Why We Need Financial Advisors Right Now

“Love or fear, the fear last longer

But love is stronger, so I stay loyal to love with honor

-Dilated Peoples

For the past 15 years I have worked with some of the best financial advisors in the entire wealth management industry. Imagine a profession whereby an individual is entrusted with money and asked to protect that investment, while this massive uncontrollable force (the capital markets) is in constant flux. This asset often times represents much more than a figure on a statement—it can be the culmination of years of hard work, a brighter future for a child, or a hope for a new beginning. Now imagine taking on that responsibility for another person and you’ll begin to understand the gravity that is placed firmly on the shoulders of a financial advisor. In this piece, I will explain why we need financial advisors more than ever.

I. Navigating the biases we all have 

Past performance is not indicative of future results. Investors understand, or should understand this statement. However, how many investors truly accept, or even think about the meaning of the statement? Investors are humans and humans have an inherent desire to search for patterns and create meaning from randomness. One of the key challenges that financial advisors face is the dilemma of the past not being representative of the future. This challenge occurs when the markets are moving in both positive and negative directions. Investors’ belief systems are impacted by past experiences. This combination of biases and the ever-changing capital markets makes investing very challenging.  

People’s belief systems are put to the test in times of extreme stress. Over the past few weeks, we have seen historic swings in the capital markets. The proliferation of COVID-19 has wreaked havoc on entire industries. It is during these times of market volatility when behavioral finance suggests that biases such as loss aversion, confirmation bias, and/or anchoring become more pronounced. Financial advisors help to interpret volatile market conditions, understand their clients’ personalities and provide clear guidance on the path forward.

II. Understanding Risk and Meeting Expectations

What about risk tolerance? Imagine an individual that started working with a financial advisor at the beginning of this past decade. It is likely that their view on risk would be very different than a long-term investor. Assessment of risk is incredibly subjective. I believe a lion keeper would have a very different world view of risk compared to a dog walker. If your only experience with the markets had been relatively positive, then would you really be able to mentally conceive what a loss of 30% would feel like to you? Extend this point a bit further to return expectations. Diversification within a portfolio works, but it won’t outperform a concentrated bet, if that bet is the “right” one. It may not even outperform “the market” (whatever that means). Advisors have the virtually impossible task of assessing risk and meeting difficult performance expectations, all while conditions are endlessly changing. The best ones are able to properly explain risk and create portfolios that generate enough return to meet goals without attempting to chase unrealistic returns. In market conditions like we have today, helping clients (sometimes through psychology) make prudent financial decisions is incredibly important.

III. Why We Need Advisors Now

The popularity of the phrase “the new normal” rose to prominence in the early 2000s.  The spread of COVID-19 has dramatically impacted human lives globally. A simple Google Search brings up many articles discussing how the virus has already created a new normal. From the impact on the global capital markets to the impact on the local economies, the impact has been massive. 

Clients need their financial advisors more than ever in times of extreme volatility. The COVID-19 spread is a different type of financial stress. During the last financial crisis due to the housing market collapse, one could still go to their advisor’s office and share their concern face-to-face. While investors lost millions in the technology bubble, people weren’t forced to stay indoors and stay away from their elder relatives. These dislocations had acute symptoms—ones that could be attacked using fiscal remedies. This feels more like a condition. Something that needs to be endured for an unknown time period. Something that will require patience and faith to overcome.

The impact of the virus has even further downstream effects on the financial markets and the role of the financial advisor. Even with massive improvements in technology, the system is still dependent upon humans. If people are asked to practice social distancing and need to self-quarantine, their productivity will likely be reduced. Market volatility increases volume, which places stress on the underlying activities required to facilitate transactions, which causes delays, which can cause errors. The blending of increased volume and decreased productivity is a very real and challenging issue in the immediate term. Financial advisors are acutely aware of how to navigate the system in times of volatility. They are much better equipped to deliver positive outcomes because of their position within the marketplace.

IV. What We All Need Now

As the hip hop group Dilated Peoples suggested in their 2006 song, “Kindness for Weakness”, there is always a choice between love and fear. A global pandemic can and will take a psychological toll on all people. During these times, it is important to focus on health and personal well-being and trust your financial advisors to help navigate you through this storm. A good advisor (like many of the ones that I work/ed with) will evaluate whether you are still able to meet your financial goals and objectives and will ensure that decisions are made based on data versus emotions.