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Clients Need a True Picture of Risk in a Bull Market

August 24, 2017

Despite a few hiccups along the way, investors have reaped the benefits of stock market growth for more than eight years now. Just this month the Dow Jones Industrial Average reached the landmark milestone of 22,000. There’s no question this is a time of opportunity for investors and advisors.

But a bull market often instills a “can’t lose” mentality for investors, leading to overconfidence and progressively riskier investments. It’s critical in this period of positive economic performance that advisors set expectations and prepare their investors for the inevitable cyclical downturn of the market. Doing so will lead to better outcomes for their clients while also establishing a level of mutual trust that can withstand any market outcome.

We know a bull market never lasts. The current period of economic recovery has persisted for 97 months since its beginning in June 2009 – the third longest of any of the 11 periods of expansion this country has enjoyed since the end of World War II. Should growth continue into May 2018 it would become the second-longest period of expansion ever recorded. If growth continues through July 2019, it would match the longest-ever recorded period of recovery at 120 months, according to the National Bureau of Economic Research. A bull market always comes to an end sooner or later. It’s an advisor’s responsibility to prepare their clients for that eventuality.

Unfortunately, evidence suggests investors are already uncertain about the trustworthiness of their advisors. A recent study from Phoenix Marketing International noted that 35% of investors surveyed weren’t fully confident in the accuracy and reliability of the information they receive from their financial firm, investment advisor, or 401(k) plan provider.

Forty-one percent of investors in the study said they weren’t given – or didn’t know if they were given – essential information about their portfolio’s investment performance. The fact that these trust issues exist now — as the market climbs — is concerning and points to the need for advisors to take a more proactive approach toward communicating potential risks.

Advisors who engage in frank conversations about preparing for a market downturn will show clients they truly have their best interest top of mind. But it’s not just about telling them that a downturn is coming. Advisors need to probe investors to discover their long-term financial goals – including their ideal retirement age, lifestyle expectations, and appetite for risk. Great advisors will gather this information and use it to create comprehensive portfolios that will limit investor exposure to a downturn — while also putting clients in a position to achieve their goals.

To better approach these conversations, advisors should visually display hypothetical portfolio performance in different market climates, including sudden shifts and reversals in the markets. This lets them better explain to investors the risks of more aggressive portfolios, as well as the bumps they will need to tolerate to achieve their objectives over the long haul.

Advisors who take the time to engage in honest communication and preparation while the market is thriving will strengthen relationships with clients and deliver better results. That way, when the market inevitably takes its natural downturn, their clients will still be positioned for success with the peace of mind that they can trust their advisor has their best interests at heart.