Friday, Jun. 24, was a day that many of us had a rude awakening. The post-Brexit landscape seemed bleak, with worries of the sweeping implications for the future as this referendum played out. What followed next was the largest sell-off in 10 months for the S&P 500, with single-day volumes at the highest in nearly five years. When looking at sector performance, financials led the downside.

The purpose of this piece is not to pontificate on whether it was the right or wrong outcome, nor is it to predict what the future will look like for the UK and EU; and this piece will not forecast where global markets will trade as Brexit is digested.

Instead, the objective of this article is to discuss the personal financial concerns that struck me upon first hearing the news and ultimately, why this entire experience, and ones like it, irrefutably demonstrates the intrinsic value of sound financial planning advice.

My colleague, Alex Phillips, is considered financially savvy by most, having worked at the institutional trading desk of a large U.S. financial institution for almost a decade. Like most people his generation, he appreciates having the ability to control the majority of his finances. However, the part of his liquid assets that he would like a financial advisor to manage might be categorized as a “small account” and may not get the most of the advisor’s attention.

Nonetheless, with a certain amount of confidence in his financial health and diversity, Alex did not think much of the impending Brexit referendum in the hours and days leading up to it. However, once the news of Brexit exploded, he immediately began pouring over his financials to examine what was the impact and whether he could take action to mitigate losses.

“I am not suggesting I should have attempted to hedge out any UK and EU exposure in my investment or retirement accounts by playing around in currency markets,” Alex said. “Instead, this starkly exposed hidden correlations in my life and finances.”

Since Alex spent a portion of his career working in London, he has tax-incentivized, UK-based, GBP-denominated retirement accounts. The equity accrued from a career in finance causes excess exposure to this particular U.S. sector, and some of his U.S. retirement investments have EMEA exposure. Furthermore, his portfolio leverage is more aggressive because of his expected years until retirement. Overall, the combination of these factors hit hard.

“I was incredibly frustrated that I hadn’t realized how much exposure I would have to this impending event. Why hadn’t I prepared for the unexpected outcome by, at minimum, trimming positions or diversifying?” he said. “But it seems that I wasn’t alone when you consider what else happened that day.”

Website traffic at Vanguard and Scottrade among others was higher than normal, as was the actual phone call volume at places that handle retirement money, like Fidelity.
While I can’t speak to what advice was given by any of those financial advisors, let us consider the decision made by one fiduciary on behalf of their clients.

Interestingly, an article from the Wall Street Journal announced that Betterment pro-actively halted trading from 9:30 a.m. – noon EST on Jun. 24 to protect its clients from volatility, which it asserts would cause them to pay higher transaction fees. While halting trading may appear as a crude first step of risk management, as trade-halting in my home country China only added to investor fears, at least it worked in this case to prevent client panic-selling at the lowest point.

After all, robo-advisors are beginning to mature in turmoil markets. Likewise, let’s think back to another similar situation this year.

Recall the January sell-off that was caused by a number of factors, including China’s economic slowdown, the decline of a previously strong IPO pipeline, concerns about central bank money flows, and the continued pessimism on oil and commodities. Uncertainty about the high-yield market and energy company prices, dividends, the pace of global market recovery and the central banks’ abilities to adequately intervene to spur any real impact were influences as well.

This led to much higher than average call volumes at major retirement advice providers and caused a number of robo-advisors to issue whitepapers in an attempt to assuage their customers’ concerns about the market sell-off and resulting uncertainty. The gist of their message was that a punctuated market event is no reason to throw away the playbook and start improvising.  

A good financial advisor, armed with the appropriate technology tools, helps with all of these things. They can analyze your entire life and help you see hidden correlations and tail-risks that you might be blind to.

Today’s advancements in technology offer financial advisors with the tools to take a more holistic approach to managing wealth and investments for clients. Considering aspects beyond an individual’s age and income, including exposure from real estate, health, family responsibilities, career and even geography, enable advisors to construct a truly suitable investment portfolio, tailored to each individual’s distinct risks and financial situation. They can ensure that the client is appropriately invested to reach goals while minimizing risk, and provide sound and calming advice in stressful and unexpected sell-offs. Alex would have had some awareness about the hidden correlations amongst his holdings if a financial advisor has guided him with these tools.

With the help of a thoughtful and thorough financial advisor, be it human or robo, who can identify the hidden correlation in his assets and advice on his overall exposure accordingly, Alex may not have found himself in such a stressful situation in the first place. More importantly, with the assurance and handholding of a financial advisor, he would be prevented from making a momentary and panicked decision to abandon the financial plan. 

Since Jun. 24, most U.S. markets have recouped their losses or at least bounced off their Friday and Monday lows. Again, the assertion here is not that global markets are never going down again; rather, sound financial planning with a trusted advisor will help investors avoid impulsive decisions that could be detrimental to the financial goals which they have worked so hard to achieve.

Halting trading may have prevented client losses but it feels more like my home country, China, where markets are intervened. If clients had worked with a human advisor who communicated a clear playbook beforehand, perhaps a circuit break would not have been necessary. Regardless, it’s beneficial that robo-advisors are experiencing market turmoil as they mature.  

Min Zhang is CEO and co-founder of Totum Wealth.