What advisors can learn from investor behavior during a crisis
Helping to make investment plans clearer is one way advisors can reduce the risk of clients making rash decisions.
Most investors are feeling good about their financial prospects, according to a survey from the Investments & Wealth Institute that was issued at the start of the COVID-19 pandemic. Of the investors surveyed, 50% are expecting positive rates of return in their portfolios while only a third of them are expecting declines over the next 12 months.
“Except where there may be extreme market declines of 50 percent or more, investors seem secure about their futures, their retirements, and their advisors,” the survey found. Specifically, 25% of investors are expecting a rate of return between 1% and 9%, 16% are expecting a rate of return between 10% and 19%, and 9% are expecting a rate of return at least 20%.
The survey also asked investors if they thought they would achieve their retirement funding goals during market declines of mild, moderate, significant, or severe scales. Results indicated investors believed they would achieve their goals despite a mild or moderate decline. However, during a significant decline, only 37% said they thought they would meet their goals, another 37% thought they wouldn’t, and 26% didn’t know. This suggests, the report said, that advisor help and communications around retirement planning is especially important during major market declines.
The survey found a link between strong advisor-client relationships and the willingness of clients to accept lower returns. However, that willingness would be tested if the market declined 50% or more for up to a period of two years, the survey found — in that case, 10% of investors said they would leave their financial advisor.
Advisors were reported to be proactive, for the most part, in providing action plans that addressed market declines. In response to the question, “Has your advisor addressed what actions should be taken in your portfolio in the event of a significant or severe market decline?” 49% of investors surveyed said their advisor had shared action plans without being asked; 26% said their advisor shared plans when asked.
Among those clients who had a plan, 36% believed it had a “significant, positive effect” on their peace of mind and 52% said it had “some positive effect.”
The survey — which was conducted by Absolute Engagement and sponsored by Toews’ Behavioral Investing Institute — also found about one-third of investors wished they had taken a different approach during the financial crisis of 2008-2009.
Despite some of the positive attitudes being expressed by some investors, financial advisers should be talking with their clients about lowering their expectations or rethinking their strategies, the survey recommended.
“This may include exiting stocks, adding alternative strategies, changing allocations more to bonds, or adding hedged equities or loss-avoidance strategies to their clients’ portfolios,” the survey found.
The survey noted that investors are more likely to leave their financial advisors the more the market falls. One step advisers can take is provide clarity to the investment plans they’ve given their investors — the survey found that while most investors are aware of a plan, they “do not always feel it is a clear plan.”
The survey was distributed to 751 investors in mid-March 2020, the same month the world began feeling the effects of the international outbreak of the novel coronavirus. On March 10, the first day the survey’s authors began collecting data, major universities began cancelling in-person classes while music festivals like Coachella were postponing dates due to the pandemic.
“As a result, we had the fortuitous coincidence of asking investors about investor behavior during a crisis, in the midst of the most significant financial crisis since The Great Depression,” the survey noted. “Of all prior infectious disease outbreaks, not even the 1918 Flu Pandemic has impacted the financial markets as dramatically as COVID-19, and the story is far from over.”
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