“The time to repair the roof is when the sun is shining.”—John F. Kennedy

One of the most important ways financial advisors can add value is to prepare clients for the constant change and uncertainty of the markets. As the U.S. stock market continues near record territory and the memory of the global financial crisis fades further into history, now is an opportune time to help clients prepare for the proverbial rainy day. Preparation before the storm gives clients a broader range of options and greater clarity for effective planning for what could otherwise be lost in an emotional hurricane.

Preempt, prepare, and reinforce

No matter where you think the U.S. stock market is heading, you should prepare your clients for the prospect of lower returns and losses that could be more severe than in recent history. Despite the low-yield environment, high-quality* bonds still serve an important role—countering equity risk and stabilizing portfolios during periods of extreme market volatility.

Advisors can add the greatest value by preempting, preparing, and reinforcing the value of the plan with clients.

First, review their asset allocations. This is the most preemptive step. If they’re like most investors (i.e., with an equity-heavy portfolio), they should consider putting new cash into bond mutual funds. The thought of putting money into bonds may not be thrilling, but high-quality bonds, such as low-cost, broadly diversified, investment-grade** taxable or tax-exempt bond funds, are one of the few asset classes negatively correlated with equity tail risk, making them among the best diversifiers in a balanced portfolio.

Second, prepare clients by widening the frame. A proactive conversation of “remember when?” can jog your clients’ memories of why their asset allocation are set to where they are. Sure the markets have been favorable for the last six years, but how did your clients feel in the beginning of 2009?

Reminding clients of a time when their plans worked effectively can help manage emotional reactions in the future. Will they lose sleep or, worse yet, abandon their plans if an asset falls 30% in value? Will your clients view a correction as an opportunity to buy or sell?

The third, and perhaps most important, step is to reinforce. Coaching, guiding, and running simulations help, but nothing prepares clients for market shocks better than training. And much like emergency-response drills, mental preparation of what to expect and how to react requires reinforcement. So when the real thing happens, you can prevent costly derailments. It can also help clients stay calm, maintain a long-term perspective, and see opportunity in a situation that could otherwise be clouded by emotional stress. They’ll be better prepared to buy into deliberation when the prevailing temptation is to do the exact opposite. And in doing so, they’ll position their portfolios for a faster recovery.

With the financial plan as the anchor, advice that preempts, prepares, and reinforces can pay off both for your clients and for you.


* High-quality fixed income securities are those rated the equivalent of A3 or better by Moody’s or A– or better by Standard & Poor’s or Fitch.

** Investment-grade bonds are those whose credit quality is considered to be among the highest by independent bond-rating agencies.