CPD: Scaling the wall of worry – a 10-point checklist for communicating volatility

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Communicating with clients during market volatility is a foundational responsibility for advisers.

The old rules no longer apply

For more than a decade, the Australian economy has, like most others around the world, operated within a low inflation, low interest rate environment. It’s an environment which has seen unparalleled growth in asset values, powering an extended bull market and driving real estate prices to stratospheric levels.

But recently, of course, that’s all changed. For the first time in many years, interest rates are on the way up, as central banks try desperately to rein in inflation. Throw in a war in Ukraine, and the many stings in the extended tail of the pandemic, and there is little wonder why markets are well and truly in a volatile mood.

For financial advisers, elevated market volatility can be extremely challenging, creating a nervousness amongst clients that can sometimes be hard to assuage.

Amplifying that challenge is the fact that many clients, and indeed the vast majority of advisers, are experiencing a high inflation, high interest rate environment for the very first time.

According to figures from Rainmaker[1], of Australia’s 17,000 advisers, only around 1300 have 15 or more years’ experience. That means nearly 90% of advisers have never experienced times like these.

Communicating with clients during market volatility is a foundational responsibility for advisers. It’s where they really start to earn their money. With that in mind, this article will suggest a framework for advisers to use when communicating with clients throughout the rollercoaster ride of volatile markets. Applying this framework will put advisers in a much stronger position to find a silver lining amongst the gathering clouds and emerge from these times with an enhanced reputation and much deeper client relationships.

1. Understand your client’s state of mind

The first step in building your approach to communicating volatility is to put yourself in your client’s shoes. You understand that markets move up and down, and theoretically your clients do too, but that all goes out the window at the first sign of trouble. Empathy is critical.

Here’s what you need to understand about your client right now:

  • their awareness of market volatility has come from the news media talking about movements in the All Ordinaries and Dow Jones indices (which may bear no relation to their own portfolios)
  • if they are like most people, they are inclined to ‘loss aversion’, a behavioural bias which means we feel losses more acutely than we enjoy wins
  • they are probably worried about the impact on the long-term financial goals underpinning your advice
  • their natural response to falling markets is probably to sell.

2. Be proactive in your communication

The most important principle to remember about managing your clients through volatile times is that too much communication is never enough.

Vacuums get filled with rubbish, and the longer you delay communicating with your clients, the more likely they are to create their own narrative about what is happening, its implications, and the necessary course of action.

There are three key reasons to be extremely proactive in your communication:

  1. Proactive communication is good client service. One of your responsibilities is to educate and inform your clients, in good times and bad. They don’t have your level of understanding about what is happening, and they are undoubtedly waiting to hear from you, hoping you can soothe their nervousness.
  2. You need to stop them from selling.
  3. Getting on the front foot will actually save you more work in the back-end. By building trust early, and making it clear you have things under control, you are likely to reduce the number of panicked calls you receive at each twist and turn of the market.

It may be worthwhile prioritising your clients for contact based on your knowledge of their specific circumstances, for example, their lifestage:

3. Have a practice level ‘core’ message

Have a core message at a practice level (a ‘house view’) that your whole team can articulate to clients in a consistent way. It could be that you are monitoring markets closely and believe that now might actually be a good time to invest. Or it could be that you recognise how unnerving market volatility can be, so you are available for phone calls if clients have questions. Whatever it is, remember, consistency is the key to instilling confidence in your clients and staff.

4. Educate your clients by reinforcing general market level investment principles

Your messaging in these times will fall into two categories: the reinforcement of general investment principles and the communication tailored to the specific circumstances of the client in terms of their risk profile, asset allocation, and the managers used.

Volatility is expected and investments are for the longer term

Remind your client that volatility is normal, and that different asset classes move in different cycles. It’s why you have constructed a diverse portfolio for them. Also, remind them that investment is a long-term proposition.

Draw on the many resources available that show market movements over time. The ASX, for example, published charts at the start of COVID to help investors cope with their fears.

Similarly, there is no shortage of resources relating to global indices.

(These resources are typically produced every time there is a major market move, so check with individual managers for the latest versions.)

A falling market is not the time to sell

Explain that no one can consistently predict the right time to get in or out of the market (the ASX has plenty of charts on market timing too). It’s human nature to lose patience and sell at or near the bottom of a downturn. But even clients able to get out early in a decline would still have to guess when to get back into the market, and they’d more than likely guess wrong. You need to coach them through this!

They haven’t realised any losses until they actually sell

Watching portfolio values rise and fall can be quite artificial. Remind them that one of the easiest ways to avoid losses is not to sell, and that markets will bounce back. Time can repair most ‘damage’ to a portfolio. (For example, 70 years’ worth of US data suggests the average downturn of 10% returns to normal within about 110 days, and the average 20% downturn takes about a year to return to its starting point. Within the context of a plan with time horizon of 20 years or more, even a year is a blip on the radar).

5. Client specific communication

In addition to the general principles outlined above, you will also need to tailor your communication to the client in front of you, in terms of their objectives, risk profile, time horizon, and the managers and assets making up their portfolio.

Understanding the underlying philosophies of fund managers and the investment approach of individual funds is critical here. Are they likely to hold or retreat to cash? Are they hungry for value or seeking growth?

Make it clear you have constructed their portfolio in a very specific way, based on their personal circumstances.

