Talking to your clients about: Volatility

In many ways, you are the main source of financial education for your clients, and that starts with separating overheated speculation from truly meaningful market trends. When the Dow moves 1,000+ points in one day or moves 400+ points in either direction every day of the week, your clients might get nervous. How can you explain major market moves in a way that helps ease their concerns? And, just as importantly, can you use these discussions to enhance your client relationships?

Even if your clients read the Wall Street Journal or watch CNBC, they may not fully understand what volatility means. The headlines can sound alarming, particularly without a full understanding of how volatility may or may not impact a portfolio and assets. That's where advisors should come in. It's a step in the right direction if clients have the foresight to talk with you about their volatility concerns. But you may wish to reach out to others proactively before they consider any rash decisions.

Describe volatility in laymen's terms

Mike McKerr, strategist, institutional trading education at TD Ameritrade Institutional, suggests starting by explaining that volatility equals uncertainty. “Markets dislike unknowns," he says, and in times when there are lots of big question marks (…like now), there's a lot of uncertainty.

“Big events like presidential elections," McKerr explains, “can lead to a flood of speculation in the financial media." While geopolitical news can generate breathless headlines that tend to scare the average investor, the markets ultimately just want events to be resolved, regardless of the outcome. For example, “After the 2016 election was resolved and with a tax cut on the horizon, 2017 had relatively low volatility," explains Mike Turvey CFP®, CMT, senior strategist, institutional trading education at TD Ameritrade Institutional. “Then, in 2018, expectations changed. Investors didn't know what was next." When that happened, volatility increased.

In order to make sure your clients can sleep easy even in times of great volatility, it can help to explain to them what's causing it. McKerr agrees. “Lingering uncertainty is the main driver of recent volatility." He cites ongoing trade tensions between the U.S. and China, lack of clarity on the Federal Reserve's monetary policy, and ongoing Brexit drama as major drivers of uncertainty.

“Volatility is likely to stick around until there is some resolution to these big unknowns," he says. Breaking down the big trends behind the headlines can give your clients a better understanding of the market.

Reframe volatility's bad reputation

Once you've given your client a sense of what is causing market fluctuations, you can start to help them rethink their assumptions about volatility. “Volatility typically has a negative stigma," says McKerr, “and market and media gurus tend to talk about it as though it's a bad thing. But in reality, it's not necessarily bad. Volatility is a two-way street."

It can be useful to reframe volatility as an opportunity rather than a reason to run for the hills. Clients who are educated on the causes of volatility and prepared to act appropriately—and more importantly, not overreact—can make the most of the market's mood swings. For instance, you can explain to clients that there are investment strategies designed to take advantage of volatility. McKerr adds that going over the different ways clients can consider hedging risk through covered calls, protective puts and collars can also help allay fears.

The key is to communicate to your client that you, as their advisor, have the tools to potentially take advantage of market movements. Turvey also suggests simple reminders such as “markets are inherently unstable" and “you have to take risks to gain returns."

Stay focused on the long term

Once you've explained what volatility is, and that you're prepared to manage it, it's good to remind clients that portfolio management is a marathon, not a sprint. Turvey suggests advisors tell clients, “Don't pay too much attention to short-term volatility." Being too focused on the near-term, he says, leads clients to view fluctuations as a cause for fear. “But fear in the markets cannot last forever—it always subsides," he says, and this is something advisors need to emphasize.

After all, adds McKerr, “the average investor has a three-to-five year horizon on most investments, so day-to-day changes are mostly noise. Long-term wealth is built by investing and staying with it, so focusing on the present can be negative. It leads to 'paralysis by analysis.'" Even if traditional volatility measures like the VIX are at 10-year highs (and as of this writing, they aren't), you've worked to construct a balanced portfolio for your client. With a sound plan in place, there's rarely a need to shift course radically.

As an advisor, you know that staying the course over time tends to pay off, but it's easy for clients to forget this. These three talking points can help you remind them to play the long game:

Strengthen your client relationships

What if your explanations about volatility and advice to stay the course don't put your clients' fears to rest? That happens, and it's fine. In fact, this is a prime opportunity to tailor your advice and ultimately strengthen your relationship.

“If a client is losing sleep, they might be taking more risk than they're comfortable with," says McKerr. In that case, you should have a conversation with your client to reassess their risk tolerance and potentially rebalance their portfolio in a way that makes them more comfortable.

“We're investors too, so we understand the emotions that come with volatile markets," says Turvey. It's natural for an investor—regardless of their level of experience—to feel apprehensive when the market appears fickle. With that in mind, take time to empathize with your clients—we all have to make peace with uncertainty.

“At TD Ameritrade Institutional, we've built a model on software and education, and all of this is available to advisors, which ultimately benefits their clients," says McKerr. “In the end, this lets advisors spend more time building relationships with their clients."

This is the message you want to leave your client with: You're with them through thick and thin. What's more, you have the tools—and institutional support—to make the most of a volatile market. So the next time your client sees an alarming headline about near-term volatility, remember you can use this as a springboard to a conversation that highlights your expertise and commitment to your clients.