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Clients Unaware of Market Crash Effect on Portfolios

By Alex Padalka February 27, 2017

Financial advisors may want to discuss with their clients the effects of a major market crash on their portfolios, according to a recent report from FinMason.

Only 27% of investors have sat down with their advisors to learn how much they stand to lose in another crash, according to a survey of 492 investors who work with financial advisors conducted from August through September.

What’s more, even among clients whose advisors have talked to them about potential losses in a crash, 62% believe it would be smaller than their stated stock market exposure would imply, according to FinMason.

Meanwhile, 57% of the survey respondents who work with an advisor are probably going to panic and sell in case of a crash, based on questions about how much they’re willing to lose before getting out of all their investments and the percentage of their portfolios invested in equities. If the next crash is similar in equity price drops to the one in 2008, it would cause a loss in equities higher than what 57% of investors indicated as their sell point, the survey found.

Advisors may want to better prepare their clients for an eventual but certain stock market crash, Kendrick Wakeman, CEO and founder of FinMason, says in the report.

Emotional response is 400% more acute to surprise events, according to some psychological studies Wakeman cites. By discussing the possible effect of a crash on their clients’ portfolios, advisors can mitigate a knee-jerk reaction, he says.

It could also help advisors in other ways. After all, during the next inevitable crash, investors unprepared for large losses “will feel upset, betrayed and litigious,” Wakeman says in the report.