How to Manage Client Expectations in Stock Market Boom

The stock market keeps rolling along in early 2018 and investors can’t get enough of the action.

The most recent Spectrem Millionaire Investor Confidence Index rose seven points in December to its highest level in three months. Meanwhile, the Spectrem affluent index increased five points during the same time period.

Both figures point to an increasingly bullish sentiment on the part of investors in 2018, especially with the recent passage of tax reform. President Donald J. Trump signed the tax reform bill, which sharply cuts corporate taxes, just before Christmas.

“It’s clear that affluent investors anticipate short-term gains in the stock market, and the Spectrem Investor Confidence indices in December reflect that optimism,” said Spectrem President George H. Walper, Jr. “Investors who are not yet in the millionaire category displayed a newfound interest in participating in the stock market rise as well.”

Others agree, noting that global markets are gathering steam, too.

“Signs point to a continuation of the long, late stage of the expansion, with a boost from recently passed tax reform as well as ongoing reform in certain international markets helping extend the expansion,” said Jason Pride, director of investment strategy at Glenmede.

“But some protection is justified to offset the potential lack of government responsiveness to any unexpected problems that may arise.”

With clients gnashing at the teeth to rack up more stock market gain, investment advisors may feel the need to reel in ambitious customers.

“We are the leaders, so it’s very important that advisors remember that and uphold the responsibility we have to our clients,” said James Comblo, a money manager at FSC Wealth Advisors in Wappingers Falls, N.Y.

'Irrational' Requests

It’s up to advisors to diagnose what the emotion is behind a client’s sometimes “irrational” requests.

“At that point, we can begin to understand what they are going through,” Comblo said. “We ask if the goals have changed. Usually the answer is no, they just feel they need to get more aggressive because they are missing out.”

A client called Comblo in early December complaining about trailing the Standard & Poor’s 500 Index by a few percentage points.

“I reminded him of the goals, for which we only required a 4 percent return annually, and that we were blowing away that goal on a year-to-date basis,” he said.

In the end, Comblo was able to have the client consider taking some of the riskier equities out of the portfolio.

“For a while at least, so we could lower their risk and the chances of giving some of the gains back,” he recalled.

It’s understood there are times when you cannot change a client's mind, Comblo said.

“Our worst-case scenario is to put the clients in a slightly more growth-oriented, fully tactical portfolio,” he said. “Our proprietary tactical portfolios are a good way to hedge against client emotions. They allow us to identify changing sentiments and move away from pain points in the market. That’s a strategy that has worked well for us in the past.”

Tamping down risky investment impulses is just part of the job these days for advisors. After all, someone has to be the adult in the room who says no.

“The dominant determinant of my client’s lifetime investment success is not investment performance, but investment behavior,” said Michael Tanney, co-founder of Wanderlust Wealth in New York City. “Consequently, one of my many responsibilities as a fiduciary advisor is to insure client portfolios against what can go wrong in order to acquire the luxury of investing for what can go right.”

Keep a Disciplined Approach

When a market heat up or meltdown occurs, Tanney said his “number one priority” is to keep investors' faith in our long-term disciplined approach.

“I remind the client that we built their portfolio like a battleship, not a speedboat,” he noted. “The portfolio possesses deeply-designed counter ballasts that enable the battleship to lean and turn methodically, yet not tip over. They must continue to trust the captain and his crew.”

Instead of making predictions about future events, investors should appreciate that today’s price reflects the expectations of market participants and information about future expected returns, Tanney said.

“In the long-term, investing should be smooth sailing,” he added.

It’s hardly a secret that overreacting to short-term market moves is a mistake many investors make.

It is crucial to set a long-term investment objective, which guides the overall risk and return characteristics of a client's portfolio by defining the asset allocation and ranges of this asset allocation, explained Steve Wyett, chief investment strategist for private wealth at BOK Financial, a bank holding company.

The objective “is vital in periods when markets are exuberant, or pessimistic,” he added.
Human emotion can lead one to become overly optimistic when markets are good or overly pessimistic when markets are struggling, Wyett said.

“Having an investment objective road map can keep investors more focused on the longer-term aspect of achieving their financial goals and objectives,” he said. “This does not mean advisors and clients cannot make tactical moves to seek returns or manage risk, but having guidelines keeps a portfolio on its longer-term track.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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