Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that President Trump is working on an economic stimulus package in response to the coronavirus pandemic that could lead to new tax planning opportunities for clients with potential payroll tax relief. Also in the news this week - beyond the market decline itself - are some signs of the related 'cracks' in the financial system under duress, including a prospective shortage of Treasury bills (at least until the Treasury proactively decides to issue more), and some odd positive correlations between bonds and stocks on big down days (rather than having bonds rally as a flight to safety) suggesting that beyond just the market sell-off there is some significant deleveraging happening within the financial system (leading those investors to sell everything at once, including stocks and bonds).
From there, we have a number of articles about how the coronavirus pandemic response may play out in the coming weeks, including a look at the epidemiological research on why it's important to "flatten the curve" by implementing policies that socially distance us from one another to slow the pace of the virus spreading (and avoid our medical system from becoming overwhelmed), the importance of emergency preparedness in an advisory firm in the event that the government limits employees from going to work for a week or few, the technology tools and systems to implement to prepare for the potential of curve-flattening work holidays, and whether the curve-flattening response to coronavirus could fundamentally shift the way we think about working from home and telecommuting in the future (as the country may en masse need to learn quickly to do so in the coming weeks?).
We also have a few articles on how to have the difficult conversation with clients, from how the 'real' question clients have isn't about what's happening in the markets but simply whether they're going to be 'okay' in the end, why it's important to be mindful of the impact that prolonged market stress can have on client's own systems (as stress hormones are released into the body for a sustained period of time), tips on talking through "corona panic" with clients to keep perspective, and why it's better to view the advisor's role in working with clients through their coronavirus fears as being less about the expertise in how to manage the portfolio in response and more about simply being the 'leader' that conveys a sense of calm amidst uncertainty and helps to paint a picture of how the future is still bright.
We wrap up with three interesting articles, all around the theme of the sometimes unanticipated and unexpected side effects of the coronavirus pandemic: the first explores how scammers and hackers are trying to exploit the focus on coronavirus for a new wave of malware and phishing scams (important to warn clients!); the second looks at how the spike in volatility and recent market declines will probably create a fresh wave of lawsuits against (bad) advisors as previously inappropriate and unsuitable investment recommendations now come to light as losses; and the last provides a crucial reminder that as advisors create value by serving as an outlet for client stress and fears and help them to stay the course, the risk of burnout of advisors is greatly elevated as well, which means that self-care for advisors also becomes more important than ever before in these difficult times!
Enjoy the 'light' reading!
Trump To Propose Tax Cuts And Other Steps To Ease Economic Fallout From Coronavirus (Andrew Restuccia & Kate Davidson, The Wall Street Journal) - With the coronavirus pandemic not just roiling markets but also potentially impairing the real economy itself if/when/as consumers and businesses cut back on travel and large gatherings of all sorts are canceled, President Trump is proposing fiscal stimulus from the Federal government to help offset the economic damage. Potential proposals include support for hourly wage workers, so they don't miss paychecks in the midst of a slowdown, creating loans for small businesses, and a somewhat more controversial proposal to suspend all Social Security payroll taxes through the end of the year - i.e., the government would stop collecting the 6.2% Social Security tax and the 1.45% Medicare taxes taken from consumer paychecks (along with the employer's equal share) - amounting to as much as nearly $1T of tax cut stimulus. However, it's not clear that Congress will take up the payroll tax cut, as both Republicans and Democrats have raised concerns. The worry is that such a payroll tax cut stimulus is not targeted and timely enough, especially since a payroll tax only helps those who are still employed and receiving paychecks in the first place, does little to help those furloughed by quarantines or laid off as the economy takes a downturn (or those who are already retired), and in general may be too spread out throughout the year to help potentially acute household cash flow needs if work activity slows. In addition, there are concerns that, when coupled with other proposals from the White House (from potential sick pay to quarantined workers, to bailout support for tourism-related industries and the airlines), the total cost of the stimulus package could balloon the Federal budget deficit over $2 trillion in 2020 alone, at a time when the market may be tumbling, but it's still not entirely clear whether or how much real economic damage the coronavirus pandemic is actually going to cause.
