• John Smith
• 31 Mar 2023

How to Thrive in Times of Market Volatility with more Client Engagement

By:      Seth Friedman Managing Editor & Frank Maselli Contributing Editor

For many experienced advisors who have lived through a variety of investment cycles over their years in the business, our current time’s present both a risk and an opportunity.  Today’s market volatility represents a unique opportunity to engage clients and reposition investable assets.  Over the long-term, smart advisors who utilize volatile markets as an opportunity to meet directly with their client-base, and to review portfolio holdings will benefit from increased loyalty while building significant trust with their clients.  Further, these efforts will likely uncover additional assets, such as 401K rollovers and other pockets of money that can be used to consolidate client holdings from other sources.

The downside for many advisors is the conundrum of what market volatility represents for you and your practice.  For a percentage of your book, some of your previous recommendations might not look so prescient at this point in the market cycle.  This can become a paralyzing exercise for advisors who are confronted with a quandary of this sort.

Given this reality, it is easy to understand why some advisors might be hesitant to reach out to clients who may have suffered serious market losses from the highs of early 2022.  Without a doubt, doing nothing is the absolute wrong move in this market.  Not only will other advisors feast on your client base like a pack of hyenas, but for many experienced advisors who have lived through a variety of investment cycles over their years in the business, our current time’s present both a risk and an opportunity.  Today’s market volatility represent a unique opportunity to engage clients and reposition investable assets.  Over the long-term, smart advisors who utilize volatile markets as an opportunity to meet directly with their client-base, and to review portfolio holdings will benefit from increased loyalty while building significant trust with their clients.  Further, these efforts will likely uncover additional assets, such as 401K rollovers and other pockets of money that can be used to consolidate client holdings from other sources.

Given this you will be forced to prospect in an awful market for new clients to replace the percentage of your AUM that’s certain to be lost to your competition.  This is the reality of sitting on your hands while your doubts of engaging clients, whose investments have suffered in a challenging market is staring you in the face.

So, what is an advisor to do in this market?  What follows in this article is a 7-step plan to address these recurring issues in a way that you can help you retain client assets and grow your practice.  Further, lets consider the idea of how you can bullet-proof your practice from further erosion when market cycles challenge your client base.

Generally speaking, advisors either excel at generating new business or investing client assets.  In my experience, it is truly rare to encounter an advisor who excels on both ends of this spectrum.  One of the benefits of working within a team is that each participant brings their own unique set of skills to the table.  The ability to discuss challenging times amongst team members usually leads to greater outcomes for all parties.  But there are many advisors who run a solo business model, that often exposes the weakness of their individual skill-set.

Here are some practical ideas to consider when facing unusual market volatility:

