Not nearly enough financial advisors are talking with their clients about the market risks they face, says FinMason, a Boston-based financial technology and investment analytics firm.
Only one in four investors working with an advisor has talked with the advisor about the risks. And even if they have, 62 percent have not understood what he or she is saying and underestimate how much they could lose, FinMason says in a survey of 492 investors with advisors.
This lack of knowledge or understanding about risk could cause investors to panic in a market downturn, says Kendrick Wakeman, CEO and founder of FinMason.
“At some point there will be another crash,” says Wakeman, “and if investors do not know their risk of loss they will have an emotional response. They will feel upset, betrayed and litigious and many will sell when they panic.”
FinMason urged advisors to talk with their clients and tell them how much they could lose if there is another recession like 2008. This way they know what to expect and can make changes to their portfolios if they want.
“I understand that many advisors don’t want to potentially scare their clients with talk about possible volatility in the market. But, if an advisor has a conversation about a crash now, in the light of calm markets, they can have a very rational discussion of why it is important to take that risk. The advisor can form a clear mental link between that risk and the potential rewards, like having a higher income in retirement,” says Wakeman.
“That turns a potentially scary conversation into a healthy and productive one. The investor now knows how much they could lose and agrees that it is important to take that risk to achieve their ultimate rewards,” he says.