Client conversations – talking about bear markets

What are the strategies to employ when having challenging conversations with your clients about market volatility?

When navigating uncertain environments, many clients simply want to have human, calming, effective conversations with their financial adviser. This article, proudly sponsored by Russell Investments, provides advisers with strategies to have those conversations with clients.

Early 2022 there were warning signs of the rocky road ahead. Yes there had been some market volatility during the Covid-19 pandemic, but the availability of vaccinations seemed to inoculate markets against excessive volatility.

Over the course of 2022, what had been referred in 2021 and early 2022 to as ‘transitory inflation’ had become well and truly entrenched and sparked a series of monetary tightening around the globe, with rates moving from historical lows to what is now, in Australia, a 10-year high.

With this backdrop, financial market volatility has increased across all asset classes. Analysts suggest that the first six months of 2023 will be the toughest and there are decidedly mixed opinions on the outlook for financial markets for the second half of 2023.

During the Global Financial Crisis, fixed income held up and protected diversified portfolios. However, with rates (and therefore yields) increasing, both bonds and equities are failing to deliver for investors and the premise of the ‘balanced’ portfolio seems to be unravelling. Some of your clients will be anxious and uncertain at this time; it’s imperative that you have conversations with those clients to ensure they don’t do anything drastic that might crystallise any investment losses they’re currently sitting on.

Who should I talk to?

When markets are volatile, all of your clients will be worried to some degree – but some more than others. Talking to them all may seem a daunting task, but it’s important. To make it more manageable, you can break your clients into different groups and then prioritise those groups. The following is one way you could categorise and prioritise those client conversations.

Now: Clients in retirement and the most anxious clients

Retired clients are typically the most affected financially by market volatility and may require an immediate review of their financial plan and, potentially, some changes. It is important to reassure them that you have reviewed their plan and explain any changes you recommend. Retirees are the group most likely to experience ‘loss aversion’, a behavioural bias that can see them looking for capital protection at the expense of future growth.

Worried clients must also be fast tracked; similarly, their anxiety can lead to poor decision making that negatively impacts them over the longer term.

Next: Clients nearing retirement

Clients approaching retirement are vulnerable to sequencing risk, the risk that the timing of negative and quantum of negative returns will adversely impact their retirement savings. Review whether these clients are still on track and make adjustments where necessary. Let these clients know whether any immediate modifications are needed, and that you’ll schedule a more in-depth conversation soon. Importantly, explain sequencing risk and any actions you can take to mitigate it. You can discuss other strategies with them – maybe they can postpone retirement for a year or two or plan additional contributions to their super or other savings.

Third: Clients planning for retirement/accumulation

This client group has more time to recoup losses and are best placed to take advantage of market downturns. Contact these clients via phone or email, share regular market updates and encourage them to focus on their long-term outcomes. Let the clients know that you will be setting up meetings with them in the near future.

The client conversation

When experiencing volatile investment environments, many of your clients will simply want to have a calming and effective conversation with their financial adviser. They want reassurance that you understand their priorities and fears, and that you empathise.

Things you should do as part of your conversation include the following:

1. Listen to your clients – they want to know you understand and empathise with their feelings. Getting the emotional and human side of the conversation is probably the hardest but the most important in terms of calming their fears and anxieties. Market volatility is only part of what is causing client concerns. Health concerns, family responsibilities and the rising cost of living may also be on the forefront of many clients’ minds. Don’t feel the need to solve their challenges immediately. Instead: ask, listen and empathise.
2. Focus on your clients’ priorities – ask open-ended questions to understand their top priorities and immediate needs.
3. Over-communicate that you and your team are available for your clients – while you may have worked to prepare your clients for inevitable market volatility, emotions can be overwhelming and unpredictable. All team members should be prepared to support clients during this time of uncertainty. Responsiveness, empathy and authenticity can go a long way in putting clients at ease. When fear is at its highest, a consistent, personalised message can in-still reassurance and confidence.
4. Remind them of your value proposition – one of the primary obstacles to investor success is not investment performance, but investment behaviour. Your ability to manage clients’ emotions and expectations during this time will be what sets you apart and is likely to set them up for long-term investment success.
5. Words matter – when addressing clients’ market-related questions, don’t use jargon and resist being too technical. Have a thoughtful and consistent core message for clients to help them focus on what matters most. After all, most clients will simply want to know: How is the market environment likely to impact my life. Am I, my family and my future going to be ok?
6. Offer to talk to their concerned friends and relatives – knowing you care about their loved ones will offer reassurance to your clients and offer you a potentially valuable entry into their inner circle.
7. Protect the plan – ensure that clients’ portfolios are still in line with their long-term plans. Portfolio allocations have likely shifted in the recent market volatility. Evaluate if any changes are needed. If all is in order, protect the plan you’ve created with the client. Making irrational decisions today can have long-lasting negative consequences on the health of a client’s wealth. By learning more about client biases and where they are on the roller coaster of emotions, you can help the client stay focused on how and why investment decisions were made in the first place.

