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Be a Financial Doctor

Much like physicians treating sick patients, financial advisors must assess the situation, make a recommendation and explain to clients the risks so they can make an educated decision about their financial health.  

The ongoing economic, health and financial market calamity has altered life for nearly every American. We're in uncharted territory and never have advisors had to contend with a situation quite like this, not even during the financial crisis.

At the same time, if anyone can navigate these drastic changes, it should be our industry. After all, broker/dealers and RIAs are required to maintain written continuity plans should a natural disaster, terrorist attack or some other emergency disrupt normal operations. 

What's more, planning is what advisors do. They look around corners for clients in an attempt to anticipate potential eventualities and work to develop a strategy to mitigate each one. 

So, while it would have been difficult to foresee the impact of the coronavirus before the beginning of the year, the extent to which advisors have adapted to remote work has not been surprising. 

Projecting Fears

Advisors have likely had a tougher time coping with markets that gain 5% one day, only to drop by just as much or more the next. Naturally, volatility like this can be disconcerting. 

During previous crises during my career—whether it was the Great Recession, the bursting of the dot-com bubble or the crash of 1987—advisors did a good job of keeping their clients invested. What they were able to do less often, however, was to successfully encourage them to invest new money.  

The investing environment may have changed dramatically since the start of the pandemic, but the need for financial advice has not. If anything, in fact, it has gone up. Advisors, therefore, cannot let fear prevent them from doing their job. 

Think Like a Doctor 

To think about this a different way, consider how doctors treat unwell patients. They examine them thoroughly, taking into consideration age, health history, and other critical factors, and then propose treatments, which could be something as simple as recommending a change in diet. 

In other cases, though, it may call for a more drastic step–surgery. When doctors explain why they believe that is the best option and disclose the risks, patients usually understand that surgery is a necessary step to feel healthy again despite the potential dangers it poses. 

Advisors need to have the same mindset: Assess the situation, make a recommendation and explain the risks so that clients can make an educated decision about their financial health.  

Things Aren't Always What They Seem

This doesn't mean advisors should become day traders. Those attempting to time the recent market ups and downs to their advantage will get their comeuppance eventually. Nor does it mean that clients should chase gains by investing in biotech or pharmaceutical companies in hopes that one of them develops a coronavirus vaccine.  

At the same time, there will be opportunities for clients. For instance, during 2013 and into 2014, when oil was over $100 per barrel, it was hard for many advisors to penetrate energy projects, with some sponsors establishing quotas or limiting participation in other ways due to sky-high demand.  

Oil prices then dropped off a cliff, prompting many of these same sponsors to create new products. This time not only were they more accessible, but also the cost structure was much better.

Nonetheless, these repackaged investments struggled to gain traction, even as many of them performed not just well but better than many of the products that everyone wanted a piece of only six months before. And the reason was simple: At the time, oil seemed like a terrible place for any investor to be.

But had advisors looked a little deeper, they would have discovered these investments were far sounder than what they believed—or, potentially, far sounder than what their fears led them to believe. 

Given what has happened to oil in recent months, as well as the lingering doubts about whether demand will ever rebound to past levels, it’s probably not wise to expect the same thing to happen this time around. 

Still, it’s important for advisors to consider all their options, even ones that may not seem so great on the surface, because what the above example shows is that opportunities may present themselves in areas where they are least expected. 

Finding the Right Remedy

Down the road, that could mean other alternatives will be attractive. Clearly, these are asset classes that are appropriate for only those who can tie up capital for an extended period. And, of course, not all alternatives are created equally. 

But when one door closes, another one tends to open, and as we have seen, it's often within the same sector. So, while the conventional wisdom is that retail and hospitality may be worth avoiding in the near term, history shows us not to assume anything. 

The point is that every advisor has fears. They wouldn't be human if they didn't. But they can't be paralyzed by them. 

Just like a doctor must step up when a patient is feeling sick, advisors have added responsibilities when there is a greater level of instability. They have a job to do, and their clients expect them to continue to plan, to look around every corner and to exhaust every angle, no matter what the market environment looks like.  

Clive Slovin is the president and CEO of Atlanta-based SFA Partners.

TAGS: Equities
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