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.”