If you can reinforce the difference between their portfolio and the well-known indices – like the All Ords – then do so; this can help stem the tide of panicked calls down the track.

Make sure you thoroughly prepare before communicating with specific clients, familiarising yourself with the specifics of their plan and portfolio, and with the latest performance data for their specific funds.

6. Use fund manager insights

Most fund managers publish regular insights on market conditions and the details of how they are managing individual funds in response to these conditions. Familiarise yourself with these insights and factor them into your client communication.

Bennelong Funds Management[4], for example, publishes monthly performance reports for its boutiques’ funds. These reports can include detailed commentary on the factors driving fund performance, fund outlook, and any significant transactions undertaken by the relevant fund during that period.

Insights on emerging trends and investment themes can also be useful for some of your high-level educational communication (e.g., newsletters and blogs).

7. Brush up your skills in communicating complex facts and data

It goes without saying that your clients are unlikely to have your level of familiarity with investment jargon and commonly used data and charts. As much as possible, make your communication a jargon-free zone to help break down the barriers between yourself and your client.

Pay specific attention if you are using charts and graphs. Whilst the ability to generate and interpret graph data is a core skill for those with science, technology, engineering or mathematics backgrounds, the majority of clients may be unfamiliar with these disciplines and struggle to derive meaning from even basic graphs.

Research[5] shows that those with experience engaging with graphical representations of data focus on contextual features of graphs (such as the key, title, and data source) which helps them make sense of the data, whereas those with less experience make more sporadic eye movements across the graph and focus more on information related to the task at hand.

Expert tips for communicating graphs and data include:

  • consider reframing percentages and probabilities, as some people struggle with this. For example, instead of a ‘30% chance’ consider rewording to a ‘3 in 10’ chance
  • combine different mediums to strengthen the message. For example, use a mixture of numbers showing core data, graphs to illustrate relationships, and words to provide context
  • clarify ambiguous words
  • consider how statements of risk are framed – for example an event with a 40% chance of occurring has a 60% chance of not occurring
  • add clear title, labels, keys and supporting captions
  • consider how colour is used and interpreted. Too many colours, especially similar ones, can make it hard to follow data. Also be mindful that some people are colour blind
  • keep charts simple, avoid fancy 3D charts which can distort perception of values and proportions (and be mindful that pie charts can be very hard to read if there are too many ‘slices’)
  • avoid adding illustrations and images to graphs as they can distract attention and distort conclusions.

8. Avoid getting emotional and defensive when communicating

Advisers can be just as emotional as clients, but when managing clients through downturns in their portfolio, its vital to be direct and remain neutral/fact based. It’s also vital to be authentic. Clients will quickly detect if you believe what you say. Remember, this is business as usual, not a reason for you to get defensive.

9. Pick the right channels

Communicating effectively – and efficiently – during times of volatility requires a broad communications mix.

For one-to-one engagement with priory clients (see above), your starting point should be a phone call. This will allow you to gauge their initial thoughts and concerns and put their minds at ease that you are ‘on the case’ and there to help. That initial call should allow you to gauge whether a more comprehensive discussion is necessary (either via video or face to face) or whether they are happy to just be kept updated through your other communication.

One-to-many communications also takes on extra importance for all clients at a time like this. The open rates and readership of your SMS, emails, newsletters, blogs, social posts, and videos are likely to go through the roof.

Depending on just how hairy things are getting, you may want to reconsider the frequency of your communication. A quarterly newsletter may need to become monthly during market turbulence. And perhaps that needs to be augmented by a weekly email or blog post (on your website and your socials) summarising the week’s developments.

Remember that some clients won’t be panicking at all and may not want to receive these regular communications – make sure you make it easy for them to opt out.

As mentioned above, there is no shortage of resources you can draw on to craft these messages. As above though, just remember to ‘dejargonise’ the content as required.

10. Listen, and adjust plans as necessary

Real life market volatility is a more accurate tool for gauging a client’s risk profile than any questionnaire. Listen to your clients and be empathetic to what they’re saying, thinking, and feeling.

Notwithstanding the importance of staying the course, the reality is that there will be some clients – because of their circumstances or their state of mind – for whom some sort of plan adjustments will be prudent.

Understanding when to stress the importance of sticking to the plan versus when to demonstrate you are acting on their concerns is the most difficult balance to get right, but it is what will set you apart as a trusted adviser.

Summary

Market volatility can be hard for clients to deal with, especially if they haven’t experienced it before. For advisers, volatility can represent an exciting to opportunity to demonstrate their value and set themselves apart. By being empathetic and available, advisers can demonstrate their care for the client. By communicating proactively, they can help educate clients, preventing them from falling victim to emotionally driven behaviours. Ultimately, this can result in deeper relationships with a more engaged, more informed client base.

 

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References:
[1] https://www.financialstandard.com.au/news/rate-rise-exposes-adviser-knowledge-gap-179795240
[2] https://www2.asx.com.au/blog/5-charts-to-help-you-through-covid-19-investment-fear-
[3] https://twitter.com/KennethLFisher/status/864987557943050240/photo/1
[4] https://www.bennelongfunds.com/performance?tab=performance
[5] https://www.professionaladviser.com/opinion/4049915/louis-williams-communicating-uncertainty-clients

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