at the wrong time.
What’s a possible scenario?
At the moment, there’s significant optimism that a coronavirus vaccine will be developed by the end of the year. But if one of the trials fails, the stock market could react very negatively because no one is expecting news of a [significant] delay.
Also when there’s finally a safe, effective vaccine, a certain portion of people will refuse to get it, correct? That will certainly be a negative.
Right. In surveys, 30% to 50% of [respondents] say they’ll [refuse to] be vaccinated. So, then, what good is having a vaccine?
You’re saying, though, that investors need to protect their assets in case an event causes a market nosedive?
That’s exactly correct.
What are the main reasons for the client anxiety?
One is the question of whether students will return to the classroom this fall. If they do, even on a part-time basis, the medical community is widely anticipating that will dramatically increase the coronavirus infection rate, ultimately leading to hospitalizations and death. If parents don’t send their children to school and have to stay home to care for them, they can’t go to work. This will slow the economic recovery.
What other reasons?
The absence of professional sports is a huge economic loss; it’s a multibillion-dollar business. If we can’t have sports, there’s an enormous domino effect [extending to severely lower sales] of peanuts and beer.
And the third reason?
The election. At this point, Trump is projected to lose, and [many] investors are concerned about Joe Biden’s tax proposals. He’s talking about massive tax increases for people who have investments and who are in high-income tax [brackets]. Their concern is that his proposals could weaken the stock market.
What are callers to your show — who are affluent investors, typically age 45 and older and who have a financial plan — asking about most?
The fundamental theme is: Do I need to make changes? [Such as]: Should I refinance now that interest rates shave dropped? Should I continue contributing to my 401(k)? They’re scared about the market — that it’s too high and is going to fall. So they want to know, for example, if they should lower their equity exposure and move to bonds.
Do you have a general answer to these questions?