Volatility: How Advisors Can Help Clients Stomach It


Investment advisors are a combination of money managers, financial educators, and counselors. It’s this last role of counselor that becomes important as market volatility ramps up. Learning to handle customer’s investing fears and anxieties makes the financial advisor a better advocate for their client.

To keep volatility at bay, the advisor can educate the client about market returns and history, the importance of asset diversification, and how to manage the expected anxieties that accompany market declines.

Be Proactive, Not Reactive

Set the stage early to cope with the inevitable market drops. The investment education and collaboration starts when the client walks through the door. Prepare the client by including a risk tolerance and risk capacity quiz and conversation. These tools inform the advisor about how a client might react to the normal ups and downs in asset values. The risk conversations smooth the way to create the client portfolio.

Next, the advisor can include a conversation about investment asset characteristics as part of their educator role. When the client understands historical market returns, they are better equipped to cope with volatility. (For more, see: How to Be a Top Financial Advisor.)

Finally, let clients understand that market volatility is expected and occurs periodically along with changes in the business cycle, global occurrences, and national economic events.

Set Up the Portfolio to Minimize Volatility

The knowledge of how each asset class has performed in the past is an important tool when setting up the initial portfolio. The proper setup helps clients deal with market volatility over the long term. The more risk-averse investor – such as a client at the tail end of their earning years – will weight bonds more heavily than stocks, for example. Whereas the aggressive individual – such as a saver closer to the beginning of their career – holds a larger percent in riskier equities.

Gus Sauter, senior consultant to Vanguard Group, Inc., told The Wall Street Journal that “one of the most common mistakes investors make is not thinking holistically about their portfolio.”

In other words, think of the big picture, not how each specific holding or account is performing. (For more, see: Financial Advisors Need to Seek Out this Group NOW.)

With a broadly diversified portfolio, when emerging market stocks fall, U.S. equities may remain stable while bonds advance. Less correlated investment assets lead to greater diversification which tempers portfolio volatility.

When stock funds are soaring, a diversified portfolio won’t go up as much, but conversely, neither will it fall as low during a market correction.

Control the Mind; Control the Money

All the preparation won’t help if the investor panics at the first sign of market volatility. The advisor needs to be prepared for those phone calls after a big market drop to talk the client off the figurative ledge.

Many investors want to sell, after a big market decline and get out of the market altogether. The advisor must be prepared for some hand holding and refresher education. (For more, see: Money Habits of the Millennials.)

Research studies show that investors’ portfolios typically perform worse than the overall market due to mental money mistakes. If the investor jumps out of the market at the first sign of a decline, then he or she is selling at the bottom. The flip side of this behavior is when an investor gets swept up in market euphoria and buys back in as stocks trend toward their highs. This counterproductive trading activity causes the investor to buy at the highs and sells at the lows. The advisors job is to make sure this doesn’t happen by being available for hand holding and education.

DALBAR, Inc.’s 20th Annual Quantitative Analysis of Investor Behavior 2014 Advisor Edition not only confirms this, but reveals the gap to be especially wide. Over the past 30 years, the S&P 500 returned 11.11% per year while individual investors have averaged only 3.69%.

Trading too often yields subpar investment returns. Not only does buying and selling at inopportune times create lower returns, so does excessive trading which increases commissions and reduces profits.

Volatility Equals Opportunities

An often overlooked benefit of market volatility is the opportunity to invest additional funds during market dips. By keeping some cash on the sidelines, when the inevitable market decline occurs, the advisor can invest the clients’ money at bargain prices. Similar to buying on sale. (For more, see: How to Help Clients Spooked by Volatility.)

The Bottom Line

The best advisors remain in touch with their clients during market ups and downs and shepherd them through the investing landscape with a combination of education and support. (For related reading, see: How Financial Advisors Can Adjust to Robo-Advisors.)


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