Special Feature

Navigating volatile markets

Financial advisors should take advantage of volatile markets as an opportunity to use their knowledge to reassure clients and keep them on course.

Ease your clients' concerns about market turbulence by explaining that it is a normal market phenomenon and that you are looking out for their best interests. You should be discussing potential volatility when markets are stable

By Dwarka Lakhan | November 2015

When stock markets are volatile, some clients climb the proverbial wall of worry. Some panic, sell their investments and sit on the sidelines in fear of losing money, regretting their decision later when the market recovers and heads higher. Other clients simply need reassurance that they are still on track to achieve their investment goals.

Your responsibility is to ease your clients' fears with proactive communication and education that reassures clients that volatility is a normal market phenomenon and that you're looking out for their best interests.

"Volatility is the single biggest concern investors have," says Kevin Sullivan, vice president, portfolio manager and advisor with MacDougall MacDougall & MacTier Inc. in Toronto. "Volatility is not well understood, it is not communicated well and, consequently, not handled well by investors."

You can help your clients filter out the short-term noise in the marketplace and get them to focus on their long-term objectives, Sullivan advises. You must be able to separate facts from the fear and emotions that typically are associated with volatile market conditions.

Christine Tan, senior portfolio manager with Excel Funds Management Inc. in Mississauga, Ont., suggests reminding clients to "focus on the amount of time they have been in the market, and not on timing the market."

She cites Nobel laureate William Sharpe, who found that market-timers must be right 82% of the time in order to match the returns realized by investors who remain invested during volatile periods - a feat that is almost impossible.

"The best course of action [for clients]," Tan says, "is to ride out volatility if you have a long investment time horizon."

Tan recommends reminding your clients that the markets historically have made greater gains over the long term, and those gains outweigh the losses made during shorter periods of volatility. And this overall trend leaves those clients who are unfazed by volatility better off.

You can demonstrate this concept to clients by using illustrations that show actual market behaviour over time, together with performance numbers.

Talking about volatility and risk should be a regular part of your client-communication program, Sullivan says. Ensure that your clients understand that you have a risk-management process in place that is designed to mitigate the risks resulting from volatility.

One of the key points you need to explain to your clients is the difference between risk and volatility, Sullivan says. Risk is associated with a permanent loss of capital. Volatility, on the other hand, results in a temporary decline in the value of investments, which typically is recovered over time when the markets stabilize.

Another aspect of investing that must be stressed at the outset is the power of diversification.

Tan points out that holding multiple asset classes within a portfolio that do not move together - that is, they are not correlated - can protect against volatility.

Still, volatility has a psychological impact on clients who are more concerned about potential loss of capital than about making gains. That means you must contact your clients in good or bad market conditions.

"Investors want interpretation and guidance during market ups and downs," Sullivan says.

When communicating with your clients, you must take into account that they have different temperaments, each of which you should be familiar with, says Nadira Lawrence-Selan, marketing and communications consultant with Hathleigh Consulting in Woodbridge, Ont. Some clients are more nervous than others and thus have higher servicing needs, while some clients might be more knowledgeable about market behaviour. So, you might have to customize your communication strategy to meet the needs of clients with different temperaments.

Don't wait for your clients to contact you to express their concerns about volatility, says Lawrence-Selan: "Pre-empt their call."

You can call your clients, send emails or letters, or provide relevant research reports on the markets - depending upon each client's temperament or level of sophistication.

Call the clients who are most nervous about volatility first, Sullivan says: "Remind them that you are on the ball and that there's no need to panic."

Lawrence-Selan suggests that more in-depth research reports or other relevant material should follow soon after, once you have taken the initial steps to alleviate clients' immediate fears. The ultimate goal, she says, is to reassure your clients that volatility will not prevent them from achieving their investment goals.

© 2015 Investment Executive. All rights reserved.