1. As an advisor, you should understand the exact nature of each client’s portfolio down to the investment level. Before reaching out to the client to allay their concerns, here are a few points worth considering: What was the client’s original risk tolerance at the time they became a part of your practice?  How has the original portfolio you constructed with the client performed annually and over the life of the investment?  When was the last time you updated each client’s investment profile?  How often have you reached out to the client to review their individual holdings? How fluent are you with each asset manager you are using to run client money? How are you accessing this data? As we all know, bull markets tend to obscure potential weaknesses in a client’s portfolio.  Back in 1993, Warren Buffet told his investors, “You only find out who is swimming naked when the tide goes out.”
2. Investment wholesalers representing asset managers are not your friend in these moments. Consider that more than a few wholesalers go dark when the products they represent fail to perform, many cannot be counted on to provide unabashed candor to advisors.  First, these remarks are often scripted by the marketing department of a given asset manager.  Second, your business and each wholesaler’s approach might be in conflict.  Why is this so?  The goal of any asset manager and their representatives is to retain client assets.  That is most certainly your goal as an advisor, but with a different twist.  Great advisors know when to reposition assets, while most wholesalers are focused solely on asset retention for their firm.  Make no mistake, wholesaler compensation plans are uniquely designed to incentivize accrued AUM to stay on the books.  Further, it is rare in the business for any asset manager to fully explain why a given investment is under-performing against its tracking index.  The best approach for an advisor is to engage portfolio managers directly or to have their assigned wholesaler provide the resources to address your specific questions.  Finally, the internal compliance regulations of any given asset manager will likely prevent wholesalers from deviating or offering the additional detail that you and your clients require to assess an investment holding.
3. The investment profile of a given client’s financial needs and holdings should be a living document rather than representing a snapshot in time. It is a given that the investment goals of any client might change over time.  This is especially so for families with children who are still in school and those folks who are transitioning toward retirement.  Ignoring these life events puts you and your practice in jeopardy.  It is no secret that client complaints increase geometrically in bear markets.  The first document your compliance department will request when investigating a customer complaint is the financial profile.  If this document isn’t in order, you have placed yourself and your career in personal jeopardy.
4. The best financial advisors I know use each client profile as a document that binds not only the advisor to the plan, but the customer as well. There is nothing wrong with having a client (and their spouse) initial each individual aspect of a given plan.  In fact, this is especially so when it comes to recommendations you have offered, where the client is not in agreement.  For instance, if you have recommended to a client they purchase or increase their current life insurance, and the client doesn’t agree, this should be noted in the plan.  Further, you should take the additional step to have the client(s) initial this notation.  While this step sounds elementary to doing business, I can assure you it is a weak point for many advisors in the industry.  Finally, by updating the profile annually you will likely uncover new financial needs and investable assets.  But this can’t really be accomplished effectively over a series of Zoom meetings or client calls.
5. When investment outcomes fail to meet both your own and your client’s expectations, it’s appropriate to consider what went wrong. Back in 2001, a significant portion of the Putnam family of growth mutual funds significantly underperformed their tracking index and their peer group, which led to some very serious client losses.  If you are a younger advisor, some of your more experienced colleagues may recall this era.  The post melt-down autopsy determined there were a variety of factors that led to this event, but one of the most compelling reasons related to many differing Putnam growth funds owning many of the same securities with similar portfolio holding ratios.  When these moments occur, and I am not trying to disparage Putnam which is a great company, its time to seriously evaluate your partners.  As a fiduciary, this is your responsibility.  For advisor’s, this is required if you want to remain viable in the business. (https://money.cnn.com/2003/11/21/funds/fundsfire_investing_putnam_0310/index.htm.)
6. If you haven’t picked up on my messaging, there is an over-arching theme to this piece. Your clients don’t make financial or investment decisions by some form of divine intervention. OK, maybe some of them do.  But if you’re running your practice responsibly, than any investment decision reached between you and your client(s) is a collective choice.  As such, both you and your client own the responsibility for a given strategy.  Behavioral psychology posits that the advisor is going to own more than there fair share of blame for poor investments outcomes.  Further, very few clients possess the self-awareness to accept shared responsibility.  Rather, they prefer to have someone else to blame when things go awry.  Referring back to your client’s investment profile and their sign-off is a great way to mitigate this conflict that could cost you a client.
7. My final point, even the best advisor’s lose clients. This is and will be the reality of the investment advice industry today and a 100 years from now.  Your efforts to stem the tide of client attrition through proper practice management may not add a single identifiable $1 of revenue to your practice.  But proper strategic planning will help you keep the clients you are serving well and position you to ask for introductions to potentially new clients for your book of business.  This is not nothing. Rather, it is an opportunity for you to benefit from the mistakes of your competitors. And that is something you can’t put a price on.

On any normal day our profession is part numbers and part psychology.  But in times like these psychology and emotion take over almost completely.

Holding hands is a very personal act of caring and reassurance.  It’s one thing a computer could never do, and it might be the most important service you provide.  Your greatest value comes from mitigating the impact of emotions on money.  That includes tamping down a client’s irrational exuberance in good times and calming their fears and preventing them from making poor decisions under duress.  Imparting this peace-of-mind is why we are here and it’s the biggest part of something called ‘advisor alpha’ which far exceeds any fees for what you charge for your service.  Think about it: One bad emotional decision can set a client back years on their financial journey.  Preventing poor choices is a cornerstone of our job.

But for you to be able to hold hands with your client’s you need a free hand to hold.  If your hands are covering your own eyes in uncertainty or terror, you’re screwed and you surely won’t be able to comfort anyone else.  Plus, your clients will read that fear or hesitation in your voice and be unmoved by any forthcoming advice.

So, whatever you intend to do with your clients right now, do it with calm, control and conviction.  You can’t sound scared, confused, uncertain, hesitant or wishy-washy.  Whether or not you want to act depends on your professional judgment … but make a damn decision and portray it with professional confidence.  Clients will be inspired by your leadership and clarity of thought.  Further, they will appreciate these qualities tremendously.

© Advisor Squawk 2023

Seth Friedman

Seth Friedman is a 35-year veteran of the financial services industry and the owner of Advisor Squawk. He has extensive experience in wholesaling, product distribution, and sales management, having worked with notable brands such as Jackson National, Nationwide Financial, and Mutual of Omaha. Throughout his career, Seth has been a top performer, helping financial advisors drive long-term revenue through their practices. With Advisor Squawk, Seth aims to create a forum to help advisors and wholesalers grow their sales and profitability. Contact Seth at sfriedman@advisorsquawk.com.