When markets decline, clients lose money. Their statement values decline. As their advisor, you tell them to focus on the long term, but they often stay angry. You are tempted to point out the market went almost straight up throughout 2017, but you don’t. It seems like when the market rises, you are just doing your job. When the market declines, it’s your fault. Why do they get so upset?
Eight Reasons Why Clients Get Upset
You would never trivialize their losses. Money is serious business. It would be helpful to know how they think.
1. Loss aversion
An article from the American Psychological Association references research showing “The aggravation that one experiences in losing a sum of money appears to be greater than the pleasure associated with gaining the same amount.” (1)
Tip: Market volatility is like a storm. When real estate prices declined during the Great Recession, your client probably didn’t think about selling their house. They reminded themselves of the fundamentals and decided to ride it out.
2. This time it’s different
Redd Fox played Fred Sanford in the 1970’s TV classic, Sanford and Son. In times of stress he would clutch his heart and say: “This is the big one! I’m dying!” Clients often think recent international events or market volatility will end the world economy.
Tip: You’ve heard “The four most dangerous words on Wall Street are “This time it’s different.” You might show them a chart of stock market movement over a fifty year period overlaid with political or economic events taking place at different times. You can’t predict the future, but we’ve gotten through scarier times before.
3. TV news
Sensationalism sells. On Thursday, April 5th, the DJIA opened up at 500 points down. TV news programs talked about it in advance, giving their reasoning why the markets were in turmoil, as they put it. The market recovered and closed up 219 points. I didn’t hear any newscasters saying: “False alarm. Sorry if we scared you.”
Tip: Its likely volatility will always be with us. You need to always be looking at the fundamentals. Steadily rising corporate earnings have traditionally been a major driver of the stock market.
There’s an old saying about investing in commodities. It’s like putting cash in a bowl, throwing in a match and watching it burn without being able to do anything. Today, the equity markets can feel like that. Throughout 2017, clients just watched the markets rise. They looked forward to opening their statements. Now, the market declines for no apparent reason. They aren’t doing anything different. Why are they being punished?
Tip: One of the areas where an advisor adds value is suggesting clients take action and buy on dips. You are empowering them to take advantage of the situation. Just be sure the fundamentals are intact for the stocks you are recommending.
5. Measuring from the high water mark
Clients often measure losses from the highest point their account or individual investment ever achieved during the time they owned it.
Tip: A more realistic measurement might be measuring vs. their initial purchase price and how the investment has done over time. Compare to an appropriate average if necessary.
6. The gloomy friend
Many clients have a friend who they think knows something about the stock market. They respect their opinion. Unfortunately, this particular friend has a perpetually gloomy outlook. The good times can’t last and fiscal calamity is right around the corner. When the market declines, they feel vindicated. If the market recovers, they don’t admit they were wrong, they just weren’t right yet. In their opinion, the crash is coming.
Tip: They could be right. After all, a stopped clock is right twice a day. You might show your client that chart of market activity over time and ask when their friend was correct in their prediction. Many of us endured the dot com crash and the Great Recession.
7. Inside information
Some clients like to think the markets are rigged, the smart money gets out early and “brokers” know about declines ahead of time. You just didn’t bother telling your client. They get angry at you.
Tip: When the market declines, stocks don’t get put out with the trash. They are sold to a buyer, who presumably thinks this is a good time and price to be buying these shares. They likely look at technical factors and fundamentals when making their decision.
8. The New Normal
Some clients feel the good times are over and the problems we are facing are “The New Normal.” This makes them angry. Does anyone remember the late 1990’s expression “The New Economy?” Companies didn’t need to have fundamentals anymore. They just needed a good idea… Then came the dot com crash. Fundamentals mattered after all.
Tip: Patience is a virtue. If your client owns dividend paying blue chip stocks, they are collecting something as they wait for their stocks to hopefully rise. Does your client understand the concept of total return?
It’s no laughing matter when clients lose money. You can’t minimize them as paper losses, because their securities are worth what they could sell them for on any given day. You can’t promise anything either, because no one knows what the markets will do. You are likely in the same boat. You can take a leadership role, focus on the fundamentals and suggest actions they could take.
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