High-net-worth client expert offers some tips on how to manage post-pandemic expectations
We’ve been in a long bull market. Many clients have short memories. The post pandemic period has been called the New Normal. Some people might think this means bear markets are a thing of the past. As a seasoned advisor, you know if the stock market has historically returned 10% on average over many decades, when things have been so good for so long, there might be some down years lurking around the corner. How do you have this conversation with your client?
You might think your client might dismiss your comments. Ignore them. They might even decide to change advisors or invest on their own. How tough could it be? Here’s the point: When the market hits rough weather someday, your client will remember you brought it up ahead of time and suggested possible courses of action, even if they ignored your advice at the time.
Taking Away the Punchbowl
Do you remember the quote: “The job of the Federal reserve is to take away the punchbowl just as the party gets going.” (William McChesney Martin) He was referring to the Fed raising interest rates. In this case, you are talking to your client about reducing their exposure to stock market volatility. Here are some talking points:
- Asset allocation. Generally speaking, the categories are stocks, bonds and cash. When stocks do well, the percentage allocation to equities swells. You can make the case for bringing it back into line by reallocation some of the money in stocks over to bonds and cash.
- Bonds are boring. Or worse. Both you and your client think higher interest interest rates might be on the horizon. You know long term bonds suffer in a rising rate environment. Consider laddering some shorter term bonds. The logic is as time passes, if rates have risen, the client can take advantage by adding another bond at the far end of the ladder.
- Shock absorbers. The stock market moves in cycles. No one knows the length of those cycles ahead of time. A choppy stock market can be like driving over a potholed road after a severe winter. Bonds and cash are similar to shock absorbers on your car. You still feel the bumps, but they aren’t as severe.
- Sector rotation. Since the market has done well, some clients think owning a broad market index like the S&P 500 is a good way to get a good return and eliminate the middleman, the financial advisor. When the market goes down, they might assume every stock in the index declines the same amount. The index is comprised of 11 sectors. They each behave differently, since they represent different industries. Some outperform the overall index, others do worse. The sectors holding up better when the market declines indicate where money is flowing. These might be the leaders in the next up cycle.
- There are no superheroes. Some clients might thing the job of their advisor is to pluck them from the crosswalk just as the out of control truck is barrelling towards them. Then the superhero sets them back down once the danger has passed. That’s called market timing. It doesn’t work. The superhero might not see the out of control truck coming from the opposite direction or the piano falling from the sky. The advisor, who is no superhero, has you taking precautions when they sense danger is out there. They try their best to keep you moving in the right direction, even if there are setbacks.
No one wants to hear they should be taking precautions.You tell your children to bring a sweater when going out at night because it can get cool in the evening. They aren’t happy about it. They can‘t see the point. But they are glad they took your advice.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” is available on Amazon.