Meet Steve and Beth. After the economic collapse of 2008–2009, they couldn’t stomach seeing the financial markets plummet, taking their hard-earned money with it. So they called their advisor, withdrew from the market and cut their losses, vowing never to return. Whenever their advisor tried touching base, he was met with a cold shoulder.
As the economy regained steam, Steve and Beth watched from the sidelines as markets climbed to new, all-time highs. They knew they were missing out on potential gains and wondered if they should consider risking the market again. “Hey Beth, maybe we should contact our old advisor.”
And then the pandemic hit.
Does this hypothetical scenario sound familiar? Maybe you’ve tried touching base with risk-averse clients who’ve gone dark, and you’re now wondering how to navigate conversations amid heightened global uncertainty and market volatility. How can you connect with risk-averse investors and help ease them back into the market to benefit from the potentially higher returns that a portfolio managed by a financial advisor can bring?
Show Historical Data
Stock market volatility has received a lot of media coverage in recent months. For some, it’s felt eerily similar to the crash that brought on the Great Recession a little more than a decade ago. Some risk-averse individuals who’ve hesitated to enter the market might feel good about their decision to stay on the sidelines.
But history repeating itself may not necessarily be a bad thing. Because even at its recent lows in March 2020 to around 19,000, the Dow was still nearly triple what it was at its low in March 2009.1 Short-term losses may be concerning and there are no guarantees, but when you focus on potential long-term results and the benefits of staying the course, your risk-averse clients may be more willing to re-engage.
Take a Behavioral Finance Approach
Data can be compelling, but any advisor knows that heightened emotions can trump hard facts any day. Rather than sticking with a plan, stress and anxiety may lead an investor to make short-sighted decisions that go against their better judgement and personal values. Part of an advisor’s job is to be a behavioral coach as much as a financial coach, helping clients develop a solid plan and sticking with it. On their own, clients may be swayed by changing tides and overestimate risk.
By taking a behavioral finance approach, you can connect with clients on a deeper level, help them identify their values and align them with their long-term goals. When fear and uncertainty enter the picture, they may be better able to stop, take a breath and make reflective, purposeful decisions that lead to better financial outcomes. And the meaningful way you communicate with them may help build confidence and trust in you and the guidance you provide.
If your client has been slowly accumulating savings in a low-yielding savings account or money market fund over the last several years, they’ll likely cringe at the thought of shifting a sizable chunk of it over to stocks and bonds. Risk-averse clients may feel more comfortable dipping their toes in the water, so to speak, investing a smaller portion of their assets. As they watch their small investment make potential gains over time with your guidance, they may be more likely to take on more risk.
Include Lower-Risk Investment Options
Participating in potential market growth doesn’t need to be an all-or-nothing proposition. There’s a potential balance between traditional bank savings accounts with meager interest rates and equity investments that may have higher returns, yet also have the potential for significant loss. Options like risk control annuities may provide the type of guarantee they’re looking for as part of a retirement plan.
While there are many types of annuities, some allow clients to invest in the market at their own comfort level. A variable annuity or registered indexed annuity may allow clients to set a limit on how much loss they’re willing to risk while still participating in market growth, up to a cap. Fixed annuities can lock in a competitive rate and protect principal, while income annuities provide guaranteed income.
You’re there to provide clients with the right financial guidance, bring clarity and help them take calculated risks. Approaching market participation may be concerning, but by sharing the points made here, you may be able to help them increase their risk tolerance while ensuring you have their best interests at heart.
Get more timely advice on how to address investor fears in our helpful guide, How Investors Can Take Control of Market Volatility. Access the guide below.
1Dow Jones Industrial Average, INDEXDJX, September 2020