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"Saving Financial Lives One Day at a Time"

By Grant Lucas, CFP®, CLU, CAP, PMP, CSSBB

Protecting your clients from cashing out in tough markets – Part 1

When things are down, we can’t hit the panic button and when things are up, we can’t relax. We’ve just got to stay consistent – Kirk Cousins

I believe every financial advisor who has survived a major market downturn has received that dreaded client call, “I can’t take it anymore. Get me out of the stock market.” When I first
considered writing this article in mid-April 2020, we were in Bear territory with a major pandemic underway and I was going to focus on that call. Now in mid-August 2020, the markets are in record territory. Even though 30 million people are out of work and we just recorded one of the largest drops in GDP ever. I think this presents an opportunity for financial advisors.

Today’s market truly is intoxicating. It reminds me of younger days when I attended the types of parties where we drank our alcohol right out of the bottle; since we considered glasses a waste of time. When I was intoxicated, I felt smarter, stronger, more attractive, wittier, and invincible. And, then came the next day of a gut wrenching, eyeball popping, head crashing hangover.  The exhilaration of intoxication followed by the agony of a hangover and that is the purpose of this article – to protect your clients from this intoxication / hangover cycle.

There are really two parts to protecting my clients from the urge to cash out when the market suffers a major downturn. The first is the conversation I had when the market is up and the second is the conversation I had when the market is down. Since the market is up, this article is going to focus on the first conversation; the critical one I always tried to have during an up market to inoculate my client against the inevitable down market. 

I suspect many of you are already having these conversations with your clients and I congratulate you for that. And, I suspect many of you received the dreaded calls in March and
April and I hope you were able to talk your clients off the ledge and kept them invested, especially after May through mid-August upturn. I am very interested in what you are doing to
help your clients and I am including my email address at the end of this article to hear your methods and views.

When I was practicing as an advisor, I reached to my clients to have a quick conversation concerning where they were and where they were going. These calls could be as quick as 15
minutes or longer depending on what I heard from them. Although I am a big fan of 12 step programs, the method I followed had only four steps that I found worked well during the 2001-2002 and 2007-2008 downturns: 

1. Review Client’s current situation
2. Update Client’s life goals
3. Confirm Client’s risk tolerance
4. Develop action plan

Review Client’s current situation: My Father always said that if you don’t know where you are, it is hard to figure where you are going. My client may have become one of the
unemployed and was wondering what to do. Today, this is an opportunity to discuss the CARES Act and how it might help them with access to cash and defer their student loans if
applicable. There have been several good CARES act articles in the Journal of Financial Planning, you can review them at: https://www.financialplanningassociation.org/learn/journal. I would then ask about everyone’s health, even in pre-pandemic times. I asked about any other changes in their life. The goal of this step is to ensure there are no surprises when I proceeded to the next steps. My client may be frazzled and frustrated by everything going on at present and I took the time to listen. I suspect current advisors can learn a lot from someone who has had reduced social mobility for six months. I learned my clients may not remember the conversation; but they remembered how I made them feel.

Update Client’s life goals: I would take a few moments to review their personal and financial goals. This allowed me to remind them of what was important to them and learn of any
changes. This was also a great time to review their emergency fund and ensure that it was up to the task of protecting them against job, societal, and market uncertainty. I had several clients during the 2007-2008 downturn who were using their HELOC as an emergency fund when then their lenders reduced the loan amount available and left them with bad consequences. Some of my clients also used their credit cards for an emergency fund. I would check their risk exposure to unexpected death, loss of income, and liability. With a pandemic underway, this is also a great time for a risk review and may provide the opportunity to protect their families against unexpected death.

Confirm Client’s risk tolerance: This was my key conversation to protect my client’s against panic and bad decisions during a market downturn. I always explained that I knew that the
market will go down. I didn’t know when, or why (although I have some good guesses this time), or how much; but I knew it would happen and I wanted them prepared for it. I always
liked to use a financial example: if a client had $1,000,000 with me in a 70% stock and 30% bond portfolio, I would let them know a 50% market downturn would cause their portfolio to lose $350,000 and I asked them how they would feel when their $1,000,000 decreased to $650,000.  If they said they could not accept that, it was time to update their risk tolerance. If a client told me it was my job to keep that from happening; I would explain my crystal ball had been broken for years and they might want to find a financial advisor who could do that for them. I had other clients tell me since the market was going up they wanted to increase their portfolio risk, this was another educational opportunity.

Develop action plan: Based on the previous three discussion points, I always created an action plan for them to follow. This could be as simple as no changes while reminding them
about the impact of a market downturn on their portfolio. It could involve increasing their emergency fund, rebalancing their portfolio (don’t forget tax consequences), or updating their
risk protection products, such as life insurance to protect their loved ones or liability insurance to protect against the unexpected. I always reminded them about the market going down (multiple times) and then reminded them that after a downturn the market always went up; we never knew, why, or how much. It is important to have a plan and stick with it. The key is to review all this with them before ending the conversation. If there are follow up steps, I always tried to schedule the next appointment during the call rather than allow the client to “get back to me.” I was shocked to discover that many of my clients would agree with my recommendations and then ignore them. The follow up appointment helps improve accountability.

I wish you the best of luck in a very challenging time. I have serious cabin fever and am tempted to take unnecessary risks daily. Fortunately, my Spouse, also known as The Boss
keeps me as safe as possible. My next article will focus on the second conversation when the market falls. I hope this article has been helpful to you. I would be interested in hearing your views and how you help your clients during uncertain times. I can be reached at [email protected]