Volatility highlights the need for behavioral coaching

April 24, 2018

 
Michael Lovett

Michael Lovett
Head of RIA Group

The most common topic of conversation I've been having with advisors recently is around market volatility. While the recent volatility is certainly normal in the context of long-term market behavior, it feels especially jarring with the memories of negative investment statements all but faded. Clients are feeling uneasy. Investor amnesia is real; we've all seen it!

If history has shown us anything, it's that the stock market is destined to go through another sustained down period. Are you and your clients prepared for a potentially more challenging investment environment ahead?

The chart below offers an extreme example of the dangers of letting clients' emotions control their investing decisions. Skittish investors who pulled their money from the markets during the 2008 recession missed out on the recovery. Investors who stayed the course were rewarded. That's a lesson we can all learn when market volatility kicks in.

Investor discipline can have its rewards

Investor discipline can have its rewards

Notes: Stocks represented by the Standard & Poor's 500 Index. Bonds represented by the Bloomberg Barclays U.S. Aggregate Bond Index. Cash represented by the 3-month U.S. Treasury bill. The 50% stock/50% bond portfolio was rebalanced monthly. Data provided by FactSet. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Why behavioral coaching matters

In recent years your role as a behavioral coach has likely meant discouraging clients from taking on excessive equity risk or chasing higher yields. But being a successful behavioral coach also means helping clients understand the bigger picture of long-term averages and the need to stay in the markets during downturns.

You've laid the foundation to get them thinking long term, to understand that markets don't increase forever, and you've gotten them prepared for when the bulls leave and the bears show up.

There is a lot of talk around the value of advice, and in our advisor’s alpha research, we outline why we believe behavioral coaching can add significant value to your clients' portfolios. Think of the example in the chart above. If you had successfully discouraged your clients from changing their 50% stock/50% bond portfolios to all cash in March 2009, then you would have saved them from missing out on 87% in returns.

Have a communication plan in place

Even if you've been talking to clients throughout your relationship about long-term investing, they'll likely need to be reminded about those principles during the heat of a market correction. In a separate blog post, my colleague Don Bennyhoff talks about a VALU framework for client conversations where you reinforce the value you're providing.

Here are a few of my own suggestions:

  • Prepare general talking points and have standard charts (like the one above) ready that you can use during times of market stress.
  • Talk to your staff about the messages you'll be delivering to clients during tumultuous market events. They can help support your outreach and reinforce consistent communication.
  • Be proactive, and connect with clients before they contact you. Research shows that if you're responsive and reach out to clients before they pick up the phone to call you, it goes a long way to building trust. Clients who had a high level of trust in their advisor have a 70% likelihood of giving them more money to invest and a 94% chance they would recommend their advisor to others.
  • And know what method of communication clients prefer. Some may need a simple email of reassurance, while others may require a phone conversation or an in-person chat. Try something different, such as a live webinar with your clients.

Putting clients on the right path

Successful investing and successful client relationships often rely more on taming emotions than on taming the markets.

In a world where advisors' value propositions are under pressure, the better advisors will focus on areas where significant value can be added. We believe behavioral coaching is one of the keys to success.

Notes:

  • Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
  • Investments in bonds are subject to interest rate, credit, and inflation risk.
  • Diversification does not ensure a profit or protect against a loss.
  • Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
  • All investing is subject to risk, including possible loss of principal.

Michael Lovett

Michael Lovett is head of the FAS RIA Group and a member of Vanguard's executive team.

Previously, Michael was Vanguard's head of distribution in Australia, responsible for the distribution of Vanguard's managed funds and ETFs to retail and institutional clients and advisors in the Australian marketplace.

Before joining Vanguard, Michael helped build a business at Challenger Limited that seeded boutique fund managers. While there, he managed the institutional and retail sales teams for the Challenger boutiques, and the business grew to more than $15 billion in assets under management by the time of his departure. He also ran combined institutional and retail teams at HSBC.

Michael completed a graduate diploma of applied finance from Finsia and holds a Bachelor of Commerce from Deakin University, where he majored in economics and finance.

 

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