Talking to clients about ... COVID-19

To say the current situation in the market and in the world is unprecedented would be an understatement. The S&P 500 dropped 20% into bear-market territory in just over three weeks, small businesses are scrambling to stay afloat, and many workers in the service industry and gig economy are suddenly without work. Things are uncertain for your clients, which makes it a busy time for you.

Three senior strategists from TD Ameritrade's Institutional Trading Education Team took time out of their extremely busy schedules to offer some suggestions for how to help walk clients through the rocky times we're currently experiencing. [For context, this conversation took place after the market close on Wednesday, March 18.]

Q: What are you hearing from advisors this week? What kinds of discussions are they having with clients?

Mike McKerr: I don't think we've had a week this busy in a very long time, and a lot of the conversations are about what's really going on with the current market moves. When do we think that they might stop? And how long do we really expect volatility to stick around for? I think the reason why people, especially advisors and clients, are so concerned is because the situation is largely unprecedented. And, for the most part, it really came out of nowhere very quickly. So ultimately, we've seen some clients liquidating their accounts. We've heard some advisors adding to positions, using some of the dry powder that they have available. But the No. 1 thing that I think we're hearing is, how long is this volatility really going to stick around for? And how can we really attempt to capitalize on it?

Mike Turvey: I've gotten a few calls in the last week or so, also, where the clients are so desperate that they're asking their advisors if they should hedge their portfolios. But it's actually the worst time to do that, because it's potentially expensive. Volatility is high and everybody's worried about the future. But I think once advisors walk clients through it, when clients see how expensive it could be, the discussion probably looks a little bit different. Most of the advisors I talked to have a plan in place for their clients and they're pretty much sticking with the plan. That's helping them, I think, in those discussions.

McKerr: I think it's key to focus on the investment plan in place, based on clients' risk tolerance, and continue to assess. I would say it's important not to stray too far from that. Don't do anything drastic because of one blip in the grander scheme of things, over the course of however many decades you're going to be an investor for.

Q: Right now it feels like monetary policy is already spent. What does that mean for the future of equities and the economy?

McKerr: I've always said, never underestimate the creativity of a central banker. Because even when you think they don't have additional tools or arrows in their quiver, they do. Throughout the 2008 financial crisis, we certainly saw many different facilities be created to ease the stresses in the credit markets.

Turvey: We've seen fiscal measures now being introduced, since Monday [March 16]. So it's not that everybody's out of bullets at this point, but a lot has been done already. Obviously, the market is waiting to see progress on the virus, right? Getting a handle on the real numbers, seeing the curve flattening. I think that's the next thing that has to happen, right? Until that happens, I would not be surprised to see the VIX still trading around 70 or 80.

McKerr: I think the volatility is centered around the fact that the government needs to come out with fiscal measures that will not only stem the spread of this virus, but also help those that are going to be affected financially. There's only so much that monetary policy can do for the economy. It can't stop the spread of a virus. But if the government is able to come out and say, we're going to put money in people's pockets that are going to be out of a job, the equity market might finally stabilize. (As of Friday, March 20, markets were calmed somewhat by fiscal stimulus plans put in motion.)

Q: Given all this uncertainty, how can advisors help clients stay calm?

Turvey: A lot of advisors' clients lived through this in 2008 and 2009, and they had the same feelings then that they have now. Obviously, it's different because of the health aspect, but people were having very similar thoughts, certainly about their portfolios. But they've just forgotten what those feelings were like. So that might be a good way to remind them, hey, we've been here before and we got through it. [See accompanying graphic.] We're going to get through this at some point too, but it's not going to be fun for a while.

McKerr: We humans fall into recency bias very easily. Especially when you consider the market— we had years of relatively low volatility, the market stair-stepped higher, and then we got a little taste of volatility with the U.S./China trade war, but it passed and the market ran right up until after we saw that phase one announcement. And here we are, smack dab in the middle of a once-in-a-generation volatility environment. Volatility is very uncertain, and in time it will pass. But for now, I think just keep in contact with your clients and reaffirm all of the things that you discussed with them when times were less volatile.

Clint Cowles: We'll get through this, just like we've gone through other things. And when we do, the American stock market will likely be at much lower prices than it was before. So once we are done wandering through this storm, we'll have more potential opportunities on the table.

Q: Is there any way to take advantage of potential opportunities currently?

McKerr: Volatility, many people think, is a one-way street. It's actually two ways. So, you certainly can be adversely affected by it. But it also can potentially benefit you if you play it correctly or approach it properly.

Cowles: Volatility may offer some pretty decent opportunities, if there are certain stocks or sectors that clients would be comfortable owning for the long term, the 5-10 year term. With volatility as high as it is right now, it's offering options traders very juicy premiums on selling puts as a way to potentially get into the stocks. But you have to be comfortable purchasing the corresponding stock at the put's strike price.

McKerr: And then from a fundamental standpoint, when you get this market movement that very much looks like a combination of liquidation and potentially capitulation across the broader market, you can get some fundamental dislocations where value investors might see specific companies that are trading below book value, things like that really start to look like longer-term plays.

Q: Any advice for working with clients in the time of social distancing?

Turvey: I think a lot of advisors are using this as an opportunity to say to clients, look, we're going to use this technology. We really have no choice at this point. We'll get back to face-to-face eventually, but for now, let's try to make this work.

Cowles: One of the interesting parts about this is the time in the world that this is all happening. We can use video conferences for nearly everything. Virtually everybody has that technology already in their house and whether they know how to use it or not, that may be a different story, but it's all there. We can certainly also do regular phone calls if you have clients that aren't as tech savvy.

McKerr: Stay in contact with your clients as much as possible. Ultimately, they came to you for guidance in planning their financial futures. So when the seas are a little stormy, it's your job to not only manage their investments, but also help manage their emotions. Volatility is all about uncertainty, and your relationship with them should not be uncertain or volatile. So keep an open line, whether it's FaceTime, Skype, phone call, whatever. I think that would benefit them more in the long run than, in many cases, a couple extra basis points of a return.

For additional insights on the market, and how you can address current events with your clients, register for one of our upcoming webinars.

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