Three smart strategies advisors are using to help clients keep calm.
In our last Dispatches article, we saw how clear, straightforward communications—delivered primarily through websites, blogs, email campaigns, and social media posts—have given advisors who take advantage of them a better handle on serving clients at this critical time.
Now, we’ll take a closer look at what successful advisors are actually saying to clients and some of the communication techniques they’re using to help investors make better decisions and avoid self-defeating ones. Specifically, we heard many Registered Investment Advisors (RIAs) describe ways they’re applying elements of behavioral science to support clients through market volatility.
Understanding the mindset of the concerned investor
Why is behavioral science important for advisors right now? We know money is a deeply emotional topic for investors—so, getting to the factors that help shape our ideas and attitudes about our finances, particularly long-term planning, is critical every day of the year. Now, amid economic uncertainty driven by a public health crisis, it’s more important than ever to understand, and speak to, investors’ mindsets.
According to Morningstar’s “A Behavioral Guide to Market Volatility,” a number of investing biases can affect how investors view and manage risk. Having a firm grasp of how biases routinely affect investment decisions can enable advisors to assist clients in managing their response to market shifts. One of the more commonly known investment biases is loss aversion.
“Losses deal us more emotional pain than similarly sized gains give us pleasure,” according to Dr. Daniel Crosby, a renowned expert in the psychology of investing. “This means that even more than trying to do well, most investors are simply trying not to do poorly(1).”
Here are some other common investing biases Morningstar has identified and how to address them.
Help clients manage feelings on current events
One of the RIAs I spoke with recently, Stacy S., shared a story about a panicked investor who called, pleading: “Please tell me I don’t have to move into my kids’ basement!”
One way to understand this reaction to market volatility is through “recency bias”—where an investor projects future events based on what’s recently happened. This is a natural reaction, especially when a daily onslaught of information is clouding our ability to see the broader picture.
But helping that investor see things more broadly is exactly what Stacy did. She was able to quickly identify the root of her client’s worry and used a visual guide—one like this Capital Group chart showing recoveries from past pandemics—to provide reassurance and much-needed perspective.
In an example of recency bias gone awry, RIA Ron R. received a call from a worried investor wanting to sell off all equities four days into the initial wave of volatility. The advisor tried to convince the client to avoid liquidating, but against his advice, she sold 60% of her positions.
Three days later, the markets had an upswing, rebounding 13%, but the client was still down 21% overall. In this case, a chart or some data showing the ineffectiveness of trying to time market ups and downs—since good days often follow bad ones—might have helped.
Encourage clients to break free from the daily news cycle
One RIA I spoke with, Wade D., expressed frustration at the number of clients calling him with worries about the barrage of news they’re receiving via cable TV and online. This can be an especially potent reality in times of uncertainty, when a story is unfolding dramatically hour-by-hour.
And yet, the advisor politely points out to his investors that their worries are based on a tendency toward “confirmation bias.” This is when we seek out views and information that reinforce our existing beliefs. For instance, if we already think the sky is falling, every leaf blown by the wind is just more evidence that we’re right.
What to do about this? It can be tough to get through to anyone experiencing confirmation bias. Exposing clients to contrary views may help, in some cases. But often a good advisor might simply try to convince investors that not even the top experts know what’s going happen next—and paying too much attention to the news cycle can be detrimental, not only to investing decisions but to stress levels.
Guide investors’ decisions to do something new vs. thoughtfully staying on course
This same RIA, Wade D., shared another story about his client, a college professor, who had been getting ready to retire when the crisis hit. Reviewing her portfolio and positions with her using remote screen sharing, Wade demonstrated that she actually still had enough cash to retire.
And yet, this conversation seemed to trigger another reaction for the client. Reflecting further on her professional commitments, beyond just their implications for her financial picture, the professor decided she was not actually ready to take action on her retirement plan. She decided she’d rather continue teaching for at least another year, driven by a desire to thoughtfully continue doing what she loves.
“She made me feel good because she said it was so nice to be able to talk with us and really trusted us in helping her make this important choice,” Wade recounted later on.
This is a shining example of the difference a seasoned financial advisor can make in the lives of investors simply by listening, offering thoughtful analysis, and providing a trusted perspective on the important decisions that shape their lives.
Rui Moura is the former CMO of Russell Investments and is a seasoned RIA and IBD business development professional. He relies on his broad base of industry relationships and contacts to gain insight into the ongoing evolution of the financial industry.