Communicating in turbulent times
In the last ten days, investor anxiety around markets has reached levels not seen since the fall of 2002, when the post tech boom correction bottomed out. Driven in large measure by newspaper headlines and radio reports of “plummeting markets”, subprime bloodbaths south of the border and a recession in the U.S. which is either imminent or has already arrived, investor apprehension and pessimism has reawoken from a period of slumber.
In thinking about how to respond, advisors need to consider a five point strategy, centered around five Ps – Proactive contact, Probing for concern, Providing Perspective, revisiting the client’s Plan and Phasing in your response.
Proactive contact
In markets such as the one we’re in, it’s critically important that you call nervous clients before they call you or before they’ve made up their minds to pull the plug on their investments.
In our research, advisors get marks for proactive contact – but receive almost no credit for returning calls which clients have initiated. Beyond the issue of whether you get points for placing the call, the dynamics are generally much more positive if you initiate the call.
Many advisors are reluctant to contact clients during periods such as this one, either because they don’t want to heighten investor anxiety (or create concern where none exists) or because they feel that they don’t have definitive answers on what’s happening.
Until the last week, a case could be made that many investors were oblivious to the current market developments. As market volatility and losses have moved from the business page to the front page and to lead items on newscasts, however, most clients are aware that something untoward is happening; this is exacerbated by immediate online access to statements. (And for those who receive monthly statements, if they didn’t know that something’s going on before they look at their January statement, they’ll certainly know afterwards).
So the first concern about fueling undue alarm is not going to apply in most cases.
As for the view that you shouldn’t contact investors without having a definitive response to what’s happening in the markets, most clients aren’t expecting their advisor to have all the answers – but they do want reassurance on three things.
First, they want to feel that their advisor shares their concern about losing money and is monitoring what’s happening in the markets, second that he or she has some kind of a general plan in place on how they should be responding and finally that they are important enough for their advisor to contact with that plan.
If your clients don’t hear from you, they’ll often reach one of three conclusions – you don’t care or aren’t on top of what’s going on in their account, the markets have completely collapsed and you haven’t got a clue as to what to do next or they aren’t important enough for you to call. Any of these three sentiments mean that your client is at risk if they’re approached by another advisor.
One investor I spoke to recently summed it up: “If I know that my advisor is thinking about what’s happening out there, that means I don’t have to”.
A final note here – don’t assume that investors will call you if they’re worried. Sometimes they will – but often they’ll just sit there and stew … losing sleep and becoming targets for an approach by another advisor in the process.
Probing for concern
There are a number of ways to communicate with clients.
One approach is send a letter or email summarizing your views and inviting clients to contact you with questions; in some cases, you may wish to indicate that you’ll be in touch to discuss their account.
While there is some value in sending a letter or email and it may buy you a bit of time, it’s difficult is get your letter to stand out from all the other communication which clients receive.
A better approach might be to invite clients to listen in on a conference call in which you discuss recent developments; in the ideal world, you would have a question and answer session with someone from your firm’s research department or head office, senior management or a wholesaler from a fund company or if you have sufficient clout a money manager as your guest. The conference call approach has two advantages – first, it stands out for its comparative uniqueness and second, the dynamics and back and forth on a call are typically much more persuasive than simple words on a page.
Ultimately, while emails and conference calls can be good starting points, there is no substitute for personal contact.
When you do speak to a client, the first thing you want to do is get a temperature reading on how they feel.
The traditional approach is to simply ask the question “Are you worried about your investments?”
The difficulty with this approach is that while some clients will say yes, others will mask their concern with answers like “not really”– many clients know from past conversations that they shouldn’t allow themselves to be impacted by short term declines. Often, people feel pressure to tell us what they think they should be saying rather than how they really feel. (There is lots of evidence of this in polling of support for political candidates – where expressed support for women and minority candidates before an election often overstates the votes they end up with.)
When talking to clients, you want them to feel comfortable sharing how they really feel. One way to do this is to legitimize their concern by saying something like “Recently, I’ve talked to some clients who are quite nervous about what’s happened in the markets of late. Is this concern something which you share?”
By asking the question in this way, you don’t create anxiety where none exists but do make it easy for clients who are anxious to share that sentiment with you.
Provide perspective
So if clients answer that yes, they are concerned, what then?
In my view, advisors have two critical roles which bring value to investors.
First, you provide perspective and balance during periods when markets are overheated on the upside or in turmoil on the downside.
And second, you serve as an emotional anchor for clients – you keep the highs from being too high and the lows from being too low.
As an advisor, the most important thing you can do right now is to provide a balanced view on what is happening – arguably, it’s in markets such as this one that advisors really earn their keep.
It’s important that you not be seen as a Pollyanna, pretending that everything is just fine and that there is absolutely no cause for concern – this will undermine your credibility rather than enhance it and risks being seen as a sales pitch to keep client’s savings with you.
