The market has more than doubled since the lows of March 2009 and money is finally beginning to flow back into equities. So all is well, right?
Not so fast. While some investors are once again buying stocks, many others are still skeptical that stocks are the best place to create long-term wealth. The daily media storm of negative news only serves to reinforce their perceptions. As a result, clients are overweight in cash and fixed income, which may make them less likely to achieve their long-term financial goals.
What can financial advisors do to help anxious clients see things differently? Recent research by the AgeLab at Massachusetts Institute of Technology provides some helpful suggestions. Anxious clients have a tendency to focus on bad news, interpret unclear news as bad news, and develop an aversion to risk. Let's examine each of these challenges and consider ways to address them.
Don't Focus on the Negative
When clients are anxious, they are more likely to pay attention to negative information. When anxious clients have a choice between optimistic interpretations of events or data that paints a dour future, anxiety-influenced clients will choose to focus on threatening information.
For example, the Dow Jones Industrial Average experienced an astonishing streak of 11 consecutive positive days in Marchsomething that hasn't happened since January 1992. An optimistic client may interpret this event as evidence that the market is showing signs of strengthening and believe that the worst is behind us. By contrast, an anxious client may interpret the same event as being the calm before the storm, and verbalize a litany of negative events that justify their worries.
In some cases, anxious clients might seek negative information to support their growing beliefs that poor results are likely. Rather than learn about a firm or an investment that has growth potential, anxious investors will point to poor jobs reports or the impact of uncertain foreign markets on the U.S. economy.
Anxious clients also process ambiguous information differently. They are more likely to see data that's not crystal clear as bador even threateningnews. And what can be more ambiguous than the future?
A little more than two years into the economic downturn, StrategyOne conducted a survey to understand how the recession was affecting the public's view of tomorrow. More than half of respondents (52%) were less hopeful about the future, and nearly half (49%) believed that their lives would probably fall short of their personal or professional goals. Even with the guidance of qualified experts, an overly anxious client's initial gut instinct is to view his or her financial future pessimistically rather than optimistically.
'Just Don't Lose It!' Mindset
Social and behavioral scientists refer to the way alternatives or issues are presented as framing. Consider these two questions you could ask a client: "Would you consider moving to a different state when you retire?" versus "Which state are you considering for retirement?" Both questions address the same issue, but the first is more passive and invites a range of possibilities for retirement living, while the second implies that the client is definitely moving, only the destination is uncertain.
High-anxiety clients are more likely to frame their objectives from a fear or heightened loss-aversion perspective. In short, anxious clients focus on ways to mitigate risk, not plan for the future. They will ask questions or assess possible strategies with expectations based on today's fears rather than on financial objectives or future life plans. A common dictum by clients today is "Just don't lose it!" rather than "How do we grow it?"
Five years after the crash, clients are still showing risk aversion, although there has been some abatement this year. Overall, investors' appetites for stocks have been nearly nonexistent since 2007. Equity mutual funds have experienced $585 billion of outflows, while bond funds have added more than $1 trillion, according to the Investment Company Institute. Although U.S. Treasury yields are at historic lows, total assets reached $11.6 trillion by the end of 2012. These trends illustrate the "Just don't lose it!" mindset.
Advisory Therapy: What to Do?
Just as a good doctor knows how to treat the whole patient rather than just a condition, financial advisors must be prepared to address how their clients feel as well as how they invest. Clients who no longer open their account statements, ignore phone calls, or choose cash investments are the most anxiety-ridden.
There are three essential qualities that may help an advisor effectively manage relationships with anxious clients. First, clients must be able to sense that the advisor cares about them as individuals. Second, advisors must help their clients cope with negative thoughts by countering them with positiveor at least more realisticways of interpreting events.
Finally, the advisor must be in command by pointing to an optimistic future scenario. An example would be highlighting positive events happening around the world, such as innovations in health care or technology or the rise of the middle class in emerging-market economies.
Financial advisors must acknowledge that there is continuing fear in the marketplace and seek opportunities to check in with clients to show that they care. They can help clients by explaining the power of markets to rise despite the constant drumbeat of negative news, and by offering products that address their clients' needs to balance risk with growth. Don't let anxiety keep your clients from achieving their long-term goals.
John Diehl is a senior vice president of the Hartford Mutual Funds.
The views expressed here are those of John Diehl and they should not be
construed as investment advice. They are subject to change. Clients
should contact their own advisors for specific advice. "The Hartford"
is The Hartford Financial Services Group and its subsidiaries.