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The reason equity market swings are an adviser’s opportunity

21 March 2018

Damian Ornani, chief executive officer of Fisher Investments, explains how advisers can use equity market swings as opportunities to improve their service.

By Damian Ornani,

Fisher Investments

In my previous column, I shared legendary American investor Benjamin Graham’s famous quote: “The investor’s chief problem – and even his worst enemy – is likely to be himself.” Back then I was referring to avoiding the bitcoin frenzy, an effort to tame greed-crazed clients. But mere days later this quote became relevant for another reason: Equity market volatility struck, stoking fear.

The FTSE 100’s 2.6 per cent dip on 6 February was its largest since the days after June 2016’s Brexit vote. In the 30 trading days between 24 January and 7 March, the index fell by 1 per cent or more seven times. There were only nine such drops in all of 2017.

The rekindled volatility raises the question: How did your clients do? I’m not talking about portfolio returns—how did they handle it? Were they shaken? Seeking action? Such responses are common, as markets’ swings frequently test investors’ resolve. But great advisers know this is when they add enormous value. With the right approach, it is possible to use turbulent times to strengthen relationships with clients and better prepare them for the next time volatility (inevitably) strikes. The strategy I like for this is the three ‘Es’: empathise, educate, then evaluate.

 

Empathise

Whilst advisers are often anesthetised to short-term volatility thanks to years of experience, many individual investors aren’t. This year’s downdraft may have been especially jarring because it broke a long calm stretch with a bang. And if it wasn’t enough to spark worry, headlines can do the rest.

The scary stories usually associated with market corrections are calculated to stir emotions and could lead to clients wanting to sell at the wrong time.

In these situations, make sure you listen and don’t dismiss concerns. Similarly, if you try to address clients’ fears with cold logic, you may end up talking past them. For your message to resonate, you must be on their side.


 

So if a client talks about wanting to sell equities during a correction, first take time to understand what worries them. Do they need the money soon? Or is it a general sleep-at-night thing?

As you explore, you may discover their goals or needs have changed to the extent that they might need a different asset allocation. But even if nothing has changed, the effort isn’t wasted. Understanding the root of their fear can help you discern the best way to approach it.

There are longer-term benefits, too. You may learn what sort of ongoing counselling they might need to be more comfortable in their present strategy. Perhaps some clients would appreciate more frequent contact or opportunities to learn about basic investment strategy. Whatever approach benefits them most, listening and asking questions can help you find it.

 

Educate

If all goes well, once your client sees you are interested in helping them, you will have an opportunity to factually discuss the best response. Don’t just give them the “what.” Explain why, in as much detail as is necessary. Talk them through the risks and tradeoffs of reacting to volatility: Since corrections come suddenly and reverse without warning, reacting at all often means reacting late – then getting whipsawed when markets rebound before you can reinvest. Not to mention transaction costs, tax implications and the other big decision – when to get back in. Remind them there is no “all clear” signal. By the time they are emotionally ready to reinvest, they may have missed a significant rally.

I also recommend reviewing why their portfolios are built as they are – a simple, effective way to encourage longer-term thinking. Providing materials that show short-term volatility is normal and doesn’t prevent disciplined investors from reaching their long-term goals can also give valuable perspective and incentivise staying disciplined. Help them see the risks associated with getting out could outweigh those of staying in.

Don’t stop there, though – check in again once the volatile period is past. This lets you reinforce lessons that might not have stuck at first when emotions were running high. Give the client a chance to compare how they feel now to how they felt before and discuss what they gleaned from the experience. The most memorable lessons are those people teach themselves. A big part of an adviser’s job is helping clients do just that.


 

Evaluate

Not every conversation will go swimmingly, and not every client will follow your advice. That is a sad truth but also an opportunity for you to learn and improve. Try to determine why: Was it something you said? How you said it? Something you failed to address? What could you have changed in your emotional or educational appeal to resonate with them more?

Assessing who reacted to volatility and how they did so can help you better tailor your service in the future. You can continue educating those needing it most over time when they are calm. Remember: Changing behaviour is hard. One discussion likely won’t do it.

Reflect on the conversations you think went well, too: Did the client take away what you think they needed, or not? A client who says they are fine with everything and rushes you off the telephone might have needs you didn’t uncover. Or you might not have been able to share valuable perspective that could help them later. Being able to open clients up and engage them is key to having a productive long-term relationship and meeting their needs.

In my view, a good adviser never stops learning from and about his or her clients – and volatile times are one of the best opportunities to do so. By striving to empathise with and educate your clients – and measuring your successes and failures along the way – you can improve your service and boost the odds your clients reach their goals.

Damian Ornani is chief executive officer of Fisher Investments. The views expressed above are his own and should not be taken as investment advice. 

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