By Alan Zabloudil and Rion Walker, Equity Traders, 1st Global
There’s an irrational fear of investing that has been building momentum across our country since 2008. A recent study from Nationwide¹ found consumers fear investing even more than death, with other fears such as healthcare coverage, unemployment and the lack of economic stability following in close pursuit.
Adding to those fears is the frailty of investors’ trust in investment management. According to a recent Investor Trust Survey by CFA Institute & Edelman², only half of retail investors trust investment management ï¬rms to do what is right.
It shouldn’t come as a surprise that investors are fearful or mistrusting. Our industry hasn’t done itself any favors and there is a lack of conï¬dence in the broader ï¬nancial services industry. Investors hit by the shock of the 2008 ï¬nancial crisis, and ongoing scandals around money laundering, rogue trading, rate manipulation and insider trading, have helped fuel the fears and dilute the faith of investors. They see, read and hear about all of these dramas, and become paranoid and fearful.
As professionals, we need to help our clients reset their expectations of the markets and rational investment behavior.
Building Clients’ Trust
Many of today’s irrational investment fears lie heavily on the shoulders of those in the financial services industry. As financial professionals, it’s our duty and responsibility to control that fear and explain its relevance.
Some of the fears bubble up because investors have not set reasonable return expectations or understand the simple equation of balancing risk and reward. Their risk profile may not match their expectations and as advisors, we need to help them understand that high returns often can’t be achieved without some risks.
While professional advice and returns on investments are what investors pay their advisors for, investors make the decision to work with advisors who demonstrate a commitment to professional standards of ethical conduct that are in the investor’s best interests, according to the CFA Institute & Edelman Investor Trust Survey 2013.
How an advisor is compensated can affect the way advisors work with clients, which in turn affects the trust factor. Some advisors are too busy focusing on asset management and commission and don’t always take the time to engage more deeply with their clients. This affects the trust they can nurture with their clients.
By taking the time to have regular discussions with their clients, and building a deeper relationship, advisors will find where their clients are in their life cycle, so they can better advise the clients at each stage of their financial plan. The result will be a long-term partnership, more growth opportunities and higher prospects for financial success.
New Generational Opportunity
With the changing demographic of financial services today, CPAs and financial advisors must be cognizant of how younger generations are thinking and reacting. For many of them, the severity of the financial crisis of 2008 has left them reeling and the uncertainty is piling up.
Younger generations are also faced with more job concerns than their predecessors. Job growth among 55- to 65-year-olds is up today, which means 25- to 30-year-olds are competing in a market against more experienced job seekers. Many of the younger job seekers are also facing mounting student loan debt and the last thing they are thinking of is how to finance their retirement or taking care of the next generation in their families.
Nationwide’s research found the three most common financial fears today are another financial crisis, the inability to finance children’s education, and healthcare costs becoming unmanageable. These fears are particularly stressful for young investors. It is critical for CPAs and financial advisors to help their clients – particularly young investors – create, stick with and see value in their long-term financial plans to overcome those fears.
Advice to Advisors
Today, most of the fears of investors are a commentary on where we are psychologically. People react to fears and concerns because of their family’s history and their own past experiences. As CPAs and financial advisors, we need to help them overcome those personal fears by helping them gain control of their financial situation. There are a few ways that advisors can embrace this fearful opportunity, and easily curb these irrational fears of their clients.
- Promote Financial Literacy – There was a time when financial literacy was part of life’s experiences, passed along by families, schools and in real life. That education has fallen by the wayside, particularly in areas such as risk management, investment knowledge and even basic budgeting. Without basic financial knowledge, people don’t know how to react rationally to market changes and they can make rash decisions out of fear. CPAs and financial advisors can educate them, help them understand the basics, and give them the confidence to contact us when they have financial questions or concerns.
- Make it Relevant and Personal – Recognize that your client’s financial experience comes from their personal experiences. Money is one of the most emotional and personal possessions we have, and people can react irrationally when it comes to their finances, especially with losses or fast changes. As advisors, we need to listen to our clients and find clues to what has changed in our clients’ lives and give them recommendations that are tailored to their life and future financial goals.
- Display Your Expertise as a Financial Professional – Thanks to the advent of self-trading, your clients can trade in commodities, foreign currency, futures and just about anything imaginable online. They are also inundated with instant information all day, every day. That’s a formula for irrational decisions and fear mongering. Our real value as financial professionals is our knowledge and accessibility; so our clients feel comfortable contacting us directly and asking our advice, instead of trying their own hand at the market or listening to the news. Reach out to clients when the markets are in flux and give them sound advice to make rational decisions!
- Customize at all Times – Your client is an individual who needs a customized plan. By communicating and listening to clients regularly, asking about their lives, their changing risk appetite, or where they are in their life cycle, you can develop and adapt financial plans that are suited to their own lifestyle. We are financial coaches who can bring opportunities, accurately assess the risk levels of our clients, and help them make well-informed, rational investment decisions that fit their long-term goals.
- Be a True Financial Friend – As financial professionals, we aren’t selling just the benefit of investing--we are selling a relationship with our clients. We should be developing and fostering the client relationship all the time and engaging our clients often. Proactively communicate with your clients often, and they will appreciate your firm because you are facilitating all their financial needs. Advisors who invest their time in building client relationships will reap the long-term benefits and prosper.
One final way we overcome the irrational fears of investors is to work on the reputation of our industry, by maintaining the integrity of the profession. We must maintain our honor and dignity and not succumb to questionable investment practices. It is up to each of us, as financial professionals, to maintain the integrity of our profession for our own long-term success.
Alan Zabloudil and Rion Walker are equity traders for 1st Global Capital Markets. Through integrity, honesty and resourcefulness, 1st Global Capital Markets seeks to build relationships with 1st Global advisors that facilitate a consultative exploration of market solutions to identify the optimal allocation of capital to achieve efficient returns and meet your clients’ needs.
1st Global Capital Corp. is a member of FINRA and SIPC and is headquartered at 12750 Merit Drive, Suite 1200 in Dallas, Texas 75251; (214) 294-5000. Additional information about 1st Global is available via the Internet at www.1stGlobal.com.
¹ Fear of Financial Planning Consumer Study, Nationwide Financial, July 2013. www.nationwide.com
² CFA Institute & Edelman Investor Trust Study, August 2013. www.cfainstitute.org