Client Communications

Begin discussing market downturns early in the relationship and revisit the topic frequently

By Leah Golob |

 

Most financial advisors with more than a decade of experience have dealt with client emotions in the face of a bear market, according to Neil McIver, director of wealth management and portfolio manager at McIver Capital Management, under the Richardson GMP Ltd. banner in Vancouver.

"There are always going to be bear markets," McIver says. "The next one is on its way."

Waiting until a bear market is imminent before attempting to prepare your clients for such an event would be a mistake, according to Larry Distillio, assistant vice-president of practice management at Mackenzie Investments in Toronto.

Instead, you should start a conversation about a potential bear market with new clients during the discovery process and continue that discussion on an ongoing basis.

Here are a few tips to help you in preparing clients, particularly first-time investors, for the next bear market:

> Re-examine your client's risk profile
Questionnaires that determine an investor's risk tolerance are a good starting point, Distillio says. But you may need to re-evaluate each client's risk tolerance to better understand how they will respond to a fluctuating market.

"Quite often in a bull market, clients overstate their ability to withstand risk," Distillio says. "In a bear market, they are much less willing to accept risk."

When going through the discovery phase with a new client, Distillio suggests, ask questions such as:

  • Does your appetite for risk change based on different market conditions?
  • To what degree are you willing to deal with a drop in your portfolio? And what about repeated drops?
  • Have you or has anyone else in your family lost significant sums of money? How did that affect your lifestyle? How did it affect your attitude about money?
  • Do you and your spouse or partner look at risk differently?
  • Do you regard financial risk as the loss of money or the loss of opportunity?
     

The answers to these questions can lead to a revealing discussion about your client's attitude toward risk and bear markets.

> Show transparency
At the beginning of a client relationship, avoid suggesting to the client that you are "smarter" than the market.

"Prepare the client for the eventuality that there will be a corrective market and that nobody can foretell the future," McIver says.

It's important to show clients your investment process, he adds, such as how you select securities and build a portfolio. These strategies need to be explained through regular communication to build trust.

Your clients' understanding of your process and your strategies to mitigate risk will help bolster their confidence during market downturns.

Photo copyright: lightwise/123RF

 

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