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Financial Planning Opportunities in a Volatile Market

Joe Buhrmann March 21, 2023

Graph on computer screen showing stock market volatility

Despite the toll on client emotions, times of market volatility give financial professionals a real opportunity to shine. By using your expertise to communicate, educate, and provide perspective, you’ll likely magnify the loyalty of your clients.

Historically, staying the course and following a financial plan has outperformed rash investment decisions when there are times of uncertainty in the financial market. But it takes a strong plan—and no small amount of willpower—to do this.

When surveyed in 2020 after the onset of the COVID-19 pandemic, advisors indicated that 85 percent of their clients who had a financial plan felt more prepared to weather market volatility than those who did not.1 But as the market ups and downs that began back in 2020 have persisted, there are forces of human nature that can cause clients to act rashly.

Human Behavior in Volatile Financial Times

The importance of understanding financial psychology is never more apparent than during market volatility. While we can tell clients that the markets over time have an upward trend, it’s still a challenge to help them remain rational when they are looking at recent account statements and seeing a loss.

Although there may be many psychological explanations for what clients experience when markets fall, one that is prevalent is loss aversion and it’s something that every financial professional needs to be familiar with.

Loss aversion refers to having an emotional reaction to a loss rather than making a rational conclusion. It’s a phenomenon where a real or potential loss is perceived by individuals as psychologically or emotionally more severe than an equivalent gain.2 Here are three things financial professionals must keep in mind to anticipate how their clients may react to a loss.

  • People have strong reactions to any loss. When portfolio values fall, that loss can cause intense feelings that could lead to irrational decisions. Some clients are better at handling this than others. Just remember that clients who seem to be overreacting are being driven by these intense feelings.
  • A surprise loss will be even more difficult to bear. Experiencing an unexpected negative event can trigger a primitive reaction and cause the brain to activate the fight-or-flight response. This is a survival instinct that is hardwired into our brain which gets the body ready for action.
  • When a client experiences an unexpected loss, their emotional response can go from feeling concerned to feeling threatened.

The key for financial professionals is to work with clients to ensure they don’t reach the point of feeling threatened. Prepare your clients by educating them about market dynamics and how the work you do for them will help position their investments for the long term.

Take Action to Prepare Clients for Market Ups and Downs

Financial professionals understand that market fluctuations aren’t new—they’re the norm. So, it’s crucial to work with clients consistently to help them understand this as well rather than waiting for changes that will cause nervous clients to become concerned or even threatened. Here are some important steps to follow.

Use Continuous Communication

Be proactive in your outreach to clients rather than waiting for them to call you. Logically, many of your clients understand that markets have their ups and downs, but that doesn’t always stop them from wanting to react in a way that will be detrimental to their long-term plan. Understand your client base and their communication needs and tailor your outreach for each as appropriate.

Provide Financial Education

The level of financial literacy likely varies across your client base. Prepare clients for changes that take place in the market by providing guidance and materials that explain what can happen and ensure they are suited to the client’s level of understanding. Make yourself available to dig into their specific questions as necessary to further demonstrate your expertise.

Offer Perspective

As part of the financial education you provide, be sure to share historical data to remind them that market ups and downs are par for the course. Using a Monte Carlo simulation can further demonstrate the strength of their financial plan over time and in varying marketing conditions. Discuss with them the steps you are taking as their planner to protect their long-term plan from these fluctuations.

Demonstrate Empathy

Market volatility doesn’t’ just impact clients, but also financial professionals—and that’s okay. By exploring and understanding your own feelings about what is happening in the market, you are better able to empathize with clients. Acknowledge that it’s common to feel anxiety and offer coping skills. Expand your understanding of financial psychology and have a conversation that steps outside of finances to learn more about your clients and what may be driving some of their fears.

Focus on Planning and Investing Opportunities

Beyond the communication and comfort you can provide to your clients when markets are fluctuating, there are a number of tangible planning and investment opportunities that are within your control that should also be explored.

Re-examine Risk Tolerance

Volatile markets may cause your clients to rethink their risk tolerance, especially those who are close to retirement. Financial professionals can reduce client anxiety by discussing why they are invested where they are, as well as some potential solutions to offset short-term impacts. For example, it may make sense to increase cash reserves and income-generating investments for clients concerned about cash flow. You can also look at cash management and debt reduction solutions.

Portfolio Rebalancing

Depending on what has been going on in the market, you may have clients whose portfolio asset allocations are no longer in balance. By periodically rebalancing their portfolio, especially during market pullbacks, you are enabling your clients to follow the advice of “buying low and selling high.”

Tax-loss Harvesting

The rebalancing described above may also involve the implementation of tax-loss harvesting—the timely selling of securities at a loss to offset the amount of capital gains tax owed from selling profitable assets. This strategy is commonly used to limit short-term capital gains to preserve the value of the investor’s portfolio while reducing taxes.3

Increasing Savings

Piggybacking on the concept of “buying low,” for your clients who are still in the wealth accumulation period of their investing lives, a market downturn offers an opportunity to shop for investments with lower prices and ultimately get more bang for their buck.

Roth Conversion

If a Roth conversion makes sense for your client’s planning strategy, consider executing it during a market downturn. Completing a Roth conversion during a down market allows the benefit of converting a greater percentage of the overall account from pre-tax dollars to after-tax dollars, without incurring a larger tax bill. When the market is down, Roth conversions are essentially on sale.

Taking a look at any or all of these options in accordance with your client base can turn up opportunities to maximize your clients’ financial planning outcomes while also helping them feel a little more in control.

Financial Planning Offers Peace of Mind

The best strategy in the face of a volatile market is to have a financial plan in place. While logic and history may dictate that the markets have always trended up in the long run, your clients need your guidance and expertise in helping them stay the course. Build life-long client relationships by proactively preparing your clients to bear whatever the markets may throw their way.

To learn more about the importance of maintaining dynamic plans that can absorb changes in the market, watch our on-demand webinar 5 Ways to Add Sizzle to Your Stress Tests.

DISCLAIMER: The eMoney Advisor Blog is meant as an educational and informative resource for financial professionals and individuals alike. It is not meant to be, and should not be taken as financial, legal, tax or other professional advice. Those seeking professional advice may do so by consulting with a professional advisor. eMoney Advisor will not be liable for any actions you may take based on the content of this blog.

Sources:

1 eMoney COVID-19 Pulse Research, May 5 – May 19, 2020, n=227

2 Liberto, Daniel. “Loss Aversion: Definition, Risks in Trading, and How to Minimize.” Investopedia, 2022. June 27. https://www.investopedia.com/terms/l/loss-psychology.asp.

3 Kagan, Julia. “Tax-Loss Harvesting: Definition and Example.” Investopedia, 2023. February 16. https://www.investopedia.com/terms/t/taxgainlossharvesting.asp.

Image of Joe Buhrmann
About the Author

Joe serves as a Senior Financial Planning Practice Management Consultant at eMoney Advisor. With more than three decades in the financial services industry, Joe aligns his know-how and passion to help firms of all sizes increase usage, adoption, and engagement through a modern financial planning experience. He leverages his expertise and supports internal departments across the enterprise, helping Communications, Marketing, Relationship Management, and Sales. Joe attended Illinois State University, where he received his bachelor’s degree in Applied Computer Science and his MBA.

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