Instead, you need to marshal facts to place recent market developments in perspective.
Note that just providing your opinion that the worst is behind us or that prospects appear positive going forward, while better than no contact at all, won’t be all that reassuring to many clients – what many investors are looking for are facts and a well reasoned argument rather than simply your opinion.
In having these conversations, you need to focus on the mid to long term prospects – I wouldn’t hesitate to be honest with clients about the extent to which neither you nor anyone else has a good handle on what will happen in the immediate period ahead.
You might talk about the magnitude of the decline (15% from market peaks, which while not trivial, is not dramatic by historical standards) or what the recent correction has meant (giving up all of the gains in 2007, while not painless, is something which we have come to expect from the markets). You could talk about what stock valuations currently look like, the relatively low importance of housing in the U.S. economy or where dividend yields among financials sit.
And you might look to credible third party evidence to buttress your case, whether it be something which your firm has produced, an analysis from a fund company or an article from a credible publication such as the National Post or the Wall Street Journal. As one example you could include a link to Rob Carrick’s January 17 article in the Globe and Mail, in which he discussed the opportunity to buy Canadian banks with dividends of up to 5% (equivalent to 7% on a GIC when the dividend tax credit is applied).
A few clients have already made up their minds to bail out of the market and nothing you can say or do will make a difference. For most investors, however, what is essential is that you bring hard data and fresh perspective to recent developments in the market and to where we stand today.
Revisit your plan
One of the most common complaints from many clients is that their advisors “stand pat” during these kinds of market periods – sometimes taking the cynical view that advisors feel that they already have their money, so don’t bother to put in the effort to suggest changes.
Perhaps unfairly, many clients interpret recommendations to maintain the status quo in their portfolio as indications that either their advisor is not on top of what’s happening with no clue as to what’s going on or that he or she is simply not sufficiently interested in their account to spend the time to formulate recommendations for changes in their investments.
Clearly, this does not mean that you should be modifying portfolios where it’s not merited or recommending change for the sake of change. Bear in mind however that if you are suggesting that clients maintain the status quo, you need to let them know that you have taken a hard look at their investments and that they truly are well positioned based on the best information before us.
For clients in individual stocks, your conversations with clients need to take place in the context that most clients are looking for their advisors to be proactive – rightly or wrongly, they feel that the market environment has changed and that their portfolios should be changing in response, whether it be increasing the cash component or reallocating their portfolio into sectors or markets which appear particularly beaten down and show the best potential in the period ahead. The bottom line: If you’re not going to be recommending any changes, you need to explicitly address the reasons why not.
As for clients in mutual funds or other managed money programs, many investors are concerned that nothing is being done with their money in response to market changes. Sometimes, just telling them how their manager is repositioning their fund will help address this fear and buy the time you need.
At the end of a telephone call, if you sense that a client is still uneasy, you might say something like “Has our conversation today answered your concerns or would you like to schedule a time to sit down to take a more indepth look at where we stand?”. Experience has shown that while there is certainly a role for telephone calls, there is no substitute for meeting face to face to address client anxiety.
Phase in your response
In recent conversations with advisors, I’ve had a number talk about the difficulty of getting clients to invest money that’s in cash or commit new investments to the market.
In light of the level of uncertainty that we’re in, that sentiment is understandable. At the same time, if investors wait until it’s obvious that current concerns are unwarranted, they’ll risk missing a major move in the market.
One solution is to suggest phasing in any move to invest cash or new funds.
Once you’ve talked about the prospects going forward and ideally have gotten client agreement that while markets will likely continue to be volatile in the short term, things continue to look positive for the mid to long term, the question becomes what you should do next.
Rather than suggesting that clients become fully invested immediately, you might recommend investing some of the money on the sideline now (half let’s say) and agree to phase in the balance over the course of the next six to twelve months. While doing that means that they might miss a major run up, it also reduces the impact of a further downturn – for many clients this will be a more comfortable approach than committing everything now.
As an alternative, if clients want to maintain that big cash position because they have been spooked by some of the doom and gloom headlines, agree on the level of market recovery at which they will begin reinvesting their funds.
In Summary
It’s markets such as the one which we’re in today in which financial advisors prove their true value.
You don’t have to go through all of these five steps on client communication. What you do need to do, however, is to make effective client communication your number one priority in the period ahead.
Start by giving yourself a bit of time to craft your message – remember, you don’t need the perfect message, just a solid point of view to share with clients. Then begin making those calls to clients you haven’t heard from, starting from your biggest client and working your way down the list. In this way, you will reinforce your worth to clients, establish yourself as a trusted advisor who truly does operate with their interests in mind and position yourself well for the period ahead
In my next post on Monday of next week, I’ll touch further on some of these topics and get into more details on organizing a conference call for clients.
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