T-Bills Are Scarce And The Shortage Is About To Get Even Worse (Alex Harris & Liz McCormick, Bloomberg) - During tax season, the Federal government tends to reduce the amount of Treasury Bills it issues, as taxpayers make their requisite tax payments by April 15th and bring an influx of short-term cash to the Federal government. When coupled with the fact that the Federal Reserve has already been buying Treasury Bills to boost its own reserves, the combination was already leading to an anticipated record decline in second-quarter net issuance of Treasuries. But now as businesses, investors, and cash management vehicles like money market funds all look to lock in whatever yield they can get in the face of a potential recession (e.g., buying 1-year bills instead of shorter-term cash whose yields may fall further in the coming months with the potential for additional future rate cuts from the Fed), the concern is not only that yields may fall further, but that risk of 'insufficient' supply of Treasury Bills could impact overnight lending markets and the Fed's ability to control interest rates themselves. On the other hand, with one potential policy proposal from Treasury Secretary Mnuchin being a possible delay/extension to the April 15th tax deadline, the Treasury may end out forgoing its usual season cuts to Treasury Bill issuance. And the Fed may adjust its bond-buying program to include more even-shorter-dated securities, which would ease the pressure on Treasury Bills but effectively amount to a form of new quantitative easing. On the other hand, with the concerns growing about the economic fallout from the coronavirus pandemic, investors and economists are already calling both the Federal Reserve and the Federal government for a combination of monetary and fiscal stimulus to help offset the potential impact.
Something Weird Is Happening On Wall Street, And Not Just The Stock Sell-Off (Neil Irwin, The New York Times) - The headline decline in the broad market indices has been eye-popping, officially crossing this week into official "bear market" territory in what has been the sharpest turnaround ever from record-highs to a new bear market (just 16 days, crushing what was previously a 42-day record as the market turned from record highs to a bear market in the fall of 1929), and what may still shape up to be the worst weekly market decline in history. However, times of extreme market distress can create additional market turmoil that goes beyond just stocks themselves and, notably, several other 'aberrations' appeared this week as well. Most notably, bond prices and stock prices have largely moved together this week, when normally they move in opposition, particularly on Wednesday when stocks fell alongside gold and a wide range of Treasury and other bonds that are normally the 'safe' destination that rally when investors panic in a "risk-off" day. Which is raising questions of whether there are more significant problems emerging with the underlying market liquidity of bonds (as there has already been some evidence of liquidity stresses in certain bond ETFs that periodically traded at significant discounts to their underlying NAV this week), and that some major financial players are experiencing a cash crunch that is forcing them to sell anything/everything they can (i.e., selling bonds to raise cash, instead of buying bonds as a flight to safety from riskier assets). Perhaps in response, the Fed announced on Thursday afternoon that it plans to inject up to $1.5T into the financial system by directly buying a wide range of Treasury bonds as a means to ease liquidity in the system. Though for longer-term investors that don't need to sell and raise cash themselves (i.e., bond ETFs trading at intra-day discounts don't matter for investors not looking to sell for years or decades hence), it's not clear whether any more serious concerns are present, or if the 'mild' turmoil in the bond markets is simply the economic system adjusting as best it can to what may end out being the most rapid-onset recession in market history.
Flattening The Coronavirus Curve (Siobhan Roberts, The New York Times) - When a true viral outbreak occurs, sometimes the reality is that nothing can really stop the virus from eventually spreading and infecting the majority of the population. However, a key lesson that historians and epidemiologists have learned is that in the end, how deadly a virus may be isn't just a function of how many people it infects, but how quickly it infects them. For instance, when the Spanish Flu came to the US in 1918, officials in Philadelphia simply encouraged their citizens to try to remain healthy... but otherwise didn't cancel any public events, including a major parade. By contrast, St Louis put the city on high alert, and proactively closed schools, shuttered movie theaters, and banned all public gatherings. The end result was that, in Philadelphia, the flu spread very quickly, infecting so many people at once that the hospitals were overwhelmed, and a significant number of people died simply because they couldn't access the limited supply of medical professionals, while St Louis' efforts to "flatten the curve" of how quickly the disease spread meant their medical professionals didn't get overwhelmed as the disease played out more slowly (and by the time new people got the disease, the prior had been safely treated)... such that St. Louis ended out with only 1/8th the death rate of Philadelphia. Accordingly, as the coronavirus pandemic spreads, there is a growing focus on the need to "flatten the curve" again, implementing various "social distancing" policies that won't necessarily prevent people from getting the virus in the long run but reduces the risk that the US medical system gets overwhelmed by too much spreading at once (akin to staggering work hours so local commuter transportation doesn't get overwhelmed during rush hour). Which means it's increasingly likely in the coming days and weeks that more organizations, or state governments and even the Federal government, may implement more policies designed not necessarily to prevent the pandemic but flatten the curve to ensure those who will eventually get sick can be treated effectively.
