On my computer monitor, I taped a small piece of paper with the words primum non nocere—Latin for first, do no harm. The underpinnings of the Hippocratic Oath, the phrase is as applicable to providing investment advice as it is to medical care.
When the headlines and talking heads scream, “Do something,” advisors’ first reaction should be more measured: Do no harm.
Volatility has returned to most areas of the financial markets because of a variety of reasons that fall under the general heading of uncertainty. I find it interesting how many people have been alarmed by it, rather than seeing volatility for what it is: More normal than not.
I use the word “alarmed” both descriptively and sympathetically—descriptively to characterize people’s behavior, and sympathetically because I know it’s easy for clients to get emotional about their portfolios. And when they do, the last thing they want to hear is how they’re displaying behavioral bias. After all, their assets represent some of life’s biggest priorities: college tuition, weddings, new homes, retirements, charitable bequests. Yet being able to fund these big-ticket objectives requires a proactive—not a reactive—approach.
HOW CAN ADVISORS PROACTIVELY COACH CLIENTS?
The best time to proactively coach investors to help them mentally prepare for investment challenges is when you are building the client’s initial financial plan. In many ways, the financial plan is the tool for proactive behavioral coaching.
When building the plan, mentally prepare and educate your clients on the following:
• When the best action to take is doing nothing. At times, the temptation to do something can be very strong. Sometimes, the headlines are dire—economic challenges or global strife—and our fight-or-flight instinct seems overwhelming. A longer-term perspective can help. The history of the stock market has been punctuated by a fair number of crises, yet today we're closer to the top than the bottom.
But are these the headlines that matter the most as clients try to achieve their goals? Perhaps, we as advisors can best help clients by explaining that the headlines they should pay attention to are the headlines of their lives, not the headlines in the news. These personal headlines are the basis of a sound financial plan or an investment policy statement, an invaluable tool to help investors through unsettled markets.
These headlines describe clients’ specific goals and objectives before clients are both financially and emotionally invested in their portfolios. The financial planning process also reinforces the idea that portfolios should change over time in response to headlines in the client’s life—the birth of a child or the desire to retire early, for example—rather than the market’s headlines.
COACH FOR TOMORROW TODAY
As beneficial as behavioral coaching can be, it is most effective when it is applied proactively. When adverse events occur, it allows you to say, “Remember, we anticipated that something would happen, and we agreed not to let market headlines affect our strategy.” Sounds simple, and it is, but it’s also effective. As with any coaching, it’s important your clients know you’re a team, shoulder to shoulder and prepared, no matter what. It may be the most important form of mental preparation you do for your clients.
Have a plan and stick with it, unless the client’s headlines change
Too often, “staying the course” is interpreted as “Do nothing.” This is a shame, because it means something powerful: Have a plan and stick with it, unless the client’s headlines change. Market headlines have never been incorporated into any financial plans – at least not any that I’ve seen – nor should they be. Market headlines rarely have much to do with our clients’ headlines – those things that matter the most. Helping investors understand that ignoring all the market noise isn’t being “ignorant” or putting one’s head in the sand. Rather, it is a fundamental approach for advisors to
