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Managing Client Anxiety beyond Market Volatility

A remnant from the Great Recession is ongoing financial anxiety about the future. The recent global market turmoil highlighted how this anxiety sits as a strong influencer across generations and wealth strata. Consider the following from recent studies:

Overemphasizing Market Volatility
The Jefferson National/Harris study identified market volatility as the No. 1 issue for both the macro environment and investment execution (noting the concern is actually downside volatility; investors are fine with volatility in rising markets). Volatility’s prominence in investor consciousness speaks to an important truth: when markets decline, wealth is lost; and, when wealth is lost, anxiety increases.

However, market declines are an overemphasized contributor to financial anxiety since any dollar lost has the same wealth affect. Dollars are also lost due to overspending, changed priorities, financial mistakes, unprotected property, tax inefficiency and excessive investment product fees.

Each time a dollar is lost unnecessarily, its compounding value is lost too. Wealth preservation must minimize the loss of dollars from any source, and each dollar not lost allows the remaining wealth to compound from a higher floor.

A Plan’s Wealth-Protecting Actions
Beyond a diversified portfolio to minimize the impact from market downturns, a comprehensive wealth plan protects against many other losses such as:

  • Reducing taxes through tax-loss harvesting, gains management, income shifting, and asset location
  • Lowering expenses for core asset classes with ETFs or passive mutual funds.
  • Avoiding waste by setting spending priorities and budgets
  • Eliminating financial mistakes by using an adviser’s expertise
  • Protecting property with new appraisals and resetting coverage
  • Avoiding probate using a Revocable Living Trust

Something is Clearly Missing
After the wealth plan is executed, attention shifts to the portfolio’s investment performance, thereby excluding the important value secured from the other wealth-protecting actions.

Whereas market declines are infrequent and unpredictable, overspending, taxes and high fees degrade wealth day after day. Preventing these other wealth leakages have absolute monetary value that, in total, can exceed the value generated through portfolio design.

Consider if the S&P 500 declined 50 percent over a few weeks, wealth would clearly be impacted at that moment; paper losses would result with clients’ anxiety spiking. The above IMCA data point highlights that clients value an adviser who keeps them calm in a downturn and prevents paper losses from being realized in a panic. Over time as markets rebound, the paper losses would be washed away by a new bull market—i.e. bull markets last much longer than bear markets.

What’s missed in the reporting task is a high-income client’s largest single expense every year is taxes, at a marginal rate exceeding 50 percent in high-tax states. This annual wealth erosion can far exceed the impact from a single, even severe market decline.

At the typical client meeting, the adviser’s tax alpha production—increased after-tax returns resulting from tax management tactics—is nowhere to be found in the report package.

Not Just Performance Reporting, but Value Reporting
In a performance report, a low-basis investment is shown with a large unrealized gain; a paper profit that may not be realized for years to come. The client’s financial anxiety is reduced knowing this asset exists should it be needed.

In the same vein, the adviser’s wealth-protecting actions have value even though some remain unrealized at a particular time—like a property loss or probate.

An adviser’s value is accentuated when all wealth-protecting actions are illustrated side by side in the performance report package. Seeing the wealth plan’s total value—not just related to portfolio returns—reduces anxiety from headline-grabbing market declines. When anxiety is reduced, a good portion of those 475 hours spent worrying are left to more inspiring thoughts. How could an adviser’s value to this client be more evident?

Kirk LouryKirk Loury
Wealth Planning Consulting Inc.
Princeton Junction, NJ

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You Are Insurance to Uncertainty

A client pays an adviser an ongoing fee to develop and implement a plan that will meet his or her financial needs, release anxieties and provide an avenue to achieve aspirations. Although the plan itself—and the financial and investment tools used to implement it—focus on the uncertain future, the sheer fact that a plan is in place brings the client peace of mind.

An insurance product has a similar structure in which premiums are paid with the expectation that protection is provided if the insured event occurs at some point in the future. With protection in place, the policy owner’s present benefit is the release from anxiety.

While insurance products and wealth advisers produce the same result—confidence to handle an uncertain future—society is well grounded in the need for insurance. For example, to get a car registered, buy a home or get a doctor’s appointment, insurance must be in place.

Using Insurance Principles as a Selling Metaphor

Since the need for insurance is well settled in people’s minds, using an insurance metaphor helps clients relate to the important protections wealth management provides.

Loury_March 2015_Figure

Keeping Purposes Fresh

Either through personal experience, a person’s own relationship network or insurance commercials, people understand the financial and emotional trauma that can occur when a car accident happens, a fire destroys a home or disease takes hold. Insurance companies work hard to keep these adverse possibilities in the buying public’s mind; as stories, they shift insurance from a concept to an experience.

The threat of an adverse event in the future is real. In fact, most elements of a wealth plan seek to deliver protection against what otherwise would be adverse outcomes: insufficient income; financial insecurity; wasted money; complexity; family disharmony.

With the hope that an executed wealth plan will produce financial security and peace of mind, a client willingly starts paying an ongoing advisory fee. Unfortunately, years may pass before benefits are received while the costs remain; this is especially true with younger clients.

Planning with Execution

The plan itself ties directly to an intended solution producing protection in one form or another. Think of the wealth plan as an ever-ready agenda that guides client communications to a straight line spotlighting these types of protective benefits:

  • Budgets to set spending priorities
  • Portfolios designed to minimize losses
  • Tax programs that keep more money in the family
  • Lower-fee investments that increase net return
  • Trusts that efficiently transfer wealth
  • Estate plans that smooth life’s transitions and prevent discord

People hunger for this insurance-like protection, and they’re willing to pay for the wealth planning and execution that produces it. Keep these protection stories alive in your communications and the benefits will remain real.

Kirk LouryKirk Loury
Wealth Planning Consulting Inc.
Princeton Junction, New Jersey