Navigating Headline Risk so Clients Stay the Course Instead of Panicking
Quite a few clients were caught off-guard by the “taper tantrum” of 2013 – a stark reminder for financial advisors that fear can grip markets at any time.
A mere statement by Federal Reserve officials that it would soon slow the pace of its massive quantitative easing program spawned fears an economic recovery would derail. Between May 3 and Sept. 5, 2013, yields on 10-year Treasuries rose from 1.86% to 2.45% while U.S. bond fund sales turned negative and U.S. equity fund sales fell by more than half.
During that time, some clients needed reassurance to stay the course with their financial plans instead of overreacting to ominous headlines.
Advisors say one solution in those instances is to explain to clients that planned policy events, like tapering quantitative easing, are likely to come with short-term but reversible negative reactions. It’s also wise to remind clients, as the downturn hits, that their own long-term financial plan still applies. Meanwhile smart advisors will look for new buying opportunities for their clients when assets are cheap, they say.
The underlying issue, some advisors caution, is complacency. Investors become comfortable and fail to respect the risks associated with their investments.
“Going into the taper tantrum, investors were much too complacent about risks to the bond market, because many of them had forgotten that bonds can go down,” explains Erik Davidson, chief investment officer for Wells Fargo Private Bank.
Davidson points out clients do not explicitly state when they are becoming complacent, suggesting that advisors should discuss risks to seemingly safe investments.
“Advisors need to have these talks during good times, like now, about not if a bear market comes, but about when a bear market comes. Describe what that looks like and feels like for the client.”
Davidson sees potential risks in tech stocks, which have been carrying much of the equity market, and in small-cap stocks, which have been viewed as a safe harbor from trade-war rhetoric but have valuation risk due to relatively high prices.
J.P. Morgan Asset Management
Steve Kaplan, head of Portfolio Insights for J.P. Morgan Asset Management, says that advisors need the emotional intelligence to differentiate between what clients tell advisors they are considering and what clients would actually do under panic-inducing but somewhat expected situations like the tapering of quantitative easing.
Advisors can inform their “client EQ” by learning each client’s investment time horizon and risk tolerance, while also keeping track of trailing returns over standard timeframes for the client’s portfolio compared to their portfolio benchmark, he says, because those actions can give a sense of the client’s comfort level with future market events.
“From a planning perspective, time horizon and risk tolerance become very important,” Kaplan says. “Very often when the industry or advisors look at performance they look at trailing returns over a standard timeframe.
Kyle Brownlee, a registered representative of HD Vest who runs Wymer Brownlee Wealth Strategies in Oklahoma, discusses volatility as an opportunity for clients to acquire desirable stocks and bonds. “If our end goal is to collect shares of investments where we have confidence, then we are looking to get into the market," he says. “We called clients during the tantrum to tell them that this was an opportunity to put more of their money to work.”
Brownlee suggests that, during volatility caused by planned policy events, advisors should seek investments that are otherwise fundamentally strong. If a company’s leadership and overall business strategy remain intact despite the upheaval, for instance, that firm’s stock might stand a good chance of weathering the storm.
The caveat, Brownlee points out, is that clients must be reminded that, in these scenarios, achieving gains could take several months to well over a year. That’s why his team tells clients to pay attention to their holistic financial plan — including savings, 401(k), Social Security, and their residential property — instead of obsessing over a short-term drop in a particular security that has strong potential to excel down the line.
Mike Tiedemann, CEO and CIO of Tiedemann Advisors, an FT 300 Top RIA, says his firm’s approach is to own high quality and generally stable investments, across all asset classes, so his team can focus client communications on relevant fundamental data and the compounding nature of those assets over time.
“We have periodically utilized portfolio insurance in the form of equity and credit protection, to insulate against any outsized downside events,” says Tiedemann, whose New York-based firm has $18 billion in assets under advisement and offices in several states. “Now would be one of the times in history when the cost of protection remains quite cheap relative to what it provides.”
He says this can calm clients during market volatility and allows for conversations about investment opportunities. “This enables us to be offensive in mindset as opposed to defensive during less certain times.”
"While you cannot use the past to predict the future, looking at history can give you an indication of how a portfolio might perform. For example, stress testing a portfolio to see how it would have performed during the taper tantrum could give an indication of what could be should similar events occur. Advisors can utilize this information to adjust a portfolio if performance was not in line with expectations or a client’s comfort level to help ensure they stay invested to reach their long-term goals."
- Steve Kaplan, Head of Portfolio Strategies, J.P. Morgan Asset Management
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