Understanding the Impact of Market Volatility
In November 2020, a Business Insider headline read, “The stock market will surge 26% next year as it has ‘one of the best setups’ in years, JPMorgan says.” In fact, 2021 was one for the record books, with a return of 28.47% on the S&P 500.1
Since 2009, the S&P 500 has only had one negative year of returns, in 2018.2 As such, it has become commonplace for investors and financial advisors alike to forget what true market volatility feels like. Fast forward to 2022, when the first 50 days of the trading year have produced one of the worst starts of the year for stocks ever. The SP 500 index was down 10.6% during that period, ranking as the 6th worst first 50 trading days out of 94 years of data.3
As financial advisors, we have years of experience educating our clients on protecting portfolios against market volatility. We talk about sequence risk, how the pattern of returns over time impacts the actual return an investor can experience, and that pattern’s impact on cash flow needs, especially for those who are retired. Our conversations likely turn to building volatility buffers for our clients and having alternate sources of income for those cash flows during retirement that aren’t tied to the markets.
2022 thus far has proven to be a year of reckoning for those previous conversations. For advisors who have taken the time to educate their clients, volatile markets become a time to remind clients of the decisions that have been made and why. But what about your own business? Is your financial advisory practice well positioned to withstand the market’s volatility? When was the last time you identified the risks that a volatile market presents to your practice? What are the ways you can create your own volatility buffer?
Building Volatility Buffers for Your Practice
Negative market performance is a setback multiplier. Volatile market performance will have an immediate and direct impact on your practice and income. The first hit will be a decrease in your quarterly run rate, as a downturn in market performance will lower your revenue that is calculated based on assets under management. When considering that your chosen investment manager will impact the returns for not only your clients, but your own income as well, you would be wise to make the choice diligently. How does the firm manage and communicate through a market downturn? What diversification tools do they offer? Does your firm have a stated process to make and implement decisions in all market environments?
Volatility forces a reallocation of your time. If you are self-managing client portfolios, the impact can be even more significant. In addition to more performance exposure, you’ll likely see an increase in your time focused on daily market fluctuations and news. Service requests from clients, such as rebalancing, withdrawals, and tax management trades are likely to become more time-consuming. As not only the financial planner, but also the investment and portfolio manager, you may find your time consumed with “defend your life” meetings, where clients are unhappy with performance and fault you directly. Contrast this approach to that of outsourced investment management, where even in a choppy market, you can continue to sit on the client’s side of the table as their planner and help them objectively evaluate the performance of their investment manager.
Protect Your Practice During a Volatile Market
An advisor’s time is a valuable and finite resource, and when markets get volatile, client meetings and conversations will naturally require more of your time and energy. Servicing clients becomes the first priority, as effective communication is key to keeping clients calm and invested during a tough market. Failure to communicate with clients can make them feel their advisor is “asleep at the wheel.” To build a practice buffer around communication, you should be aligned with an investment management organization that provides timely communication and access to the portfolio management team. If you aren’t communicating with your clients during a difficult market, you can be assured someone else is.
Losing control of your time during volatile markets can lead you to miss the best opportunity in years to find and meet new clients. Unstable markets create a timely opening for new conversations, as previous “do-it-yourselfers” may now see the value in professional guidance. Other prospects may become disenchanted with the performance or communication their current advisor is providing. How well-positioned are you to take advantage of these opportunities, or more importantly, how efficiently can you? If you are a one-person shop, the likelihood is operational and servicing needs will consume most, if not all, of your previous prospecting time. When the markets become volatile, your ability to organically grow your business may be compromised.
Much like your clients, market volatility will bring about a series of influences on your practice. Some you cannot control, but you can protect against many. Partnering with a firm that can help you scale in a volatile market gives your practice a volatility buffer. It allows advisors to be laser-focused on precisely where they can control their revenue, holding onto existing clients and continuing to grow new ones.
Fountainhead Asset Management: It Starts With Your Story
Fountainhead Asset Management (FAM) is a growing platform for financial advisors interested in scaling and expanding their practice. FAM’s platform provides advisors a partnership solution they can leverage for technology, institutional level investment management, practice development, marketing, compliance, and operations. Our Insights publication is designed to keep you well-informed of current events and their effects. Furthermore, we stand readily available to help you effectively communicate with your clients regarding such topics. Reach out to Fountainhead for further insights and tools on advisor best practices.
IMPORTANT DISCLOSURE: The information contained in this report is informational and intended solely to provide educational content that we find relevant and interesting to clients of Fountainhead. All shared thought represents our opinions and is based on sources we believe to be reliable. Therefore, nothing in this letter should be construed as investment advice; we provide advice on an individualized basis only after understanding your own circumstances and needs.