Many advisers have said that they were able to keep their clients from having knee-jerk reactions to 2016’s rocky markets and the Brexit vote.
This month’s cover story explores how some of these planners try to overcome their clients’ behavioral biases and develop well-balanced, diversified portfolios. Having empathy is one part of the approach. But some advisers may pick up on market turmoil or uncertainty and react rashly, much as their clients would.
“One observation we have seen in portfolios is there has been a real trend toward advisers taking back control of them since 2008, but not necessarily performing as well as the home office portfolios,” says Tom O’Shea, an associate director with research firm Cerulli Associates.
Advisers, he says, “feel the pain” of a client’s portfolio losses, “whereas the home office is at a distance from the client and manages the portfolios much more objectively,” he adds. That objective remove can be key.
Empathy, however, remains a valuable adviser trait. “People aren’t rational investors, and knowing that, how do we get them to be a little more reasonable? [The answer is] to get them focused on their goals and whether they can achieve those goals,” O’Shea says.
Industry firms have increasingly encouraged advisers to learn more about behavioral finance and to focus on goals-based planning. The simplest approach may be just to emphasize historical trends to calm both adviser and client nerves.
“You have to look at the data,” says Barbara Friedberg, an academic and author on portfolio management. “I use this kind of information across the board.” To illustrate her point, Friedberg assumes the voice of an adviser working with a client who has lost money on an international stock fund.
“Look, I get that over the past five years your returns on this particular international fund has been deplorable, in the single digits, below single digits,” she would say. “But I’d also like to point you to the periods of time where that has not been the case.”
Friedberg admits it sounds a little like Investing 101. But the teachable moment can and should be seized. Here’s how she would calm the client:
“If you pull out now, and you avoid this asset class now, you’re not going to know when it’s going to start to go back up. And then what happens, you will likely miss out. The data is super clear on this,” she says. “You’re going to miss the rebound, or at least a good part of it. and that’s a really important enticement.”