Now that the initial shockwaves of the coronavirus pandemic have passed, and individuals around the globe are adjusting to the current state of affairs, financial advisors are immersed in the process of updating clients’ financial plans to understand whether or how the recent market volatility has actually impacted them. As while the perpetual message for clients inclined to panic-sell has always been to ‘stay the course’, the reality is that, at some point, the market decline is still severe enough that at least some course correction in spending may be justified to appropriately address how to proceed in the aftermath of the down market we’ve experienced. Which in turn raises the question of how to ‘break the news’ that a spending adjustment might be necessary… and whether the discussion of focusing on spending (that can actually be controlled) may actually help further alleviate client fears.
In our 32nd episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards talk about how financial advisors can introduce discussions about sometimes-necessary spending changes, and why strength, empathy, and confidence are so important throughout the process. As importantly, even though some advisors who have stood by and defended the plans they have created for their clients may experience feelings of guilt for needing to tell their clients that some course correction is now appropriate, it is vital to remember that their clients’ financial plans have probably already accounted for the possibility of disastrous events and that these course corrections are to be expected (and may in fact be less severe than what clients fear).
Accordingly, it is not necessary for advisors to assume a defensive position out of guilt that the original plan actually does need to be adjusted; instead, they can position themselves as supportive guides for their clients, acknowledging that the turbulence has been scary, painful, and difficult, but that ultimately, they are available to work together to help the client identify if (and how) their plan needs to be adjusted. In other words, market turmoil presents an opportunity to reinforce that the financial plan is not necessarily intended as a rigid solution set in stone; rather, it is designed as a roadmap to reach a destination, and that course corrections along the way are to be expected, as ‘unpredictable’ obstacles do inevitably arise.
For clients who need to reduce their expenditures, it can be useful to point out that small, permanent cuts are generally more effective than drastic (albeit temporary) cutbacks, which can help the client maintain a better sense of control over their situation. Illustrating various ‘what-if’ scenarios (simplified by many financial planning software tools) can also have several advantages, as the process can help clients understand not only all of the different variables that can be leveraged to adjust the current projections made in their plans but also the tremendous impact that small-but-permanent long-term changes can have on their plan.
Additionally, what-if planning scenarios can be used to establish the triggers that would justify a(nother) plan adjustment (e.g., a 5% spending cut will be implemented if the portfolio falls below one threshold, or a 10% cut if a lower threshold is breached), which in practice can be helpful to alleviate clients’ anxiety (to know it’s ‘only’ a 5% or 10% spending cut), and to give them a sense of when it actually is important for them to check in with their advisor (and in the meantime reducing fearful phone calls and emails).
Ultimately, the key point is that financial advisors can best support their clients by proactively guiding them through the adjustments needed to keep their financial plans successful, and clarifying that these adjustments are not only normal, but also that they are not an indication that the plan has ‘failed’ and instead simply that course-corrections are a part of the process in the first place. And by practicing rational overconfidence to reassure clients, advisors can communicate that the financial plan is a tool to help them figure out what adjustments to make to stay on course, navigating the unexpected-yet-inevitable roadblocks and obstacles that arise from time to time.