Emergency Preparedness Plan (Josh Brown, Reformed Broker) - All advisory firms have a requirement for "business continuity" plans to ensure that clients can be served in the event of a disaster that limits the ability of employees to access the firm's primary place of business. While these disaster/emergency preparedness plans are usually thought of in the event of natural disasters like hurricanes or floods, many advisory firms are now gearing up for the potential that the coronavirus pandemic and the potential for mass social distancing, self-quarantines, or an outright "work holiday"/business shutdown from the Federal government, may result in the activation of their business continuity plans. As Brown notes, though, the evolution of advisor technology over the past decade means that remarkably little actually has to be done physically in-person at an advisory firm anyway. Video conferencing tools make it feasible to meet with clients at a distance (and indeed many firms are increasingly growing by attracting clients not in their local geographic area in the first place), advisory firms themselves are more distributed than ever before (as Brown notes, of their 31 employees, only half are in their New York headquarters each week anyway, and the rest work remotely across 9 states already), modern communication tools like Slack have created a whole new means of facilitating intra-company communication when employees aren't in one physical location to gather around the water cooler, and client portals (Brown's firm uses Orion) give clients a means to see their performance reports without an in-person meeting to deliver the results (in addition to securely relaying other key communication). Which means in the end, firms that have been more active in adopting technology are already so effective at working virtually at a distance, that the requirement to actually do so may simply end out resulting in little more than business as usual?
How Advisory Firms Can Prepare For A Potential Coronavirus Business Disruption (RIA In A Box) - For firms that are already more 'technologically savvy', the potential that the coronavirus pandemic may force employees to work from home for a period of time is a non-issue. For others, though, who perhaps haven't fully fleshed out their "Business Continuity Plan" (BCP) in the event of a business interruption (which could be a hurricane, a flood... or a global pandemic!), and must rapidly implement new technology tools to adapt, there are a number of important compliance issues to be mindful of. Key points include: from a Communication perspective, be certain to let clients know if physical mail will not be regularly checked for a period of time (and if so, how else clients should send documents securely to the firm), inform clients how best to reach the firm urgently if the physical office is shut down, and if deploying video conferencing tools for the first time, be mindful that some clients will need training on how to use those tools; from the Regulatory/Compliance end, is the firm set up to properly archive any new communication systems being put in place (e.g., if remote employees begin to text message with clients, is there a text messaging archive solution?) and is the firm otherwise positioned to actually supervise the activities that need to be supervised from a distance (e.g., still reviewing advertising, personal securities transactions, etc.); does the firm have cloud-based systems to handle virtual work, such as video conferencing (Zoom), internal communications (Slack), password management (LastPass), internet-based VOIP phone systems, and compliance tools (RIA In A Box produces its own "MyRIACompliance" tool as one solution here); and is the firm still observing proper cybersecurity measures (e.g., only accessing the internet from secure WiFi connections or via a VPN, employees not storing sensitive client information on their home non-company devices, and being especially mindful of new email phishing and fraudulent wire request scams that may be targeted towards businesses otherwise disrupted by coronavirus).
Coronavirus May Finally Force Businesses To Adopt Workplaces Of The Future (Erin Kelly & Phyllis Moen, Fortune) - For years, there has been an ongoing debate about the relative merits of working from home, and whether telecommuting and more flexible work environments will lead to reduced productivity as employees get 'distracted' from home or simply give employees more positive control over doing the work they are still committed to doing anyway. At best, many businesses have only offered flexible work schedules for a limited portion of the workweek, and/or grant telecommuting flexibility only to specific employees who ask for it. Yet when only select employees ask for such flexibility, there's often a real risk of alienating themselves from the rest of the team (and even future business promotions and opportunities). But with the coronavirus at the least potentially forcing a large swath of workers to work remotely on self-quarantine for coronavirus exposure, and at worst triggering a broad range of school, travel, or business shutdowns to prevent the pandemic from spreading further, the whole country may en masse be 'forced' to quickly learn how to facilitate telecommuting and distance-based work arrangements, and see what the impact really is. Still, though, a growing volume of research, including some multi-year experiments in major workplaces, have increasingly found that providing employees more control over their work leads to employees feeling less stressed, more energized, and reporting a greater sense of well-being, and that in many cases telecommuting actually facilitates fewer interruptions than being in the office that makes employees more productive. But with the potential for mass implementation of work-from-home policies all at once, researchers may now have a true 'grand experiment' to find out if the benefits of telecommuting extend to all types of businesses and all situations... as businesses that doubted the benefits have no choice but to find out for themselves what really happens when their employees have to stop coming to the office for a period of time?
