Clients and advisors often avoid talking about market volatility, either because the subject is too scary or because of complacency brought on by a growing economy.
But Kate Warne, an Edwards Jones principal and investment strategist, says advisors need to be open with their clients about volatility.
Advisors need to regularly assess clients' risk tolerance, Warne said in an interview with Financial Advisor. Find out how comfortable the client is with market risk, she said, adding that the assessment can help advisors understand how direct the conversation with their client can be.
Warne suggested that advisors say something like, “Do you pay attention to how much the stock market moves up and down?” As a client reveals his or her concern with the market, then pose a hypothetical question, like, “What would you do if stocks drop by 10 percent or more?”
If a client seems anxious about losing money, then remind the client that a drop in stock is normal and occurs about once a year on average, Warne said. Clients don’t lose money unless they sell, so it is important that financial advisors mention the importance of staying invested when stocks drop and, if needed, recommend ways to prepare for a market drop by adding bonds.
If the opposite of anxiety occurs, and the client seems OK with the risk of a 10 percent drop, then advisors can commend the client for understanding how markets move, she said.
Throughout discussions, Warne said, financial advisors should alter any misconceptions about the word “volatility” “because it is commonly believed that it is a symbol for decline,” when it actually refers to both the ups and downs of a market.
Lastly, tell clients to think about pullbacks as a sale at a store. “When conditions are good, like they are now, a pullback is usually an opportunity to buy stocks at lower prices,” said Warne.