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“I won $500,000 in a settlement.” When you see those personal injury lawsuit ads on TV, it sounds less like fair compensation and more like playing the lottery. This leads into the mindset “When something bad happens, it’s someone else’s fault.” When markets decline, it’s important clients understand it’s not their fault. It’s not the advisor’s fault. It just happened. That can be a tough sell.
The first reason is the mantra often associated with mutual funds: “Past performance is no guarantee of future results.” It’s like saying history doesn’t repeat itself. History does repeat itself. The market usually moves in cycles. There just aren’t any guarantees.
1. You are traveling on a train
Clients have an idealized view of what an advisor does. The client is crossing the street. A truck is out of control, heading in their direction. The advisor pulls them out of the way. The client resumes crossing the street. Superman does that. Here’s a better analogy. The client and advisor are traveling on a passenger train. Actually, there are a lot of clients in the car. The brakes on the train fail. The advisor sees what is happening. He gets everyone back in their seats, gets them into the safest position possible. The train has some bangs and scrapes, but slows down then the track is running on level ground. The advisor makes sure everyone is safe and accounted for. They call more medical attention for any injured passengers. The advisor can’t prevent the crisis. They can take a leadership role. They put the safety of others before themselves.
2. The crystal ball
Clients feel the advisor saw the decline coming. They could have “gotten me out” but they didn’t. back in 2019 we were experiencing the longest bull market in recent history. Many advisors were thinking “This can’t go on forever.” Many told clients to lighten up on equities. Buy fixed income. I think lots of that advice was ignored. It’s the logic “If you own a horse that is winning races, would you shoot it?” Bottom line, advisors were probably telling clients to lighten up. We know market timing doesn’t work. Suppose the advisor said in early 2020 as the market was hitting new highs: “I think we should get out.” Would anyone have listened? Suppose when the market has swiftly fallen about 30%, they said: “Now is the time to get back in.” Would anyone have listened? Advisors and clients hire money managers to make the day to day decisions. It’s comforting getting confirms letting you know they were buying when the world was selling.
3. The smart money gets out first
Many people thing there are some smart people (they work at a hedge fund, of course) that see things before they happen and bail. The everyday investor is left holding the bag. Clients need to know a common characteristic of Wall Street firms is they have lots of money. They each hire the smartest people. Everyone has some. The next lesson is stock that’s sold doesn’t disappear. It’s bought by someone else. The textbook theory is “for every seller there is a buyer.” The guy who think it’s time to sell is handing his shares over to the guy who thinks it’s a good price to buy.
4. The roller coaster
People often say “the stock market is like a roller coaster.” They are talking about the ups and downs. If you take a closer look at the analogy, a roller coaster climbs and dips, but returns to the place it started with all riders intact. The way people get injured is when they want to get off the roller coaster when it’s still moving! There are no guarantees. The roller coaster might have a structural problem the inspector didn’t catch. Generally speaking, roller coasters don’t take casualties in everyday operation. You need to follow the safety instructions.
5. My broker is only interested in lining their own pockets
That was a major suspicion back in the days of transactional business. Asset based pricing changed that. Advisors want clients to make money. More assets means more fee based income. Advisors want long term relationships. If a client pulls their money out, there is no fee based income. The advisor wants their client to make money. Happy clients add more money. They send their friends.
Clients need to realize working with a financial advisor is a collaborative, nor an adversarial relationship.