What to do when market uncertainty becomes unproductive

We’ve been conducting our Financial Professional Outlook survey for 5 years now, and in that time some themes have shifted and some have stayed determinedly the same. In our most recent iteration, we gained insight into how advisors and their clients feel about the markets and the primary topics of their conversations. We also took a deep dive into the topic of income investing. We heard how advisors are approaching the risks and challenges of generating yield, which I will share in a future post. Today, I want to dig into what we learned about advisors’ market views and how recent market volatility has been impacting conversations with clients.

Advisor market optimism reaches all-time survey low

The latest Financial Professional Outlook survey was fielded in October, a time when many investors remained mired in uncertainty. This is understandable since in the prior months we saw increased market volatility and fervent speculation after the U.S. Federal Reserve announced in September that it would not yet raise interest rates. Even so, we were surprised to see advisor optimism about the markets so low. In fact, the 64% of advisors who say they are optimistic over the next 3 years is about as low as in the November 2012 survey, when the U.S. “fiscal cliff” and European debt concerns were rocking the markets. Advisors don’t think clients are seeing a rosier picture. Just 25% of advisors reported that their clients are optimistic about the markets, while 53% said clients are “uncertain.” This has been a persistent theme throughout the life of the FPO survey, as at least 50% of advisors have reported client uncertainty in nearly every survey. Advisor / Investor Sentiment Index Chart The Sentiment Index provides a point-intime measurement of advisor and investor sentiment about capital markets over the next three years. The Sentiment Index takes into account both those who are optimistic and those who are pessimistic, and is calculated in this way: Sentiment Index = (% of group that is optimistic) – (% of group that is pessimistic). This chart was created by asking advisors to indicate how optimistic or pessimistic they are about the capital markets looking out over the next 3 years, on a 5-point scale of “extremely pessimistic to extremely optimistic.” Then we asked them to gauge the sentiment of their clients on the same scale. This chart was created by asking advisors to indicate how optimistic or pessimistic they are about the capital markets looking out over the next 3 years, on a 5-point scale of “extremely pessimistic to extremely optimistic.” Then we asked them to gauge the sentiment of their clients on the same scale. Uncertainty is often the result of a struggle to process information and concerns. This can be particularly challenging in an environment like we are in today, when market swings often have more to do with policy decisions than economic fundamentals. This makes it hard for investors to understand the investment landscape, and what they can expect in the future. The danger in uncertainty is that it can derail advisors and their clients from productive financial planning conversations. We saw this play out in the latest survey results, as the factors weighing on advisors’ and investors’ market views have clearly been a driving force in their recent discussions. When asked about the main topics of conversation initiated by clients in the past three months, 56% of advisors pointed to market volatility. Other popular topics included portfolio performance (48% of advisors) and global events (35% of advisors). Advisors are largely raising the same issues in the conversations they are initiating with clients: Chart 3

Refocus the conversation to fight uncertainty

When uncertainty threatens to derail a conversation with your client, it can be useful to take a step back to really examine (and distinguish) the drivers of market volatility and the drivers of financial security. What can you control and what can you help clients tune out as background noise? Questions like these can be a good place to start that discussion with your client:
  • What are your goals? Refocus on the client’s overall investment objectives.
  • How much time do you have to reach those goals? If their investment time horizon allows, remind clients of the benefits of a long-term perspective on investing rather than short-term reactions.
  • What can historical context tell us about current issues? Use history to provide perspective and help calm clients’ fears.
  • What tools are at our disposal? Review the financial plan in place and any additional strategies to help pursue investors’ goals.
It can also be helpful for advisors and investors to remember that moments of doubt can also be opportune times to remind investors of one of the tenets of investing—it is often during the times you feel the most uncertain, such as market dips, that potential investment opportunities arise that can support a disciplined investment strategy.

The bottom line

We may continue to see market volatility in the coming months, but there are many indicators that support a positive view on the U.S. and global economies in the longer term. Refocusing clients on a long-term, disciplined investment perspective grounded in an understanding of relevant history can be highly impactful.
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