Advisors Earn their Stripes in Down Markets

It’s too early to call this market selloff a down market. Stocks are only 5-6% below all-time highs. But a two-day decline of 5% is jarring, even to the most hardened investors. We know that investment losses hurt two times more than gains feel good. Even though portfolio values are higher than they were a year ago, and considerably higher than 5 or 10 years ago, this quick decline is like a knife in the gut.

The decline feels worse for investors with concentrated holdings in some of the market’s recent darlings. Here are the price declines from highs for the top ten largest companies in the S&P 500 Index. The one-year total return is included for context.

Investing is hard, and it never gets any easier. As many times as we’ve seen it before, each market decline jumpstarts fear inducing hormones, the chemicals inside our brain that cause emotions. When our retirement savings is on the line, our lives depend on market returns, or at least our ability to fund our lifestyle. This stuff matters, deeply, to our clients.

There’s been lot writing about advisory fees in the media. Many expect advisor fees to decline as fees for mutual funds have in recent years. But unlike the exponential productivity gains from technology in asset management, the hours of an advisor cannot be so easily replaced.

Sure, advisory firms are leaner and nimbler than ever before with advances in software. We can rebalance accounts with a few clicks and provide daily performance reporting through online portals. We no longer need to meet face to face for every meeting and can conduct plan reviews via screen share calls. But nothing can replace the conversations we must have with clients on a regular basis.

When markets are humming along with no volatility in sight, an advisors’ job appears easy. Investment performance becomes a blip in quarterly reviews and clients are happy to discuss lighter topics such as family or travel. Bear markets are different. Clients need more than small talk, they need unwavering advice, confidence, and hand holding.

Try explaining to a client that a $500,0000, $1,000,000, or $3,000,000 decline in the value of their investments won’t affect their retirement plan. Now try telling that to a client who plans to retire next year or one who retired six months ago. We have the tools to show them, but convincing clients that they are going to be ok is a different skill.

To instill confidence, the advisor has to believe it. Otherwise, the client will hear doubt, apprehension, or uncertainty in his voice.  How can he (she!) believe it without a comprehensive financial plan in place for the client, one that includes every detail of the client’s financial life; income, expenses, assets, and liabilities? How can the advisor believe it without an evidence-based investment strategy, one that has considered expected returns and volatility in a variety of market environments? How can he believe it if he’s not invested in the same investment strategy with his own money?

The past two days pale in comparison to the pain a bear market brings. Make no mistake, advisors earn their stripes in down markets. Advisors who don’t do comprehensive planning will lose clients, as will the many who slap together a hodgepodge of financial products with no cohesive investment strategy.

I’ve often compared the stock market to a roller coaster. While it’s slowing climbing that first hill, we easily get bored waiting for the excitement to begin. Once the coaster makes its first decent, we feel our stomachs in our throat and may even belt out a few expletives. What follows is a sequence of flips, drops, and hairpin turns, all whipping us into submission. As the train makes its way safely to the station, we’ve convinced ourselves we could do it again. Maybe next time we won’t scream as much.

Whether it’s starting today or in five years, I’ll be in the trenches with clients during the next downturn. I’ve prepared them for that day with constant reminders that it will come, even though I don’t know when. Still, it won’t be easy, it never is.

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