Connect with us

Insights

The Financial Advisor as Emotional Guide

Published

The current volatility means that some individuals need more than bottom-line financial advice. And some advisors can help with the extra needs.

Recent months have been especially volatile in the stock markets. In previous editions, we have explored the reasons for the roller coaster rides: interest rate hikes with more to follow, fears of a slowing economy, disillusionment with the FAANG stocks (Facebook, Apple, Amazon, Netflix and Alphabet) and likely more to come, trade disputes, stretched valuations, geopolitical tensions, and other triggers. With the possible exception of trade tensions between the United States and China which may be resolved eventually, I have no doubt that the other causes can be expected to continue until well into next year, if not longer.

That being the case, we need to examine our financial situations and make some judgments. You might consult an accredited financial advisor and come to some conclusions about whether or not changes are necessary, or whether to stay the course within a well-crafted financial plan. A good advisor can suggest the degree to which a portfolio needs changers or can be left intact.

That’s the easy and obvious part.

In a more complex dimension, the volatility has pointed up parts of a professional financial advisor’s role that go well beyond handling financial transactions and providing investment advice. In some cases, the advisor will become an emotional guide as well as financial expert.

The current market offers advisors an opportunity to review clients’ emotional state as well as their financial health, explains Jay Nash, Senior Vice-President, Portfolio Manager and Investment Advisor at the London branch of National Bank. Nash is a 21-year veteran of the financial sector.

The financial advisor may play an emotional role at this time, he explains. Even where the advisor has put realistic financial projections in place, clients approaching retirement and who are faced with what can seem like overwhelming volatility will find their ability to stick with a long-term plan sorely tested and in need of some reinforcement.

Related: 2019: The Advisor – Client Relationship Will Become More Important Than Ever

Related: Is the Mini-Correction a Preview of What’s to Come?

These times may test the advisor’s ability to act as an emotional guide as well as financial counsellor. That occurs because most investors know how they should invest, but their instincts may conflict with appropriate decisions. The time-honored maxim ‘Buy low and sell high” sounds so easy, but it becomes difficult when equity markets drop and expose a client’s risk. At that point, the advisor, in his or her role as emotional guide, must keep clients focused on the original plan, Nash says.

The bottom line is that an individual’s human emotional response may conflict with a carefully-drawn investment policy, Nash explains. While there is no one investment system that will work every time, having proper investment rules and following them through market cycles will allow investors to come out with strong returns.

When a system is not working, our emotional response is often to look for another one that seems to promise better results. The problem here is that by jumping from one system to another, investors often end up in a situation where portfolios under-perform constantly. That compels the advisor to be a calming influence while explaining the current financial realities, he says.

Over the last 20-plus years, the role of a financial advisor has evolved. Advisors who entered the industry in the 1980s or early 90’s were generally transactional and focused on the next trade. Maintaining a long-term plan was not central to their business or what motivated them. However, the need to provide enhanced guidance and support has become more important than ever. Advisors are called upon to provide more varied services to their clients, with emotional support becoming an important example.

Investors are looking for more than an advisor who simply enters orders, and this need tends to be heightened during times of volatility. An advisor’s ability to provide support beyond the “buy/sell/hold” decision will come through at times like this and re-assure clients.

Generally, the market corrects 10% every two years, but recent years have been an anomaly, Nash says. The near-term future holds more normal volatility levels, and clients will need emotional support to ride out the roller coaster rides.

The basic principle of this role applies across generations, although expectations are different. Millennials have only known things the way they are today. They have often grown up and begun investing in a fee-for-service investment environment and may be accustomed to a high level of support.

If conservative numbers are used and a process is followed when mapping out portfolio strategies, the implications are limited. However, individuals who require outsized returns would certainly need to re-evaluate the situation, Nash explains.

Disclosure: I do not own any equities mentioned in this article and have no intention of investing in any of them.

Continue Reading

Trending