“Making money is easy.” When everyone is enjoying a bull market in stocks, it can be easy for clients and prospects to express that sentiment. Sometimes it is followed by “what do I need you for?” Investors sometimes think they have a natural skill for making money. You’ve heard the expression, “Everyone is a genius in a bull market.” You can even buy the T-shirt! What should an advisor do?
1. Keep in touch. Few clients realize a good advisor puts as much attention into monitoring a client’s performance during a bull market as in a bear market or other volatile periods. In the old days, advisors were paid by the transaction. Today, with asset-based pricing, it is easy to make the case the client owns good stuff and should sit tight. Even when things are going well, clients still need to know you are paying attention.
2. Bull markets do not last forever. History tells us in Roman times, when Caesar rode in a victory parade, he had someone standing behind him whispering, “All glory is fleeting.” Clients might assume the good times will last forever. The expression “New Economy” was popular in the 1990s before the tech bubble burst. At that time, some people felt companies did not need earnings, simply a good idea was all that was required. Later, we discovered earnings still mattered. Anyone remember vaporware? This was a product people got excited about before it was ever built. Bull markets average five years. They might run longer, but not forever.
3. Pay attention to asset allocation. In a perfect world, clients take money out of equities as the market rises and put it back in as the market declines. This is the concept of rebalancing asset allocation. You have heard the famous expression, “The Federal Reserve is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.” Your client might ignore your advice about lightening up on equities when the market is going up, but they will remember your cautionary advice when the market turns around and heads down.
4. Give your client the credit. It can be frustrating when your client makes money by following your advice, then claims the ideas as their own. Many people have heard to proverb, “Success has many fathers, but failure is an orphan.” There is no need to remind your client those were your ideas. Instead, you might thank them for following your advice and getting in early.
5. Keep your winners. If your client considers themselves a genius during a bull market, they might embrace the idea of becoming a day trader. I have always liked the expression, “If you owned a horse that was winning races, would you shoot it?” Smart investors admit their mistakes early. A stock that declines 33% must rise by 50% to break even. That’s a lot to ask.
6. How much risk are you taking? When the stock market is doing well, do-it-yourself investors or clients at competitors might be happy because they are making money. It is good to look at the degree of risk they are taking, which some analytical tools can help find the answer. If you made a little money while taking a lot of risk, you aren’t doing that well.
7. Beware of concentrated positions. This applies to individual stocks and industries. Some clients might think they are diversified, yet all their money is in one sector. They might own several stocks in the same industry. This can be an issue when one industry does very well, and your client has become overweighted. Explain the risks and offer an alternative strategy.
8. Consider tax implications. The government is your silent partner when it comes to investing. They know stocks should be considered as a long-term investment, so they charge higher taxes on realized short term gains. Your client should bear in mind your client takes all the risk, yet the IRS takes a substantial slice when they take short-term gains.
9. Avoid reaching for risk. You have heard the expression, “The stock market is driven by fear and greed.” When things are going well, newer investment ideas need to attract money by offering the hope of even higher returns. When interest rates are low, often the higher coupon rates turn up in the junk bond category. Your prospect might think he has stumbled upon a great opportunity, but do they know the full story?
10. Who is dissatisfied? Not everyone is doing well when the stock market goes up. Some people might not be getting much attention from their advisor. Others might look at what sectors or mutual funds delivered the highest returns last year and buy into those. Meanwhile, leadership has rotated. Ask your client who they know that complains about their investments or is unhappy with their advisor. You would be interested in talking with them.
Bull markets and rising portfolio valuations are a cause for great joy. It is also the time when clients will benefit from advice.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book Captivating the Wealthy Investor is available on Amazon.