Cutting Through The Noise
By E. Hale Jones, FA Editor-in-Chief
I met with a woman this afternoon whose equity holdings
were down only 5% — and they represented only 20%
of her entire portfolio. Everything else was doing fine. Yet
when she entered my office, she was in a panic.
This was typical of the comments FA heard in talking with
advisors throughout the tri-state region. Similar scenes are playing
out all over as financial advisors seek to calm their clients
– apprehensive at best, fearful at worst over the market downturn
and the general state of the economy. Negative noise is everywhere:
the media, the politics, office, barroom and country
club chatter, even confl icting noise from financial advisors.
Should I stay in the market or get out?
That’s probably the most frequently-asked client question.
The best answers, of course, come case-by-case. Some advisors
say advising a client to get out now is essentially admitting that
what you’ve been telling him or her all along has been wrong.
Besides, a bailout now will kill all chances of recovering losses.
“The public – and to a very large extent we as advisors —
are caught up in the mania,” said Ed Mazoyer, FA market analyst
and a market specialist at Vanderbilt Securities, Melville (LI).
“Now, we’re in the “everybody sell” mania. There are some
strong securities out there you can buy for 35-40% less than a
year ago; these are bargains. Yet the public is selling because
there’s a panic going on. Your house is down 30-35%. Are you
going to sell your house? Of course not,” Mazoyer observed.
Longtime advisors say longevity trumps market timing.
They note that there have been 32 bear markets (20% or more
decline) since 1900 with an average decline of 34% — not
counting the current slide. There have been 11 recessions
since 1945 and the 10-year gains after each one has varied
little – regardless of whether one invested on the first or last
day of the recession.
When people say this is worse or this is different, experienced
advisors point out that this downturn will be remembered for the
subprime lending problems; but all bear markets have had similar
core issues. The last bear market started when the technology
bubble burst and was extended in the aftermath of 9/11.
Consumers working with financial advisors are likely to be
more comfortable than others in economic storms. Roughly
nine in ten consumers with a financial plan feel they have a
clear financial direction – 50% higher than for self-directed
investors, according to a study released by the Financial Planning
Association (FPA) and Ameriprise Financial.
Chuck Jaffe of MarketWatch says this isn’t just because they
can afford to pay for financial advice but because “the primary
role of a financial planner is not just to manage investments
and pick stocks and bonds, but to provide emotional
discipline – the ability to foment a plan and see it through
regardless of market conditions.”
But because they’re living in fear, investors are having
difficulty “sticking with” financial plans. The see two alternatives,
both bad: (1) remain invested and watch the market
sink lower and not recover for years and (2) pull everything
out and risk missing out on the recovery.
“It’s the risk of omission vs. the risk of commission,” says
Washington State University professor John Nofsinger. “It’s
failing to do something versus doing something that turns
out wrong and a lot of people get frozen in between.”
MarketWatch’s Jaffe says the current economy has forced
financial advisors to change the definition of short term.
“When the market is going gangbusters and investors
don’t want to sacrifice returns, they tend to keep the short
term short, a year or two,” writes Jaffe. That way, they can
get more money into the market to take advantage of what
seems like a sure thing.
“But right now. . . short term is defined as five years, meaning
that any money you may need for at least the next five years
needs to be in safe-haven investments or cash. Intermediate
term – which had been defined as two to five years during the
good times, now seems to be five to 10 years and long-term
investments are looking forward by a decade or more.”
By far the majority of advisors believe the market will snap
back long before then. Old timers cite history and contend
that people will look back and see that they made money
investing in a bear market but didn’t recognize it until the
next bull market arrived.
Some advisors like to point out the current positives.
FA ‘s Mazoyer says there are more positives than negatives.
He cites declining oil (and hence gasoline) prices, concerted
action by the world banks and a stronger dollar.
“The U.S. led this economy down. . . and will lead it back,”
he said.
FA
It’s Not What You Say. . .
It’s What They Hear
Reassuring Clients in Volatile Markets
More than half of adults believe a major reason financial
services professionals use jargon instead of simpler terms is
to distract clients from the fees and/or commissions they’re
paying. Nearly two-thirds say it’s to make a product seem
more impressive. Roughly half say jargon is all about making
consumers feel less confident and more dependent on
advisors.
So say the results of a survey by AARP Financial, who says
the research “generated fresh evidence of the debilitating
lack of clarity and outright obscurity” of financial services
communications.
William Nicklin, writing for www.horsesmouth.com pointed to 10 Rules of Effective Language from a book by Dr.
Frank Luntz and applied them to today’s financial advisors.
Rule 1: Simplicity – Use small words. Clients are already
confused; adding complexity with words that obscure the
true meaning of what you’re saying only makes matters
worse.
Rule 2: Brevity – Use short sentences. Clients can’t absorb
a treatise when their heads are spinning. Short sentences
will stick in their minds.
Rule 3: Credibility is as important as philosophy. Don’t
try to contradict or gloss over the facts. Explain in concise
terms what you believe to be the circumstances at the moment.
. . and show how what you’ve said in the past is working
out in the current environment – good or bad.
Rule 4: Consistency matters. It goes hand-in-hand with
credibility. Stick with your basic underlying beliefs and don’t
be pushed around by events. Your added value stems from
your paying close attention. Stay on message.
Rule 5: Offer something new. Every situation offers new
insight. Tie it to your past thoughts and advice. Give them a
new take on an existing idea.
Rule 6: Sound and texture matter. Place more emphasis
on parts of a conversation you want your clients to
remember. Raise your voice and repeat two or three times
the thought you want them to remember while watching a
financial news show or reading the paper.
Rule 7: Speak Inspirationally. Offer a positive outcome.
For example: If we look at the situation this way and conduct
ourselves this way, we will do just fine.
Rule 8: Visualize. Take a similar situation from the past
and project it onto a positive position. For example: The
market got killed in the October, ’87, crash but ended UP for
the year.
Rule 9: Ask a question. We have been through markets
like this before? How did things work out for us?
Rule 10: Provide context and explain relevance. Tell
your clients WHY their portfolios are structured the way
they are.
Teach The Kids About the ‘Financial Geniuses’
“No way” should you shelter your children from the
headlines generated by the current economic turmoil, says
Jennifer Openshaw of MarketWatch.
“Some of this mess owes its origins to young, can’t-miss
financial geniuses who grew up without seeing a downturn.
So turn it into a learning experience,” Openshaw writes.
Tell the kids what’s going on and why. Financial life is
about risk, not just reward. They’ll learn what you’re going
through. Better yet, the lesson becomes part of their
financial future.
FA
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