Clients need to understand the pain that a bad financial market can inflict, just as they want to embrace the pleasure that market gains can provide, according to Phillip Toews, founder of the Toews Corp., an asset management and advisor coaching firm.
If investors do not understand the history of the markets—including the potential for massive downturns—they may act irrationally when the market takes a nose dive like it did last March, said Toews, who is a behavioral coach to advisors and an asset manager.
“Investors lack a historical understanding of how badly markets can perform, especially since 2010,” said Toews (pronounced Taves). “This means investors are likely to abandon plans and act erratically during harsh downturns.”
The investment arm of Toews Corp., based in Northfield, N.J., has $2 billion in assets under management. It is affiliated with the Behavioral Investing Institute (BIICoaching.com) in New York City, which was created to help advisors change the conversations they have with clients and prospects so investors can weather downturns. Helping clients realize how a market can behave “represents an opportunity to add a significant value to clients at a time when many roles that advisors serve can easily be automated,” said Toews, who is CEO of the Behavioral Investing Institute.
Toews started coaching advisors in 2017, and the Behavioral Investing Institute conducts training sessions for advisors that look at their current practices and communications processes.
For example, Toews offered, many advisors want to shy away from how bad markets can get when they talk to clients and prospects. "We recommend the opposite," he said. "Advisors should educate clients about market history [and] then address what the advisor is doing to address those possibilities.
“Show them how their portfolios can handle downturns and that there is a plan in place," he added. "Once you have introduced that construct, the investor is right there with you. If March 2020 happens, they can see the risk management the advisor is adding to their services.”
And instead of talking about what a great portfolio an advisor has created, advisors should find out what a client wants to accomplish, and then explain how the portfolio accomplishes the client’s goals.
Advisors can add hedges to a portfolio to cut the losses and still capture the gains of an up market. “With reasonable expectations, clients can approach investing with greater peace of mind,” Toews noted.
According to Toews Corp. research that included 751 investors who use a financial advisor, 88% said they felt greater peace of mind during the market turmoil last March because they had a specific plan in place to deal with the volatility.
Advisors need to recognize that it is not enough for an advisor to provide the right asset management strategy, Toews said, adding they also need to build a process around the asset management to tackle the behavioral aspect of investing and address the psychological realities of investing.
“We help advisors evolve their communications to keep their clients in their portfolios,” he said.