 Client Communications in Volatile Markets
Harold Evensky
Importance of Proactive Communications
If you have yet to read or study the results of research from the field of behavioral finance, now is the time to do so.1. Academics and economists deal in a world populated by rational investors. Unfortunately, as practitioners, we live in a world populated by behavioral investors. Rational investors look at the turbulence in today’s markets and calmly evaluate the potential risks and rewards of remaining invested. Rational investors do not confuse certainty with safety. They recognize that, although the principal value of funds invested in Treasuries and CDs may be certain, after factoring in taxes and inflation, the return they receive on their “safe” portfolio may fall woefully short of what they need to maintain their standard of living in retirement.
Not so for our behavioral clients. They see the frightening headlines and are bombarded minute by minute on the radio, television, and internet with financial pornography. The result is all too often a growing panic that leads them to seek the mythical “safety” of dumping stock and running to cash. As professionals, we understand that such a move is likely to decimate most investors’ long-term financial health. As a consequence, it is important that we effectively communicate with our clients the importance of remaining committed to a sound long -term investment policy. During markets like the one we’re currently experiencing it is not just important; it is imperative.
How Should We Communicate?
There are innumerable forms of communication we might use. All are valuable, but the most important criterion is to be proactive. Naturally, we all respond to a client’s panicked call, but it is infinitely more effective to contact the client before he or she calls. How might you do that? Certainly, we need to use our traditional means — newsletters, quarterly reports, and regular client review meetings. Unfortunately, in today’s environment, although necessary, relying on our traditional tools is woefully inadequate.
At a minimum, consider “special letters” and flash e-mails. The special letter might be an extended but user friendly recap (in terms your clients are likely to understand) of how you believe we arrived at the current state of the markets. Much of an investor’s panic today is simply a result of fear of the unknown. My partner Deena Katz tells the story that when she was young and was afraid to go to sleep for fear of monsters lurking in the shadows, her mom would shine a bright flashlight in the dark corners to assure her that all was OK. Think of your special letters as your flashlight, dispelling the fear of the unknown. Flash e-mails are designed to provide immediate feedback to your clients regarding breaking news. For example, when the U.S. Congress rejected the first bailout package, what did that mean? Although you obviously couldn’t predict the politicians’ next move, you could explain the issues that led to the bill’s failure and the actions the administration and congressional leadership were taking to try to get a revised bill through.
With the ease of defaulting to e-mail, don’t overlook one of the most obvious and all too often overlooked strategies — simply picking up the phone and calling your clients. You do not need to have any answers; merely the fact that you personally acknowledge that you know your clients are worried and that you assure them that you are staying abreast of the markets will dissipate much of their fear.
Finally, be creative. Host an informal morning coffee and bagel “What’s Up with This Crazy Market” get together in your office; set up a series of regular call-in conference calls to keep your clients (and their friends and family) apprised of your latest thinking. This is easily arranged by numerous services that will provide you with an 800 toll-free number to send to your clients. The cost is very modest, and you can leverage the program by sending all of your clients a transcript of the call and posting the transcript and a Wav or MP3 file of the actual call on your web site.
What Should We Communicate?
The most important thing to communicate is that you are well aware of how scary the markets are and that you understand your clients are worried. However, it is imperative that you also convey a sense of calmness and optimism. Using the concept of framing from behavioral theory, the basic theme we convey to our clients at Evensky & Katz is that we see only two alternatives for the ultimate outcome of today’s financial market disruption. Either it is the end of the world as we know it, or we will get through it, as we have done with world wars, astronomical interest rates, September 11, mile-long gas lines, S&L failures, and tech bubbles. Should the world actually end, there is no safe harbor. As we tell our clients, we don’t plan for Armageddon. If, as we believe, the global economy will ultimately recover, this is likely to be the most extraordinary investment opportunity in the last few decades, if not the last century. We believe it is a question of “when”, not “if.”
The next step, as noted earlier, is to provide your clients with some background on how we got here. For example, you can begin with a brief history of the housing boom, which was fueled by progressively easier financing (i.e., the famous subprime mortgages), which culminated in the infamous liar-loans, and which was exacerbated by the packaging of those loans in ever increasingly complex security wrappers offering high yields with purported safety. Then, explain that, in hindsight, the economics of that boom was based on the naive assumption of ever-increasing housing prices. And finally, illustrate how the snowball effect of falling housing prices precipitated a massive deleveraging, which, in turn, resulted in a massive sell off of investments, which, in turn, resulted in a downward spiral of the markets, which, in turn, led to an ever-increasing credit crunch, which, in turn, led to more sales, to panic, to more sales, and to more of a credit crunch, and on and on.
Next, you might put this current crisis in historical perspective. For example, you could use calendar years; 1931 was way worse. It plunged 43.3 percent, and it followed 1929’s 8.4 percent loss and 1930’s 24.9 percent loss. The year 1937 was pretty ugly, down 35 percent, and from September 2000 to September 2002, the S&P 500 Index lost 44.73 percent. Then remind your clients about subsequent market returns. Remind them that the disastrous 1931 market was followed by 1932’s 54 percent gain and that 1937’s loss was followed a year later by a 31.1 percent return in 1938. The tech bubble loss through 2002 was followed by a 28.7 percent return in 2003. The point you want to convey is that market returns spike up just as fast as they spike down and that it happens when everyone least expects it. We’d all like to sit on the sideline until “the right time.” Unfortunately, no one has ever successfully done that with any consistency. If they had, Warren Buffett wouldn’t be one of the richest men alive.
Once you’ve set the stage, it is time to help your clients turn their attention from the world markets to a focus on their personal circumstances and investments. Remind them that you both worked hard in the planning stage to develop an investment plan that is both realistic and flexible. Although you certainly never anticipated this type of market, you recognized the reality of market volatility. That’s why you were so adamant during your planning meetings to clarify the time horizon of their goals, establish emergency reserves, and develop a diversified portfolio. Remind them that they own diversified portfolios and therefore have relatively small investments in many companies. As an example, if they have $100,000 in the market as represented by the Russell 3000, they own about $3,000 of Exxon, $2,000 of GE, $1,500 of Microsoft, $1,400 of P&G and J&J, $1,300 of AT&T, and smaller pieces of another 2,994 companies. If they really believe all these companies will be going broke, they probably should get out of the market. If not, now may well be one of the best investment opportunities in the last few decades, if not the century. Mind you, you’re not suggesting that it won’t get much uglier, just that you believe unquestionably there is light at the end of this tunnel.
As professionals, we know our clients are fearful of what will happen to the economy because of the credit crunch. We also know that to achieve their life goals, they need some component of their portfolio to achieve market returns. We do not know if we’re now at the bottom of this vicious bear market. As the saying goes, “No one rings a bell at the bottom”; however, we also know that to make money in the market, you must be in the market. Thus, the ultimate goal of your communication strategy is to assist your clients in weathering this turbulent period and have them maintain their composure and commitment to their investment plan. Our success is measured by the kind of call one of my associates received the Friday the market recorded its worst week in history up to that point.
“Mary called this afternoon just to say thank you. She is a firm believer in our firm, and she asked me to pass along the message to everyone that what we do does help people navigate these times. Actually, she insisted that I pass her message along to everyone.”
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1. For an overview of behavioral finance and an annotated literature review, go here.
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