After a decade-long bull market, concerns about slowing global growth, trade wars and a possible recession has clients understandably on edge. But, while clients may be focused on the negative aspects of rising volatility, advisors can use current market uncertainty as an opportunity to not only optimize their client’s portfolios, but to also foster closer connections within those relationships.
Here are three things advisors can do to make volatility their friend:
#1 – Rebalance, rebalance, rebalance
Rebalancing client holdings is good hygiene at any time, but it’s particularly prudent in an uncertain market. It’s easy to stay invested in market segments that have recently outperformed, but portfolios typically benefit from taking the so-called “hard road” – or rebalancing away from what has worked in the past and forging a new path.
Harry Markowitz, the father of modern portfolio theory, was known to say that “Diversification is the only free lunch.” If that’s true, advisors should think of rebalancing as a complimentary dessert. As it is difficult to identify exactly when trends are going to shift or change, regular rebalancing is key to keeping clients more closely aligned with their strategic allocations.
When rebalancing, it’s important to look at long-term and current trends in different asset classes and sectors. By evaluating evidence and assessing their likely trajectories, advisors can make more strategic determinations regarding where it makes the sense to tweak portfolios.
#2 – Stay in touch with clients (and look for more)
While market volatility and uncertainty may cause frayed nerves, it’s also a potential catalyst for productive client discussions. Taking the time to meet with clients to update their long-term goals and planning assumptions can make them feel more in control, while giving you a chance to work through any fears in a productive and reassuring way. In effect, periods of volatility can be used to reinforce the merits of your financial plans to clients.
From a business development perspective, you can also use the current market turbulence to reach out to prospects. Other advisors that haven’t made it a point to sit down with their clients to discuss portfolio concerns are creating a ripe opportunity. Revisit your top prospects and reach out to see if they have any questions or concerns you can help address. Remember that many people avoid asking questions for fear of admitting ignorance. Take advantage of this – ask your prospects if there are any questions that they haven’t felt comfortable bringing up with their advisor. If prospects feel more supported by you, it may be an environment that will promote them to finally join your client list.
#3 – Tax-loss harvest
Tax-loss harvesting isn’t just an activity for year-end. Engaging in tax-loss harvesting any time, or at least on a quarterly basis, can help advisors mitigate their clients’ potential tax burdens throughout the year – especially during times of volatility.
While some clients may balk at this now, it will actually benefit them over time, especially if an advisor opts to replace the position that is sold at a loss with one that is similar, but not what the IRS deems “substantially identical.” In order to stay abreast of the IRS’s wash-sale rule, tax-loss harvesting can deduct losses by selling securities and buying an ETF that is slightly different. Note, however, that this can get murky, as there is no precise definition of “substantially identical.” Ultimately, clients will appreciate any inconvenience associated with capturing tax losses in the event that this exercise is valuable in offsetting long-term gains.
Market volatility frequently causes stress and worry for clients, but with a proactive mindset, advisors can turn an uncertain market into a recipe for success – both for their clients and their businesses. Whether it means spending more time engaging with clients and prospects, getting tedious work out of the way, or taking the time to rebalance based on clients’ long-term financial goals, a volatile market can present a real opportunity for advisors to truly shine.
If you are an advisor seeking ways you can leverage market volatility to increase engagement with your clients, contact us at firstname.lastname@example.org.
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