Managing risk amid banking crises and economic turmoil

By Micki Hoesly

It seems too often that we hear about a new, unexpected financial threat, like the recent collapse of Silicon Valley Bank (SVB). It’s natural for clients to worry about the security of their investments when the market reacts to surprising bad news – but we advisors needn’t wait for dire headlines to address portfolio risk with clients.

Instead, take the time to discuss strategies for navigating risk at the outset of the client relationship. Communicating proactively about the measures in place to help balance risks can prepare clients to weather the volatility both financially and emotionally.

Assess risk holistically

Whether the economic outlook is stable or rocky, risk should always be a key part of your preliminary and on-going discussions with clients. We start by assessing a client’s ability to accept portfolio risk:

• What is the client’s risk tolerance? Are they willing to invest in securities that have potential for both significant upside and significant downside, or do they prefer a steady approach, willing to give up some of the upside opportunity to help limit some of the downside risk.

• What is their time horizon? If they’re younger or early in their career, they would likely be able to weather more volatility because they have time on their side, but only if the investments will remain untouched to meet a long-term goal. If they’re closer to retirement age (using the money), and don’t have a lot of excess assets to support their retirement income, then a more moderate or conservative portfolio or bucket approach to their assets might suit them better. One bucket approach would be to have a portfolio specifically for the first five years of retirement, which would be conservative and liquid, with other assets invested in a more balanced approach to fund further into retirement.

• What is their risk capacity? Does the client have a large excess of assets that they could afford to have some at higher risk? We find that risk tolerance and risk capacity don’t always go hand in hand. Some people can emotionally handle risk, but don’t have enough extra assets that they can handle a large market downturn.

These three questions set the foundation for our plans, but they are just the beginning for developing solid portfolios. We also look at other risk factors that could unintentionally impact clients’ financial security. For example, if a client works in real estate, we may choose to avoid real estate investments or other investments that could be highly sensitive to adverse changes in interest rates. That way, when the housing market is weak and they’re not making as much income from their job, they may avoid taking a simultaneous hit in their portfolio.

It is helpful to have tools available that not only help us evaluate overall portfolio risk, but also allow us to share with clients how various portfolios have historically behaved in past markets.

We also talk with clients about not only diversifying their assets but also diversifying their strategies of investing. For example, some of their retirement money could be invested in a typical well-diversified portfolio of stocks and mutual funds. One part of their retirement money could be invested in a variable annuity with guaranteed income benefits.

Another part of their retirement money could utilize products which buffer downside risk but have upside capture caps. The idea of diversifying investment strategies is just one extra level of spreading risk so clients are more likely to be confident even during economic turmoil.

You’ve got it covered

With major events like the collapse of SVB, we proactively find out what exposure our clients may have in their portfolios, so we know underlying risks and are able to communicate with clients how this event may impact them. As news broke about SVB’s potential collapse, we could use our tools to look at all the underlying holdings in mutual funds for our accounts and assess any exposure.

We also contacted several mutual fund companies to find out if there was exposure to some of the bonds. The ability to know quickly if there was specific exposure was crucial – it allowed us to pass this information on to our clients and show that we were diligent in following up for their benefit.

This proactive outreach assures our clients that we’re on top of any economic developments and that we have tools in place to ensure we’re managing their portfolio appropriately for their unique situation.

Be a life preserver

Planning for stormy economic times should begin when skies are clear – at the outset of planning – to ensure risk is balanced when skies darken. And when the inevitable storm comes, proactive outreach will help clients remember you’re behind the scenes helping to ensure they stay afloat.

About the Author
Micki Hoesly is President of Resource 1 Inc., a registered investment advisory firm, and has a bachelor’s degree in business management and a master’s in financial services. She is currently registered as a registered representative with Ceros Financial Services, Inc., Member FINRA/SIPC. Hoesly is a 43-year MDRT member, past Chair of the Top of the Table and served as MDRT President in 2014. She currently resides in Virginia Beach, Virginia, with her husband, Michael.