A Prescription for Financial Anxiety

But to create a portfolio that will turn those dreams into reality, we first must understand that client at the deepest level. After arriving at that intimate understanding of the person on the other side of the table, we can come up with a plan to help them realize their goals.

That’s not revolutionary; lots of advisors do that. And a lot of clients take those plans and just file them away without ever giving them a second thought. It’s up to the advisor to help them put that plan into action by using it as an accountability mechanism. It’s like working out – you know where the gym is and that you should be getting more exercise – but doing it is hard, which is why the advisor has to act as a financial trainer or life coach.

Normally in the planning process, people are asked their goals, and they list these lofty, mostly unattainable items and then they take no steps to achieve them. To get around that, we ask about their habits and then build a systematic process where we can change those habits – each day, week and month –to have an outcome that allows the client to accomplish their goals.

And by acting as a coach and checking in to see whether clients are achieving their plans the advisor helps them maintain the necessary discipline and good habits. That’s why in addition to asking clients about their goals during the planning process, it’s also important to ask them about their spending, saving, and investment habits.

If people don’t change their habits, it’s very hard to change the results.

The process

The financial plan should serve as a roadmap that gets clients to their desired financial destination, but to be successful that plan has to have an underlying process. When markets and valuations are climbing, it’s easy to stick to the plan. It’s when an unexpected catastrophe, like the COVID-19 pandemic, hits and clients panic that the importance of process comes to the fore.

When markets go into freefall, as we saw last spring, clients are likely to have the kneejerk reaction that, “the plan isn’t working anymore so we need to make a new plan.” But history has shown that to be the worst possible reaction. Following it can end up costing the client significant potential returns.

As advisors it’s our job to build a process that acknowledges that there are going to be times when portfolios will drop, perhaps by as much as 40% and to educate our clients about that process. We don’t know when these unknown events will happen or why, just that they will. That is why we explain to clients is that by hiring us, they are exporting their financial anxieties so they can stop worrying about their money.

Even the most well-educated clients may be suffering from a certain degree of financial illiteracy. We teach them about the importance of removing the emotion from financial decisions. We tell them we know they will make bad decisions on their own because they are emotional about money. Advisors are intellectual about their money. We want them to understand our process for managing money so they can have confidence in it.

And while we don’t want our clients making emotional decisions about their money, we don’t want to be emotional either. We explain to them that we only change investments quarterly and no matter what happens we will only make changes to their portfolio in January, April, July, or October and that we make investments with the thesis of a three- to five-year time horizon.

The only time we would deviate from that timeline would be due to an exogenous change, like the manager quits and leaves the strategy. It’s important to teach people why we trade, so they know why we’re doing what we’re doing. Advisors who are constantly trading can make clients nervous and question the underlying strategy, not to mention increasing the portfolio’s expenses. Seeing their advisor stick to a process that they understand convinces clients to stick to the plan and stay invested through less than stellar markets.

Persistence

The plan and the process make it possible for clients to achieve their goals, but only if they stick to them. It’s important for clients to understand that you have to be right twice if you abandon your plan – you’ve got to pick the right time to sell and correctly time when to buy. A more likely scenario is selling when the market is at the lowest (in this case the middle of March) and sometime around October or November feeling brave enough to get back in but missing the entire rally that occurred in the meantime. If you have a solid plan and stick to it, you only need to be right once and stand a much better chance of making money than people who jump in and out over and over. As the saying goes, “the key is time in the market, not timing the market.”

Although it is emotionally challenging, sticking to the 3Ps is a prescription that goes a long way toward alleviating financial anxiety for both you and your clients.

Nicholas Hamilton is a regional partner with Concurrent Advisors, a Denver-based firm that is part of the Raymond James organization.

Any opinions expressed are those of Nicholas Hamilton and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.

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