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Client Conversations
How some RIAs prepare clients for market downturns

When the stock market goes into a tailspin, individual investors often get jittery and some choose to bail on stocks. But veteran RIAs know that such client behavior is counterproductive, as it usually ends up having a negative impact on investment returns.

 

Market drawdowns are not uncommon, as demonstrated at the beginning of the COVID-19 pandemic in early 2020. Between February 19 and March 23, the S&P 500 Index, which tracks the price of the largest U.S. listed public companies, fell by 33.9%, according to data from the Federal Reserve Bank of St. Louis database. The market bounced back within a few months after the crash.

 

To many people, the pandemic alone was scary and the drop in the stock market was alarming. However, some savvy advisors anticipated that such events would occur.

When the stock market goes into a tailspin, individual investors often get jittery and some choose to bail on stocks. But veteran RIAs know that such client behavior is counterproductive, as it usually ends up having a negative impact on investment returns.


Market drawdowns are not uncommon, as demonstrated at the beginning of the COVID-19 pandemic in early 2020. Between February 19 and March 23, the S&P 500 Index, which tracks the price of the largest U.S. listed public companies, fell by 33.9%, according to data from the Federal Reserve Bank of St. Louis database. The market bounced back within a few months after the crash.


“A lot of the work we’ve done to keep clients invested through market panics really occurs way before the panic has actually materialized."

Rene Jarquin
Chief Investment Officer

To many people, the pandemic alone was scary and the drop in the stock market was alarming. However, some savvy advisors anticipated that such events would occur. “A lot of the work we’ve done to keep clients invested through market panics really occurs way before the panic has actually materialized,” says Rene Jarquin, chief investment officer at Single Point Partners.


Jarquin says the planning starts when clients are onboarded at his company. At that point, clients are told that Single Point advisors will build a financial strategy on the assumption that, eventually, the stock market could drop by perhaps 20% to 40%. Not only did that happen at the beginning of the pandemic, but it also happened a number of other times, including from 2000 to 2002 when the dot-com bubble burst, sending stocks down 42%.


For Single Point advisors, that means structuring investment portfolios to have enough cash and high-quality bonds to sustain the client for an extended period — up to four or five years, Jarquin says. The goal is for clients to not have to worry about living expenses during a market downdraft and, therefore, feel less compelled to sell stocks.


The strategy yielded strong results during the recent pandemic. “We did not sell down a single client [during that time],” Jarquin says. “95% of the time we were going the other way and we were buying [stocks for clients.]” He acknowledges that some clients were very anxious for a couple of months. “They’re just wired that way,” he says.


“We work with a lot of professionals who appreciate education, appreciate research [and] appreciate data.”

Nicholas Olesen
Director of Private Wealth

Other RIAs have the same goal in mind but use different techniques to help calm investors. Kathmere Capital Management, for example, used podcasts and webinars to educate clients during the market tumult of the pandemic. The idea was to inform clients on how frequently market crashes occur. “We started doing a weekly live webinar and we’d go through the market data on historical drawdowns,” says Nicholas Olesen, director of private wealth at Kathmere. “We work with a lot of professionals who appreciate education, appreciate research [and] appreciate data.”


For Kathmere, the webinars garnered a lot of interest. Olesen says 70% of the firm’s clients signed on to the webinars at least once a month during the crisis — a far higher rate of interest than you’d normally expect.


Now that the market has bounced back, Kathmere offers webinars once a quarter and podcasts are recorded every two weeks. In the event of another market crash, the firm would likely increase the frequency of both. “We’re 80% sure we would start them back up right away,” he says.


Another technique at Kathmere involves an electronic prompt on the client’s online account at the company’s custodian. If a client wants to trade, a message appears on the screen asking them to talk to their advisor, Olesen says. Still, clients can trade without consulting their RIA. Despite that freedom, most clients discuss what they want to do with advisors before making decisions, he says.


Kathmere doesn’t insist that all client trades go through an advisor. “It’s their capital, we’re the advisor. We’re going to give them the best of our advice,” Olesen says. “Then, if the clients want to act in a contrary manner, they have the right to do that.”



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Standard & Poor’s 500 Composite Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks.