There’s been a lot of dire talk lately about a recession. Negative economic growth in the first half of this year seemed to confirm the most pessimistic predictions. Some experts even said it would take a miracle to avoid a deep economic downturn.
Naturally, clients worry. But should they? What might a recession mean for their financial and retirement plans? What do advisors need to know about recessions—and how can they allay clients' fears without being dishonest?
Be Proactive
“Be proactive,” said Aneesa Custovic, chief investment officer at Cardinal Retirement Planning in Chapel Hill, N.C. “Clients will feel even more uneasy if they are constantly asking you about what’s going on.”
She suggested sending out newsletters or simply calling nervous clients to say it’s about to get bumpy. Consider some timely forward-thinking guidance to help them prepare for likely downturns or volatility. Remind them that downturns are a normal part of the macroeconomic cycle. “The market has ebbs and flows, and so does the economy,” she said.
Recessions, she added, are not always extreme; they can be shallow and short-lived. What’s more, markets don’t necessarily lose value for the entire recession. They usually recover before a recession is technically over.
Don’t Sugarcoat
“Historically informed honesty is the best policy,” said Brian Frank, CIO of Frank Capital in Key Biscayne, Fla.
Often the most harm comes from making panic moves instead of following a long-term plan, he said. Still, he recommended regularly reassessing clients‘ risk tolerance while staying on the lookout for new opportunities. “If you can invest when others are forced to sell, you will significantly boost long-term returns,” he said, acknowledging that that’s easier said than done. “Your psyche will want to raise cash to alleviate the pain of paper losses,” he said.
The Fear Factor
For clients of Edelman Financial Engines, the fear of losing portfolio value has been one of the biggest stressors. “The question I'm hearing from clients right now is, ‘Does this big drop in my portfolio throw off my plan?’” said Claire Mork, director of financial planning for Edelman in Denver.
She reassures clients that their planning accounts for market volatility and high inflation. It’s made to be resilient. So instead of going against the plan, she recommends clients stay “focused on the things they can control, such as discretionary expenses.”
Mork’s colleague, Isabel Barrow, a director of financial planning at Edelman’s Alexandria, Va.-based offices, went further. “We also work with our clients on a regular basis to tweak and adjust their financial plans as circumstances warrant,” she said, referring to changes in clients’ personal lives as well as in the broader economic landscape.
History Lessons
For John McCafferty, another director at Edelman in Alexandria, Va., it helps to remind clients of the lessons of history. Recessions “all end, and so will this one,” he said.
Philip Chao, founder and CIO of Experiential Wealth in Cabin John, Md., said it’s important to remember that there have been 14 recessions in the U.S. since the Great Depression of the 1930s, and each one lasted an average of 11 months. “Recession is a natural part of an economic cycle,” he said.
It’s also vital that clients understand what the word “recession” really means. “A lot of clients still have a false impression that all recessions uniformly mean years of high unemployment, shortages, inflation, terrible market returns, running out of money, etc.,” said Clay Ernst, executive director of financial planning at Edelman in Colorado Springs, Colo.
Definitions may vary, but most economists agree that a recession is simply a prolonged and significant downturn in economic activity. Typically, as in the current state, it’s used after two consecutive quarters of declining GDP. As such, Ernst pointed out, “it’s a lagging indicator.”
Even if the next quarter continues to show negative growth, he said, it’s important to remember that the stock market has had three straight years of solid, double-digit growth. “One down year out of four doesn’t mean the train is off the tracks,” said Ernst.
Listen To Your Clients
To be sure, for many clients the spate of bad economic news does feel like a train wreck. It’s important to listen to them and their concerns.
Rob Comfort, president of CUNA Brokerage Services in Waverly, Iowa, recommended “simply being there for clients. Holding their hands through turbulent times is when advisors truly earn their keep.”
Communication is key. “We communicate to clients that we are constantly challenging our assumptions and always striving to adapt to a changing world,” said Sam Solem, a portfolio manager for private wealth at Intrepid Capital, an independent RIA in Jacksonville, Fla. That clarity and candor, he said, “gives them comfort that we have a close eye on the world and how different events can affect their portfolios.”
But make sure to remain well-informed. “Study research from multiple economists, as their perspectives differ significantly,” suggested Smitha Thomas at Sancus Wealth Management in Dallas.
Recession-Roofing
There are a few ideas that might be especially relevant in light of a recession.
For instance, clients should maintain “adequate cash reserves,” said Brian Leslie, a director at Edelman in Omaha, Neb. “You need to make sure you’re in a position to weather the storm in the event of an income disruption. You don’t want to be in a position where you’re forced into selling your long-term growth assets at an inopportune time.”
Another good idea is to reinforce the value of diversification. “Strategic asset allocation has endured for a reason, and advisors can point their clients to historical data to help them stay the course,” said Chris Tidmore, a senior manager at Vanguard’s Investment Advisory Research Center in Malvern, Pa.
Tidmore pointed to early 2020: By late March of that year, he said, a $1 million portfolio of 60% equities and 40% fixed income securities would’ve lost about 20% of its value because of the pandemic shock. Then the market rebounded. “Converting the portfolio to cash at that time would have cost an investor more than $350,000 over the next eight months, versus the alternative of staying invested,” he said.
Silver Linings?
Certainly no one can guarantee that history will repeat itself, but historical knowledge can help calm client fears. “If advisors can show the market returns during the last recession, combined with the current plan for the client ... they will be able to explain the impact [of a recession] and justify any adjustments confidently,” said Chris Volpe, head of Zephyr, a Merrick, N.Y.-based fintech platform for advisors.
Or, as Dylan Huang, senior vice president and head of retirement and wealth management solutions at New York Life in New York City, put it, “We can’t predict, but we can plan.”
Advisors, he said, should “help clients understand and define their risk tolerance and incorporate protection solutions that both guard against a challenging market environment and set them up to prosper when conditions improve. ... One good thing about the financial services industry is that we have a tool for every financial need.”
Indeed, the silver lining of downturns is that they can create opportunities. “One of the worst mistakes is capitulating and creating permanent losses at a time when opportunities begin to present themselves,” said Jeff Wagner, senior partner at LVW Advisors in Pittsford, N.Y. “Use volatility to your advantage.”
Recessions, he said, can be a chance to “shift defensive assets to aggressive assets,” meaning in part that equity downturns are often good entry points.