A top advisor says it’s important to have conversations with clients that take the emotion out of the investment decision and focus on the long term from a fundamental standpoint.
Financial advisors know that investors’ emotions can run high when markets get volatile, and guiding clients during these times is especially important now as more are growing concerned about a pending market correction.
This task has taken on extra weight during the past two years with the sharp pandemic-led stock market decline in March 2020 to the record highs in recent months – and those advisors who have been able to prevent clients from making the wrong decisions with their money have reaped the rewards.
Some of the advisors in SHOOK Research and The Globe and Mail’s inaugural edition of Canada’s Top Wealth Advisors say the key to keeping clients’ emotions level is to have a strong relationship based on trust, constant communication, and a solid portfolio structured to weather market storms by focusing on the long term.
There are always crises in the markets, and it’s an advisor’s job to help their clients manage through them, says Mark Therriault, a financial advisor with Nicola Wealth Management Ltd. in Vancouver.
His first strategy is to keep in close contact with clients directly and remind them through his firm’s bulletins of past market corrections – such as the tech bubble in 2000 and the global financial crisis of 2008 – and how they played out. “My job was really just talking them off the ledge,” he says.
“That’s the conversation I was having with clients, [that] the circumstances [of the pandemic] may be unprecedented, but what’s actually happening – fundamentally – is not, and so why would there be an expectation that this is going to be any different than what we’ve seen in the past,” Mr. Therriault says.
The point of these conversations is to “take the emotion out and focus on the long term, and from a fundamental standpoint, a rational standpoint as opposed to an emotional one,” he explains.
Then, he emphasized the long-term goals of their diversified portfolios. For many investors, he suggested buying more equities during the downturn as history shows they recover in time, telling clients that “I’m confident that … 24 months from now, we’ll be happy that we made that decision,” he says. For some clients though, that is “a challenging conversation.”
Mr. Therriault had a few clients who wanted to sell everything when the market dropped in March 2020, and he countered by asking, “If we’re going to sell, at what point would you feel safe putting your money back in?”
Clients would respond that they’d reinvest when the market settles and he would then point out that they would lose out on all the upside if they react emotionally instead of rationally and stay invested.
In addition, when clients approach him about a “hot stock” like Tesla Inc. TSLA-Q +1.78% increase or GameStop Corp. GME-N +0.07% increase, he talks to them about how much the stock has gained already, how it doesn’t fit into their plan, and asks them if they’re “willing to be on the losing side of it.”
The ‘emotional curve’ of investing
For Jean-Maurice Vezina, a 35-year veteran of the investment industry and a financial planner with IG Private Wealth Management in Montreal, good relationships are the strength of his business. “Clients need to trust us,” he says.
“My philosophy and my approach are to manage the assets and invest new money when the market is down,” he says, adding that he explains the “emotional curve” of investing to his clients and how their portfolios are invested for long-term gains.
“We know it’s not the time to sell when the market is down,” and when the market is up, “we don’t know if it’s going to go higher,” he says, which is why advisors must formulate a clear financial plan with each client.
Mr. Vezina says he had one client who was “in a panic,” wanting to sell in March 2020. When a client reaches a panicked state, “it’s too late. I can’t control an emotional client,” he says of the client, who didn’t take his advice of not to sell. Now that client says, “I should’ve trusted you.”
There’s so much short-termism in financial markets, and it’s so detrimental to creating wealth.
— Debra Wooding, CIBC Wood Gundy
However, clients who have been with him during market downturns know they can trust him and his approach, he adds. Mr. Vezina also suggests advisors shouldn’t work in isolation because you don’t have the time to do the research needed to support your clients. “We need to work with a team,” he says.
Corrections are ‘an opportunity’
Debra Wooding, first vice-president, investment advisor and portfolio manager with the Wooding Group at CIBC Wood Gundy in Edmonton, says she calls her clients in times of market turmoil and listens to their concerns to find out how they’re feeling. The pandemic was “obviously an emotional time. People were worried, people were frightened.”
But when clients talked about selling, she emphasized that “there’s no possible way to get good compound growth unless you’re in it for the long term,” she says. “There’s so much short-termism in financial markets and it really is so detrimental to creating wealth.”
She would go over clients’ uniquely tailored portfolios with them, point out the diversification of assets, geography, sectors, and how it’s on the path to reaching their long-term financial goals. “It’s really about buying quality,” she adds.
Many clients were adding cash to their portfolios to take advantage of the downturn.
“I just tried to get them to focus on the fact that corrections are not our normal, it’s an opportunity,” Ms. Wooding says “This is what we do. We’re professionals. This is where the value of advice is so important.”
Clients may want peace of mind all the time, but that’s not how the market works, she says.
“There are going to be recessions, there are going to be bear markets, they are going to be periods that are a little uncomfortable, but that’s just part of it,” she says. “You have to get through that part to truly reap the benefits of long-term compounding of wealth.”
Negotiating with the client
Jennifer Tozser, senior vice-president and portfolio manager with Toszer Wealth Management at National Bank Financial Wealth Management in Calgary, says she understands why clients get worried when the market falls.
“I don’t like it when my account goes down, either,” she says. “But we have a strategy to deal with it.”
She called all her clients when the market fell to find out how they were doing and what other events might be happening in their lives that could affect how they feel about their portfolios.
In her experience, people can handle two stressful events in their lives, but not three or more. The pandemic was one, the lockdowns were two, the market decline was three – and others included homeschooling, job losses, a business decline, and the uncertainty of everything. If their portfolios were down, they’ll target it as something they can control.
If a client comes to her at the bottom of the market and wants to sell and can’t be convinced otherwise, she tries to negotiate. She’ll say, “Let’s sell 50 per cent today, and let’s come back in three months.”