5 Reasons Why Financial Advisors Must Engage Actively With Their Clients During A Downturn

By Vinayak Deshmukh | Feb 16, 2023

According to Don Connelly, one of the financial industry’s most successful mentors to advisors, "The stock market is the only market that when prices are slashed, clients run away". During an economic downturn, clients are bound to be anxious and will have a thousand thoughts running through their minds. "What will happen to my investments? Should I cash out on my investments?" are some of the questions many clients have. Financial advisors need to take charge of the situation and support their clients effectively. Contrary to what most think, it's important to communicate more often with clients during these times. Here are the 5 reasons why financial/wealth advisors should actively engage with their clients during a downturn.

1. Poor/No Communication - A Red Flag That Something Is Wrong

Poor performance seldom leads to a poor advisor-client relationship, but poor communication is a sure-shot way for advisors to get fired. In fact, according to a survey by Financial Advisor magazine, 72% of clients said they fired their advisors due to their advisor’s failure to communicate on a timely basis. 

During a downturn, clients may feel anxious or uncertain about their investments. This is the time to communicate and provide reassurance. As Anessa Custovic, CIO at Cardinal Retirement Planning rightly says, "Be proactive. Clients will feel even more uneasy if they are constantly asking you about what’s going on." Now is the time to pick up the phone and talk to clients about current market conditions and remind them that downturns are a normal part of the macroeconomic cycle.

Having said that, communication need not be restricted to assuring clients during bad times. There’s no substitute for personalized communication during all market cycles - be it regular emails, newsletters, market outlook, educational videos, etc. Digital communication combined with in-person communication is a critical part of advisor-client relationships.

2. Taking A Long Term View & Increasing Trust

During times of economic volatility, clients panic. Trust is the ultimate currency in wealth management, as clients seek to preserve their wealth in an increasingly complex world. But how can financial advisors increase the trust of their clients during a downturn?

According to Brian Frank, CIO of Frank Capital Partners, "Historically, informed honesty is the best policy." Clients may have questions or concerns, and it's important for financial advisors to address these with complete transparency. It goes a long way in building long-term relationships. Now is the time to help clients focus on their long-term financial goals rather than short-term market fluctuations. By taking a long-term view clients can stay focused on their goals and investment strategy even during a downturn.

3. Emotional Connection Strengthens The Financial Connection

Identifying and understanding client emotions is the key to responding to them in ways that will strengthen client relationships. Chris White has aptly described in his book "Working with the Emotional Investor: Financial Psychology for Wealth Managers" how to understand client personalities and their reaction to potential losses. This can help financial advisors in times of economic uncertainty. He has classified wealthy clients into 3 different personality types: fixer, protector & survivor.

                    Ref: White and Koonce, Working with the Emotional Investor

Fixers are risk-taking clients who want to win at any cost. Survivors may be tempted to keep things for longer than they should. Protectors are anxious that things may go out of hand. The 3 zones are based on the stakes involved. The light zone is for low-stakes events when everything is going fine, e.g., a bull market while the dark zone is for high-stakes events, such as the subprime mortgage crisis of 2008-2009.

Assessing the specific type of client advisors work with is the key to being optimally effective with that client. During low-stakes situations, for example, the majority of clients may exhibit behavior consistent with all three personality types. However, the real difference emerges during times of economic turmoil, such as a downturn or recession. Advisors need to carefully identify clients at this moment and guide them accordingly. Once advisors are able to connect with the personality type of the client emotionally, they can tailor advice accordingly, thus gaining the client's trust.

4. Deploy Technology To Identify Opportunities

Now is the time to utilize the investments made in technology to proactively serve clients and manage economic turmoil. Technology tools to aid communication are one part of it like email, webinars, and video communication, while the other part is identifying the right opportunities for long-term portfolio growth.

Technology tools like AI algorithms, automated software, databases that offer a unified client view, etc can help advisors derive useful insights regarding client values and insights, and the way their portfolios are structured. Such software platforms enable advisors to make smarter and more strategic investment decisions for their client portfolios, be it identifying opportunities to invest in undervalued assets or making strategic purchases. Financial advisors can proactively rebalance their clients' portfolios to ensure they remain aligned with their investment objectives.

Investing in the right technology tools helps banks and wealth management firms in the long term, and comes particularly handy during downturns.

5. Get Referrals From Existing Clients

While it may sound crazy, it's important to constantly search for ways to expand the client base, even in the face of an economic downturn! Systematic communication with existing clients in a downturn keeps them informed about the actual status of the market and its effect on their investments. This helps improve the clients' trust in their financial advisors and helps build an emotional connection with them.

Understanding the existing clients’ needs fully and bringing stability to their portfolios will automatically pave the way for new referrals. James Pollard, the host of the "Financial Advisor Marketing" podcast and founder of TheAdvisorCoach.com, has shared interesting stats on client referrals:

  1. 58% of wealthy investors found their financial advisor via referral.
  2. 70% of loyal millionaires are likely to refer people to their primary advisor, yet only 10.7% of advisors actually ask for referrals.
  3. People are 400% more likely to become a client when referred by a friend.

Clients are already fearful and skeptical of their advisor's decisions during a recession. So, if a financial advisor performs to the standards expected by the clients or above them, he/she is going to be the go-to advisor and leave other advisors behind.

Economic Recessions - An Opportunity To Strengthen Client-Advisor Relationships

By actively engaging with HNI clients during this time, financial advisors can not only strengthen client-advisor relationships but also stand a greater chance of becoming the advisor of choice when the great wealth transfer will happen. The young and wealthy clients i.e. GenYZ clients have already lived through times of great uncertainty such as the Great Recession and the COVID-19 pandemic. They are motivated to improve their financial standing, with around two-thirds of millennial and Gen Z investors believing that the key to financial success is working with a financial advisor. Now is the time for financial advisors to be proactive in helping their clients navigate uncertain financial markets.

To understand how our HNI client engagement solutions can work for your bank or wealth management firm do get in touch with us.
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