Emotion and investment is not a good pairing

Market volatility and the general uncertainty of current times are likely to make for some challenging client discussions. Sometimes these conversations can be uncomfortable, particularly if clients question decisions that you’ve made. However, if you authentically ask, listen, and empathise, a difficult conversation can be the one that cements your relationship.

There have been a number of pictorial representations of investors’ emotions over the years – and for good reasons. Investors do get emotional, and emotions can lead to poor decision making. This, in turn, may lead to financial loss. No matter how much you prepare clients for market volatility, it often comes as a surprise and sparks a roller coaster of emotions.

The cycle of investor emotions illustrated in figure one is a good way to open a conversation with a client. You can talk your client through the emotions, ascertain where on the ‘roller coaster’ they find themselves and discuss previous market cycles where investors experienced similar feelings. Being able to normalise your clients’ emotions and demonstrate the market recovery that followed each cycle will better position your client now and in the future. And one thing we know about market cycles is that they repeat.

Start with the positive emotions. Remind your client how it felt when markets were reaching new highs and investment portfolios were generating positive returns. It’s important to reinforce that this is a time of maximum risk – investing at the top of the market or chasing past performance is not a good investment strategy. Talk your client through each and relive the emotions.

Optimism

Investors typically start with optimism, which sits at the inflection point on the emotional upswing. It’s the human condition to commonly expect things to go our way, or to receive a return for the risk of investing. We go into the markets because we believe we will be able to grow our wealth through our investment choices.

Thrill

When markets move in the direction investors hope to see, it’s easy to get excited about the possibility of even greater gains and, when the momentum continues, the experience is thrilling enough to begin to anticipate even higher returns.

Euphoria

As markets reach the top of the cycle, investors may experience euphoria. It’s not uncommon for investors to think they made a smart move to invest when they did and believe that the good times will continue unchecked. Some investors may convince themselves they can tolerate higher levels of risk and may begin to trade themselves or instruct you to change their portfolio to invest in riskier asset classes.

The second phase starts with the market peaking and starting to turn. In the same way that it’s hard to pick the bottom of a market, it’s also hard to pick the top…except with the benefit of hindsight.

Complacency

The second phase of the cycle occurs when the market starts to turn. At first, investors believe the downturn is just a blip, a momentary issue that will pass like so many have before.

Denial

Investors may believe that things will improve shortly. Some investors want to jump into the markets at this point, while others sit and watch, confident that things will soon right themselves.

Hope

Investors grasp at straws, hoping that the market will shake off the factors causing it to fall. Surely it has to bounce back soon?

In the third phase of the cycle, the realities of a bear market come to the fore and investors may become depressed and desperate. As the markets continue to fall, investment values decline.

Fear

When market losses accelerate, real fear kicks in. Some investors may then turn defensive and want to switch out of riskier equities to more defensive asset classes such as bonds.

Panic

Many investors missed the chance to take profits, and may try to get portfolios back into the black by either selling their worst- performing investments or moving into securities that don’t fit their risk profile. When that doesn’t work, panic sets in. This is when advisers – and these challenging conversations – are most important.

Capitulation

At this point, investors often feel at the mercy of the market, and some pull out altogether and abandon their investment strategy at precisely the wrong time.

In the fourth phase of the cycle, investors second guess their actions. Should they have invested the way they did? Should they have remained invested? Will they achieve their investment objectives? In fact, successful investors understand this is the time to invest, the point of maximum financial opportunity.

Despondency

Those who remain invested may become despondent and wonder whether they should ever have invested their hard-earned money in the markets.

Indifference

Some investors try not to follow the market, not to look at their superannuation balance or other investments.

Scepticism

Investors may experience some scepticism when markets start to rise and will often be cynical about signs of recovery, wondering if market growth will last.

Caution

Though investors are hopeful about signs of recovery, they may be reluctant to invest money, even at a point when prices are relatively low and investment opportunities are attractive.

Worry

Investors come to realise the market is recovering, however they continue to worry about investing until it reaches a point at which they are comfortable with its direction and momentum.

For those investors who let their emotions rule their investment decisions, the market cycle can begin all over again. Because emotions can be such a threat to an investor’s financial health, it is important to ensure your clients know how to keep their head above water in the cycle of investor emotions and understand how it can drive poor investment decision making.

Market volatility isn’t new and won’t ever go away permanently. Look at these occasions, and the conversations you have, as opportunities to really demonstrate your value to your clients. Without your guidance, it would be too easy to fall prey to irrational emotions and make bad decisions. With your expert guidance, investors will be better prepared to navigate the tough times to be best positioned to meet their financial objectives.