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.