When times are good and the markets are flying high, investors tend to forget that volatility is a normal part of the investment cycle. However, many investors panic when they see volatility in their investment portfolio.
As an MFD, you would have probably received calls from some of your clients worried about the recent sell-off in the market. A client overpowered with emotions is difficult to deal with. This is why experts recommend that MFDs should keep their clients prepared for such scenarios beforehand.
"In any investment, it’s important that investors are aware of the potential risks. Even if things look all rosy at the time of investment, you should apprise investors about the negative scenarios that may come up later on," said Lovaii Navlakhi of International Money Matters.
He said that dealing with clients can become even more difficult during tough market situation if the on-boarding was done on the basis of false promises.
"It all depends on what you have told them beforehand. If you on-board by promising stable or high returns then you are more likely to receive such calls," he added.
Rushabh Desai of Rupee With Rushabh Investment Services feels that the best way to avoid facing such scenarios is to ensure that clients have practical expectations and are aware of the nature of the market.
"We have to manage their psychology. None of us, be it MFDs, RIAs or fund managers, have any control on the market. All we can do is keep investors prepared for such scenarios. Explain to them why markets are falling and what can happen in the near future," Desai said.
"If the goals are nearing then clients have a reason to worry. In such cases, investors should take an appropriate call to minimise losses," he added.
A whitepaper by LPL Financial lists five steps to prepare clients for market volatility and help them weather the storm. Here are they:
Educate early
Start educating your clients at the very beginning of your relationship with them and continue to emphasize important tenets in every meeting and interaction. Even if you think clients understand how investing and market cycles function, they need to know how you view historical performance, current market cycles and the appropriate way to respond.
Communicate early and often
Once you have laid the foundation for clients through education both at the beginning of the relationship and in ongoing meetings reinforce your message through ongoing communications.
Your communications do not have to be long or involved, even one to two paragraphs that explain your position on current and market events is enough to reassure clients that you are on top of things and care about them.
Be proactive
When market volatility hits, do not wait for clients to call you; instead, reach out to them immediately and let them know you are aware of what is happening and prepared for any contingency.
If you are doing regular emails or blogs, push out a special edition as soon as possible with your thoughts on the situation.
Counsel, counsel, counsel
When times get tough, you’ll need to put on your counsellor hat and coach clients through the uncertainty.
In many cases, clients just need reassurance that their strategy is right for them and you have the expertise necessary to see them through.
Make adjustment as a last resort
If clients need you to do something, a good first step is to readdress risk tolerance.
Go through a risk tolerance questionnaire with clients again and explain the impact of switching to a model with a different risk tolerance.
