How To Help Clients Through Calamitous Times

“Sanguine” isn’t the adjective to describer 2022 market action. Far from it and while this year won’t go down as the most volatile or worst in financial market history, the combination of bonds and stocks falling in unison is weighing on clients. That’s putting things mildly.

The silver lining is that trying times further enhance the value of advice and plenty of data points confirm clients want advisors on their sides in turbulent environments. Entering this year, it was widely known that inflation was going to be a front-and-center because its emergence in 2021 was badly misjudged as “transitory.” As such, the only thing surprising about the Federal Reserve boosting interest rates is the intensity with which the central bank is doing so.

Part of the dismay surrounding the ongoing rising rates and inflation conversations is that many of the assets that work when these economic conditions arrive aren’t doing so this year. Add that to the litany of reasons as to why advisors are as relevant as ever.

However, that relevance can be further enhanced by knowing the right ways to approach apprehensive clients and having the strategies to backup that verbal advice. Some ideas to that effect follow here.

Attention Matters, So Does Avoiding Mistakes

It seems obvious, but advisors being aware and attentive is mandatory in any environment, but the importance of those traits is amplified this year. Add to that list keeping clients from becoming paralyzed with fear – the element of psychology that so frequently intersects with being an advisor.

In a recent report, Scott Welch, WisdomTree chief investment officer – model portfolios – highlights the importance of those traits, noting many clients may have become complacent during the previous bull market. Now, some may want to be under-allocated to risk assets.

“Market timing is notoriously difficult, and generally we do not recommend moving to cash, thereby locking in recent losses that we believe may recover over the course of the next 24 to 36 months,” he wrote. “Our stance: stay diversified, stay liquid, but stay invested. Here is a chart of global market performance over the past 20 years. The market is not required to always go up, but that does seem to be the trend.”

He also points to a major issues advisors can and should help clients with. That being behavioral mistakes. Those can range from over-favoring large-caps to selling low, among others.

“In times of stress, many investors default to behaviors that can harm long-term performance,” added Welch. “One example of this is home country bias or reallocating to what seems to be a more known and comfortable market: your own. In this recent market environment, however, the EAFE and EM markets offer attractive valuation potential for the patient investor.”

Time to Talk Tax-Loss Harvesting

Tax Day is in April, but it’s always a good idea to discuss tax-advantaged strategies with clients, including tax-loss harvesting. Tax-loss harvesting is the act of selling a losing position to offset some of the capital gains obligations on profits on a winning trade.

Advisors can also help clients employ tax-loss harvesting in their discretionary accounts. Say a client is holding shares of a once hot stock that has turned sour and the outlook is bleak and also wants to trim exposure to a value fund that's surged this year, Tax-loss harvesting is appropriate here because it gets the client out of the losing position and offsets some of the capital gains liability on the winning investment.

“There has rarely been a time over the past 10 to 12 years when active tax-loss harvesting has had more potential to add value, in both the equity and bond market,” concludes Welch. “Remember, the two things an advisor has the most control over are fees and taxes. Smartly managing both can help advisors ‘pay for themselves.’ Take advantage of it.”

Related: Short-Term Corporate Bonds Could Be Income Elixir