When Lehmann Bros. collapsed in September 2008, investors panicked. As the market tumbled, many sold their equity holdings -- and then stayed on the sidelines in cash for the next few years.

Big mistake, of course. "It wasn't very long after, maybe a year, before a diversified [60% stocks/40% bonds] portfolio was up over those who'd stayed in cash," points out Rod Greenshields, consulting director of Russell Investments' Private Client Services, and the author of Russell's most recent Financial Professional Outlook survey.

But overriding client emotions and persuading them to do what they ought to do can be tricky. The most recent version of the quarterly FPO survey, released Thursday, dug into this area of behavioral finance and found that 39% of the advisors say they work with all clients to develop a written investment policy statement, which can guide clients' strategy in times of flux.

That's an approach Greenshields recommends. "They're useful commitment devices," he says. "If you have a conversation with a client and get them to agree to long-term goals, you then have legitimacy in bringing them back to [those goals]. By reminding them of [their decisions] last year and year before, you help them be consistent with that person who wasn't in the midst of the euro crisis , or the Cyprus crisis," he adds.

"You can get a lot more buy-in with the investor with a conversation like that than by just telling them, 'You shouldn't worry about A or B or C,'" he says.


Among the other findings of the survey, which queried 479 advisors in February:

  • Advisors and clients have wildly varying outlooks. Among advisors, 72% said they are optimistic about the capital markets over the next three years -- but only 21% said their clients shared their optimism.
  • Client sentiment varies widely by generation. When asked to break down client sentiment by age, advisors reported big differences. Relatively few advisors (13%) reported that clients over 66 were optimistic about the markets; and only about a quarter found boomers to be optimistic. But many more advisors (42%-45%) said that their Gen X and Gen Y clients were optimistic. (Similarly, more advisors reported pessimism among their older clients than younger investors.)
  • Clients are worried about current events. When asked about client-initiated conversations, 63% of advisors said government policy concerns were the dominant theme. (By contrast, advisors said the conversations they were initiating most were about portfolio rebalancing.)

When clients panic, says Greenshields, the best thing advisors can do is to keep them focused on their long-term goals: "You can't deny [clients'] fear and concerns, but redirect them to productive things under their control -- [such as] investing intelligently in a way that's well diversified and can handle these shocks."
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