Incorporating behavioral finance concepts into your financial planning process can help you and your clients stay on track for meeting financial goals, particularly during a bear market. John Forlines III, CIO of W.E. Donoghue & Co., LCC and Professor of Behavioral Finance at Duke University, recently joined us for a webinar to discuss how you can coach your clients through this difficult time.

Understanding Your Clients and Their Biases

Our cognitive biases make it difficult to make good decisions, especially during periods of market volatility. To deal with uncertainty and complex topics, humans naturally create their own narratives, and investment decisions are no different. On their own, investors will typically make bad decisions, fueled by their emotions and the way they are framing a situation.

What’s particularly challenging is that the investor narrative is almost always short term, focused on what’s happening right now. This perspective is then fueled by the media and interactions on social media.
As advisors, it’s your job to help your clients balance logic and emotion and make decisions that are focused on the long term. This is a hard but necessary task.

Bear Market Practice Management

In a bear market, clients are more likely to track their investments and come to you with questions and concerns. The following strategies can help you better manage their fear and reinforce the value of your relationship.

  • Proactively communicate with your clients – don’t wait. Talk to them on a regular basis and spend at least half of the conversation discussing their personal lives (family, work, etc.). This will help to calm them and build your relationships.
  • Understand that your clients are on information overload and demonstrate empathy. You know that volatility is inevitable, but investors don’t. Their fear is real.
  • Reframe the narrative. Your clients likely don’t know the difference between losing money and their portfolios declining. Help them understand the long-term perspective and that if they stay the course and stick to their plans, the markets will recover.
  • Explain what’s happening now in relative terms, using 2008 as an example, but focus on today. This is an event-driven bear market, which happened as a result of an exogenous factor (COVID-19). These bear markets are typically shorter than structural and cyclical bear markets. Understanding this may help your clients feel more positive about the future.
  • Create a schedule of client appreciation events to give them something to look forward to in the late spring or early summer.

Investors are more likely to seek out new advisor relationships based on lack of service than performance. Reach out now and offer your guidance and support. For additional details and insights, watch a replay of the webinar, “Using Behavioral Concepts to Create Better Client Relationship: Bear Market Edition.

The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

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