It’s often said that when you’re an advisor you have to hold clients’ hands during market tumult and times of volatility. But what if you admitted to the client that you, too, are concerned about the market?
At least one specialist investor behavior thinks that is exactly what you should do. Why? It builds trust.
Eben Burr is the president of Toews Asset Management, a financial services firm headquartered in New York City. Toews has created something called the Behavioral Investing Institute, where Burr serves as a lecturer and coach.
In an interview with Financial Advisor, Burr said that when advisors reveal their own concerns about markets they can help clients prepare for both good and bad times. And this technique can be used with other behavioral investing strategies to make clients more relaxed about market downturns and more willing to stick with their financial professionals during market turmoil.
And these days, there’s a lot of turmoil. Investors are currently facing interest rate hikes, the threat of recession, a potential banking crisis and other challenges. But Burr and Toews think all this instability gives financial advisors a chance to build trust with their clients and better construct portfolios for volatile markets. The firm believes behavioral investing strategies offer a way to manage clients’ emotions in high-stress market environments and prepare advisors to have more productive conversations about portfolio management.
Burr said such investing strategies balance “the economic needs of the client with their human side—and helps prevent clients from acting on instinct or emotion.”
“It is normal for clients to be afraid in a bear market,” he said, “but if you establish good communications with clients, you can get them to take advantage of a down market or at least mute the effects of volatility for them.”
Advisors need to acknowledge those market risks and tell the clients how it could affect them personally, he added. “Tell them what the risks are and how their portfolios are braced to handle those risks. No one likes negative financial surprises, so prepare them for the possibilities ahead of time.”
Advisors should also explain that the clients themselves have a certain amount of responsibility in troubling moments.
“Americans, as a general rule, want to take action, but the advisor needs to convince the client not to throw out his or her financial plan,” he said. “If you are always changing your plan, you don’t actually have a plan. For instance, we have known for a long time that interest rates would eventually go up, so any good financial plan should put a client in a position to accept that fact.”
That means advisors should also be ready to explain to clients what they can expect of a changing economy—for instance, that the era of cheap loans is probably over.
“An advisor needs to be able to explain in 30 seconds what they do and how they do it,” Burr said, “and they need to assure clients that these economic changes are normal. That builds client loyalty.”