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Preparing Clients for the Inevitable Correction

By Steven Lang July 15, 2015

Memory can play tricks with investors as with anyone else. After seven years of good tidings — rising markets and slowly rising employment rates — financial advisors say some clients have forgotten that downturns are inevitable.

It could be a stumble over Greece, rising interest rates or something else that triggers a sell-off. Regardless, advisors need to remind clients to brace for a possible change in wind direction.

For Roger Ward of TrueWealth in Atlanta, recent global events are triggering advisors to remind established clients about buy-and-hold discussions prior to past corrections. But newer investors and millennials call for different conversations. “They have no sense of market history,” he says. An advisor might need to walk them through a correction for these clients’ first time.

Many clients of TrueWealth, which manages about $1 billion, signed on after the crash of 2008. Ward says he and his colleagues try to educate them so they won’t panic when indexes drop. Specifically, TrueWealth reminds clients the U.S. hasn’t had a meaningful stock market correction since 2011. It stresses that corrections are inevitable but temporary, with most cycles lasting about 40 months, peak to trough.

Like Ward, Hugh Anderson, a Las Vegas-based advisor with HighTower, fears that his clients are getting too accustomed to good returns. His practice, which manages $700 million, peppers its quarterly send-outs, blog posts and FA-client conversations with slowdown warnings.

Right now, it’s underlining the importance of prudence and telling clients not to be “greedy.” “If your allocation is higher than planned, sell the gains and rebalance into fixed income,” he says. “That’s where we are making the change.”

Hugh Anderson

The 2008 crash was both a blessing and a curse, Anderson says. Though a cause of loss and consternation, it showed a new generation of investors just how ugly the market can be, which seared a measure of caution into investors’ minds.

Some advisors — like Matthew Tuttle of Tuttle Tactical Management in Stamford, Conn. — believe their peers aren’t doing enough to warn clients of a slowdown these days. “This sets them up for nasty surprises every five years or so when we hit a bear market,” says Tuttle, whose firm manages about $200 million.

Don’t Stir the Pot

But Bob Phillips of Indianapolis-based Spectrum Management Group, which manages $500 million, thinks global economic changes come with lots of warning, and their implications get “baked into” securities values well before they come to crisis. As a result, he doesn’t feel the need to warn clients about a slowdown that may be longer coming and less severe than pessimists assume.

To some extent, TrueWealth’s Ward can sympathize with this view. After all, for some clients, downturns will always be a surprise — no matter how much they’re warned beforehand. But, he says, others — whether from education or temperament — simply “sit back and go, ‘Oh, that’s why I have fixed income.’”