2022 has been a tough year for investors, with U.S. equites down more than 15% and fixed income facing the worst performance in more than 40 years as it ended November down nearly 13%.
For advisors, challenging market environments can mean tough conversations with clients. Since the Great Financial Crisis, advisors prepared their clients well for the inevitability of market volatility, but volatile market environments can heighten human emotion and blur clients’ appreciation for their long-term plans. After all, as a famous boxer once said, “everyone has a plan until they get punched in the mouth.”
Expect Lots Of Questions From Clients
The concurrent, double-digit, declines in fixed income and equities made 2022 a particularly challenging year for investors. As the magnitude of paper losses sinks in, advisors may face more questions than usual in end-of-year meetings with these clients who are unaccustomed to seeing such sharp declines in their overall portfolio.
As a silver lining, falling bond prices—with their corresponding higher yields—have made fixed income a more attractive asset class for investors. Yields have not been this high in more than a decade.
Fixed income yields, prices, and inflation can be difficult to explain to clients. Given that most investors are experiencing significant losses on their fixed income investments for the first time, advisors will need to educate and reassure clients of the critical role of bonds in their long-term financial plans. One way to reassure clients is to help them understand the impact that higher yields have on long-term fixed income returns. Vanguard’s 2023 Economic and Market Outlook shows that investors with sufficiently long investment horizons will likely be better off in wealth terms by the end of the decade in spite of the losses they incurred in 2022.
Seize The Opportunity
2022’s challenging market environment could lead to clients reassessing their advisor relationships. This presents challenges, but also opportunities for financial advisors. Advisors can still find ways to differentiate and grow their practice in the coming year by putting their clients’ needs first.
In fact, the most successful advisors will use the current market environment as an opportunity to educate, reassure, and build trust with their clients.
Here are three ways advisors can provide additional value and serve as a sound, stable voice of reason amidst turbulent markets.
1. Amplify Empathy
Financial planning is a people business. Vanguard research suggests that higher levels of trust are associated with longer-term client relationships.
Empathy – truly listening to and understanding clients’ hopes, dreams, and fears – builds trust. Advisors demonstrate empathy by making sure clients feel understood. Focus on building financial plans around clients’ unique goals and behaviors and have conversations about clients’ entire financial pictures, not just their investment portfolios.
The industry-wide trend toward more comprehensive financial planning built around investors’ long-term financial goals will likely continue in 2023 and beyond. Comprehensive financial planning offers more room for big-picture conversations that build client trust over time.
2. Embrace Tax Alpha
Advisors increasingly understand and embrace the role of tax planning as a structural source of alpha in clients’ portfolios. The tax code is very complicated, and advisors recognize that many un-advised investors could be “leaving money on the table.” By capturing that tax alpha and communicating the value to clients, the most successful advisory firms gain an edge by building tax alpha into their financial planning model.
Most advisors seek tax alpha for their clients through optimizing tax-efficient accounts choices, such as Roth accounts versus traditional and strategically using HSAs. We also see advisors prioritizing tax-efficient investments such as ETFs.
Advisory firms are also exploring newer ways to produce tax alpha, such as personalized indexing, Roth conversion strategies, optimal tax planning for small businesses, charitable giving strategies, and inter-generational wealth planning strategies.
3. Prepare For “The Great Wealth Transfer”
As has been well documented, the coming decades will bring significant wealth transfers, both between baby boomer clients and their millennial children, but also between spouses. McKinsey research indicates that 70% of women choose to switch financial advisors after the death of a male spouse.
Additionally, Cerulli research finds that 87% of children will leave their parents’ financial advisor after inheritance.
Much has been made of these coming wealth transfers, but many advisory firms still see wealth transfers as just a part of an estate plan, and not a dynamic opportunity to further deepen relationships with their clients.
Advisor practices that will prioritize and operationalize next-gen wealth planning have an opportunity to retain higher levels of assets. By actively embracing intra- and inter-generational wealth planning and operationalizing it during the client’s lifetime, as opposed to building it into an estate plan, advisors create additional opportunities for greater and more flexible total wealth transfers, while improving their chances of retention with spouses and next-generation clients.
Increase Efficiency
The three attributes above all require advisors to spend their time in the most valuable way possible: working with clients and potential clients. Assets per advisor is a critical metric to advisor and firm profitability. Advisors are well aware of the impact of higher net worth clients in achieving this goal. However, another way to drive higher assets per advisor is to pursue simplicity in the advisor service model, which drives firm efficiency and allows each advisor to serve additional clients.
The most successful – and profitable – advisors will find ways to spend more time on activities that differentiate them and drive their economic model. For example, model portfolios empower advisors to focus on client relationship needs by streamlining investment manager research, portfolio construction, and portfolio monitoring. The use of technology to automate tasks that are repeatable and scalable will also continue to drive efficiencies for advisors.
Looking Forward
2022 demonstrated the unpredictability of markets. The upshot, however, is that 2022 also highlighted how much investors value trusted financial advice.
Many more investors could benefit from high-quality financial advice. Vanguard research suggests that when done well, advisors can add significant value for clients through behavioral coaching, asset allocation, cost-effective implementation, rebalancing, and optimizing for taxes.
As we head into a new year with more uncertainty ahead, embrace opportunities to structure your practice around sustainable, long-term sources of value for your clients like true empathy, financial planning that helps clients meet their goals, and structural tax alpha to help clients keep as much of their returns as possible.
All investing is subject to risk, including the possible loss of the money you invest. Investments in bonds are subject to interest rate, credit, and inflation risk.
Ryan Barrows is the head of the RIA channel for Vanguard Financial Advisor Services. Prior to leading the RIA team, Ryan led Vanguard’s advice work outside the United States, including the establishment of Vanguard’s joint venture in China with Ant Financial. Previously, he led the team who developed and launched Vanguard’s direct-to-consumer business in the U.K. and worked in Vanguard’s Corporate Strategy Group.