Study examines how financial advisors can help clients weather market volatility

Today’s volatile markets have taken a toll on many American investors, who are dealing with inflationary pressures, a threat of recession, and rising health-care costs. Faced with these challenges, investors – their advisors – are looking for strategies on how to stay calm and focused on achieving their short- and long-term financial goals.

As financial advisors work with their investment clients, they may want to consider the types of investments that could help calm nerves, said Laura Varas, CEO and founder of Hearts & Wallets, a market research and benchmarking firm that specializes in consumer saving, investing and financial advice.

“Hearts & Wallets’ qualitative research finds mutual funds seem to be the managed product that provides the most benefit in helping investors handle market volatility emotionally,” added Varas.

Two factors seem to help investors with emotions related to market volatility: 1. Having a professional portfolio manager. 2. Transparent reporting.

Importantly, there is a threshold for the percentage of mutual funds within an investment portfolio that confers an emotional benefit in handling market volatility, according to Hearts & Wallets’ research. An allocation of over 25% in mutual funds in an investment portfolio appears to be the threshold associated with lower difficulty in handling market volatility emotionally, Varas said.

Two factors seem to help investors with emotions related to market volatility, she explained. First, the sense of having a professional portfolio manager. Second, transparent performance reporting. “This is true for mutual funds and, to a lesser degree, other managed products, such as ETFs,” she said.

In addition, financial advisors shouldn’t underestimate the role of having a professional fund manager, Varas said. “Our research finds growing consumer interest in the managers behind investment products.

High consumer interest in the managers behind their investment products jumped 7 percentage points nationally to 36% of households in 2021, up from 29% in 2020, according to Varas. (Note: High interest includes scores of 8-10 on a 10-point scale.)

The spike in interest in the “investment companies [who] managed my mutual funds” was the highest among younger investors, said Varas. Interest was up 13 percentage points to 44% in 2021 from 31% in 2020 among ages 35-44, and up 14 percentage points to 37% in 2021, from 23% in 2020 in ages under 35, Varas added.

Only 16% of U.S. households do not want to know about the managers behind their products. The biggest increases in high consumer interest in the managers behind their investment products occurred in the $25,000 to under $750,000 in investable-asset range, year over year, according to the research.

Understanding perceived investing experience

Something else that financial advisors may want to consider is assessing how experienced in investing their clients perceive themselves to be – as an inexperienced or an experienced investor.

“Our qualitative research finds that more experienced investors are better equipped to handle market volatility. Experienced investors say their real strengths are knowing when to seek help, including financial professionals, and how to judge that help. Experienced investors may manage money on their own, but say they know help is an important element to success,” Varas added.

Inexperienced investors say they are often fearful. These investors can be caught in a mindset of fear, focused on the downside instead of on the upside of investing. They see investing as a game of “guesswork” in which they are passive spectators, even victims, Varas said.

They believe a downside of inexperience may drive poor results, due to panicking, being too cash heavy, or jumping into rallies at the top, she added. Inexperienced investors think that experienced investors devote time to constantly watching markets, even though experienced investors say that they do not.

A financial advisor should work with inexperienced investors to help them understand that there isn’t a “secret sauce” to being an experienced and successful investor, Varas said. “The financial advisor should position himself to be a primary source of information and advice for these investors, recognizing that 43% of households use 7-plus sources today, which is triple the 14% of households in 2010.”

 

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]. 

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