Business Operations: Financial Advisors’ Pivotal Role
The havoc that coronavirus has wrought on society and the economy has not been without some silver linings. Many people are being forced to re-prioritize.
For financial advisors, the past several weeks have proven stressful, but also validating. “Patience and asset allocation remain paramount in all of this,” explained one rattled but resolute registered representative at a bank-owned brokerage. “We know markets overreact. Our job is to make sure our clients do not.”
Here are some more reflections gleaned from recent conversations with investment professionals regarding what they have been seeing and doing during these turbulent times.
Advisors say working remotely has been fairly seamless with many clients being extra appreciative of prompt communication, understanding the gravity of the current situation and recognizing it affects everyone. Some heads of small financial planning firms said they have moved to having a one person in the office with others working remotely on a rotating basis.
On the one hand, an advisor that repeatedly urges his or her clients to sit tight during a prolonged stock market meltdown could be accused (wrongly) of being like a deer in the headlights. But industry veterans know that in times of gut-wrenching volatility inertia is an asset.
"Never make any drastic move during the middle of a crisis," Bob Maynard, CIO, Public Employee Retirement System of Idaho, and something of a dean of long-term investing, has always said.
Preventing a hasty, emotional decision is one of the most important actions an advisor can take in guiding their clients' finances. One Upstate New York CFP spoke of a client, in her 60s, who could not heed the “sit tight” mantra, repeated to her by phone throughout the March meltdown; instead, not being able to stand another moment of unsettling losses, she insisted on getting out, demanding that her portfolio be shifted from 50% equity down to zero, selling equity mutual fund shares, as it turned out, near the low and right as the market rebounded dramatically at the end of March.
"These are the times when retail clients most rely on their financial advisors," said Eric Green, Co-CIO, Penn Capital, a Philadelphia-based mutual fund and separate account manager.
Some clients will need more reassurance than others, although most investors seem to understand how important it is to stay the course. Roughly 90% of its U.S. individual investors have not traded in response to the market decline, Vanguard said March 27.
No one is saying that proactive steps can’t be taken amidst turmoil. “This is time to harvest tax losses,” said a Westchester County broker. “You can use this opportunity to upgrade your portfolios with strong, well-managed companies that show good cash flow with steady dividends while eliminating the leveraged companies at risk in this environment.”
Asset allocation is the singularly most impactful decision an advisor can execute. In March of 2020 having a balanced mix of stocks and fixed income has made a big difference.
Rarely has "down 8% YTD" ever sounded so great but that’s what 60/40 and 50/50 stock/bond mixes did, faring better relative to 80/20 accounts or those 100% pegged to the S&P 500. Value equity also has shown mettle after being forgotten for an entire decade dominated by “FANG” stocks.
Best Laid Plans
Many Americans are woefully unprepared for retirement. But for many individual investors, particularly those who engage with a knowledgeable, long-term-minded wealth advisor, there are indeed ample nest eggs. Planning ahead, including contingencies for “black swan” events, pays off. Advisors are pointing to steps taken years ago to protect retirement savings, such as implementing a second IRA that is annuitized via GICs and able to generate cash in any environment.
Fear-ravaged markets prompted some millennial investors to seek the kind of financial expertise that can't be gleaned quickly from an app, according to Investment News' Emile Hallez. Advisors that may have seemed out of step with the times or annoying kept are finding new appreciation, particularly those who insisted their clients set up an emergency fund.
Playing the role of disciplinarian will not be easy for advisors as some of their clients no doubt will be eyeing their 401(k) accounts as economic hardships accrue. About one-third of retirement plan participants have financial advisers, according to Cerulli Associates. This segment will at least have someone to steer them clear of doubled-whammy (tax, opportunity costs) early withdrawals and to share some ideas on how to take advantage of low rates.
As the crisis enters new phases – scenarios range from hopeful to catastrophic – advisors will be getting more questions for which there are not going to be any blanket answers.
Is this a buying opportunity? Should I be taking more/less risk?
At the end of February, many experts and forecasters held too tightly to optimistic scenarios (“a major outbreak confined to Asia and with limited effects”) which turned out to be well off the mark. Grim possibilities have to be confronted. Bloomberg Economics’ extreme-worst case: Recessions around the world and $2.7 trillion in torched GDP.
How near or far from retirement will drive the response in conjunction with a person's ability to sleep at night. Best-case outlooks can’t be assumed, nor can worst-case possibilities be ignored. These are the times that try men’s souls, and emphasize the importance of planning ahead with the help of a trusted advisor.