With a market decline of nearly 30% in just a few weeks as the coronavirus pandemic expands and amidst eye-popping daily market volatility, most financial advisors today are simply trying to help clients to remain calm, stay the course, and not engage in panic-selling. As while it’s relatively ‘easy’ to keep clients focused on the long-term and to stick to their established plans when their retirement accounts are marching steadily higher, it’s a different story when a major disruption occurs. Yet, in practice, following the advice to “do nothing” in the face of historic volatility is challenging, as it’s human nature to want to do something – whether to fight or flee – in the face of a dangerous threat.
However, just because advisors may be guiding clients to “do nothing” when it comes to selling out of their portfolio, it doesn’t mean that nothing can be done. Instead, recent market volatility does present a number of other financial and tax planning opportunities, from the more ‘obvious’ topics, like rebalancing and tax-loss harvesting, to other potentially necessary adjustments, and even opportunities, that might not be readily apparent mid-crisis.
As a starting point, advisors should re-run clients’ retirement projections, which could mean communicating some not-so-pleasant news (such as having to adjust the plans they’ve made for their retirements and/or even their current lifestyle). But knowing whether their path has changed (or in some cases, not!), and by how much the plan will need to be adjusted (often far less than what clients fear) will go a long way towards mitigating their current stress levels.
Advisors can also help clients effectively adjust their budgets as needed. While many have likely already changed some of their spending habits (if only because they are constrained by social distancing from many of their usual activities), some will need to make longer-term adjustments. And while severe (but shorter-term) spending restrictions might seem like the immediate ‘best’ option to follow, oftentimes smaller (but permanent) cuts can be far easier to adapt to (and can actually be more effective in the long run!).
From another budgeting perspective, making contingency plans for next-in-line sources of cash, should a client deplete their emergency fund, is an important step. While such an event may not seem very likely at the moment, game planning for such an event can at least provide peace of mind, especially since some of those options (such as using a home as a source of funds) take time to secure.
Other potential planning opportunities include reducing loan payments to lenders making special accommodations for those affected by COVID-19, using the once-in-a-lifetime option to transfer funds out of an IRA and into an HSA, fixing “asset-location” problems that have (up to this point) been impractical from a tax perspective, and reviewing (and maybe revising) healthcare proxies, living wills, and advance directives to account for current travel restrictions and the healthcare implications, should a client contract COVID-19.
Ultimately, the key point is that financial advisors are uniquely positioned to help clients – almost all of whom are under an unusually high amount of stress at the moment – by making mid-course adjustments to their plans, staying focused on the bigger picture, creating contingency plans, and generally providing them with some peace of mind in these highly uncertain times. And more generally, doing something – with respect to the financial plan – can help clients feel like they are more in control (even as advisors guide clients not to panic-sell from their portfolios). As with everything, this too shall pass, but the important thing is for clients to take steps to control those things that are in their power to control.