Bear Stearns near-collapse and sellout to J.P. Morgan was just one more act in the ugly market drama unfolding on Wall Street: Big brand-name firms, thought to be failsafe, are reeling from the sub-prime crisis and its fallout. The economy and the markets are on the skids. Financial advisors are left to mollify their clients’ anxieties about their safety of their assets—and their retirements—however they can. There’s no question that they’re skittish: Investor confidence, as measured by the State Street Global Markets Index of Investors Confidence, sat at 83.5 in March. Granted, that is a better reading than it got back in December, when it bottomed out at 65.3. But it’s still low compared to an average last year of about 97.
Most advisors say the best way to calm clients during bad markets—and keep them from packing up and leaving for another advisor or another firm—is constant communication. You’ve got to reach out to clients first, not wait for the client to call you in a panic. Thomas Orecchio, principal of fee-only Greenbaum and Orecchio in Old Tappan, N.J., which manages about $450 million in AUM, says his firm immediately sent a letter to all 200 of the firm’s clients after the Bear Stearns news came out, explaining to them what had happened, and why their assets are safe. “When the market is in a panic situation—especially with what happened over the weekend—we send out a letter or email saying, here is the situation, this is the economic environment, we monitored the market and looked at your portfolio, here is your performance,” he says.
One obvious and key point to stress with clients: Think long term. “With the latest market decline, we are trying to help our clients to back up, and focus on the big picture. We always stress to our clients that it's important to think about performance in terms of a full market cycle (three to five years),” says Chad Smith, CFP at Financial Symmetry in Raleigh, N.C. Smith says that during this market cycle, like all market cycles, clients will experience both losses and gains. During the most recent market drop, his firm has emphasized with clients the total gain in dollars that their investments have earned since they first began working with the firm. “When they see how profitable their portfolios have been over the last five-and-a-half years compared to the last five-and-a-half months—they feel much more at ease.”
Advisors need to get beyond the basics of competency and integrity if they want to keep clients happy and loyal—especially in tough markets, says Jim Kane, a senior fellow at loyalty consulting firm, The Brookside Group. “There are four behaviors that any company or group has to demonstrate in order for their client to be loyal to them,” he says. Those behaviors are: Understanding who the clients are as individuals, anticipating the clients’ needs before they ask, projecting their needs into the future and understanding the biggest challenges clients face.
The best way to do that? Listen. David Morganstern, CFP, AIF, at fee-only CMC Advisers in Portland Ore., says he listens carefully to his clients so that he can sort out when their fears are rational and actionable, versus purely emotional. Obviously, retired clients tend to be more emotional, because they are typically living off of their portfolios, and have less time to ride out a storm. As a result, Morganstern addresses their concerns differently.
Sometimes advisors hit a wall with clients. Communication becomes impossible; the clients are inconsolable. Orecchio says his firm has had a few clients who have said, “I can’t take this,” and insisted on cashing out. But that is a deal-breaker for his firm, and, on occasion, they have resorted to firing such clients.
Of course, client loyalty is something that has to be developed in both good and bad times. If the advisor has done a first-rate job with the client, then the client is more likely to ride out rough markets and forgive them for mistakes. “When someone is loyal to you when you make a mistake—which every company does—whether it is losing money or a bad investment—if you have a loyal customer, you’ve built up so much good will with them that they believe that mistake is an anomaly, and it is not part of who you are or what you do for them, and so they excuse you,” Kane says.