Answering The One Question Every Client Has (Ron Carson, Forbes) - When markets get 'scary', clients often start calling with questions, concerns, fears, or an outright desire to "get out" and stop the pain. As advisors, we're tasked with trying to keep them on board, help them to stay the course, and address the questions and fears that they have. But ultimately, as Carson notes, all the client phone calls and meetings in the midst of market turmoil really just boil down to one question: "Am I going to be okay?" Recognizing that "okay" can mean different things to different people; for some, "okay" means being assured that they remain financially self-sufficient enough to avoid becoming a burden to their kids, while for others it's about being able to buy their dream home, or ensuring that a child can afford to go to college or get married. In other words, while the market impact may be financial, the true impact of market volatility is not on the client's portfolio or their balance sheet, but the real-world goals those assets are intended to fund... and whether those goals will still be "okay". In fact, this is precisely why advisory firms often suggest running an "update" to the financial plan in the face of market turmoil, specifically to show that the client is "okay" and their goals are still on track (and if not, what they have to change to become "okay" and get them back on track again). The key point, though, is simply to remember that the phone call about whether to sell in the face of a market decline isn't really an investment concern, per se, but a fear that everything is not "okay" and that the real question is not about whether it's a good time to buy or sell, but how to get more comfortable again that everything really is going to be "okay".
Responding To (Prolonged) Panic Mode (Blair duQuesnay, The Belle Curve) - As the coronavirus spread and was labeled a full-blown "pandemic" by the World Health Organization this week, so too did investors seemingly go into full-blown "panic mode", with what may shape up to be the worst weekly market decline in history. And as duQuesnay notes, when "panic" sets into human beings, it's a purely physiological response - the brain pumps out stress hormones, adrenaline levels go up (increasing the heart rate, elevating blood pressure, and increasing energy supplies) to literally gear the person up to run away from danger, while cortisol increases blood sugar and the body's ability to repair tissue in anticipation of the 'damage' that is coming. In short spurts, the brain's danger response mechanisms can be and have been remarkably effective survival mechanisms... but over prolonged periods of time (e.g., from an ongoing bear market), the constant wear of stress on the body can add up, especially if/when it's compounded on top of greater uncertainties as sports teams shut down, colleges and secondary schools begin to shut down, travel begins to shut down, and businesses and jobs at large may begin to shut down as well. Which means it's especially important to take steps to reduce what may be an extended period of stress hormones in your own body. Key tips include: turn off the television (and shut down the computers/phones) for at least a few hours every day; take pauses for some deep breaths (yes, breathing techniques, along with yoga and meditation, really are effective at reducing stress levels); make (or even schedule) some time for fun and relaxation to de-stress; make sure you still get some sleep; and try to keep the sense of fun and enjoyment in being human (laughter physiologically does help bring stress levels down). In the meantime, remember that the more bad news that comes out, the less bad news there is left to drop, and while it's often not clear when the darkest hour has come until it's already passed, sometimes the best course of action is just to focus on the micro-actions that keep us healthy and 'sane' amidst the stress, and keep putting one foot in front of the other until this too has passed.
Talking Through Corona Panic (Morgan Housel, Collaborative Fund) - One of the fundamental challenges of hindsight is that what seems obvious after the fact is almost never so obvious in advance, which makes it even harder to keep perspective in the moment of what clients (or even advisors themselves) may feel "should" have been anticipated even though it never really could have. In fact, as Housel notes, the change in perspective when the situation changes quickly can create a number of striking distortions in our perspective. For instance, Housel notes that when uncertainty amplifies, our field of vision tends to shrink and shorten (at the worst possible time)... as when it feels like "everything" is changing every 24 hours, it's hard to stay focused on anything beyond the next 24 hours (even if it's the worst time to be short-sighted). Or as Nassim Taleb says, "history doesn't crawl; it leaps", which makes us inevitably underestimate how much can change and how quickly it can change when a leap occurs given that 99% of the time it's just crawling along. Similarly, the way you think you'll respond to risk often doesn't turn out to be how you actually respond when the time comes, and relative values get especially hard to deal with (yes, the market is down more than 20% from its highs just weeks ago... but it's still higher than it was just 15 months ago in December of 2018!). At the same time, it's important to acknowledge the real challenges... that it's OK to admit that this is a big deal and can be scary (even though the 'gray' area between pure panic and pure optimism may feel unsettling), and it's OK to admit that things may get worse before they get better. Though if you really want to keep perspective in the long term, Housel suggests keeping a diary... both as a way to process your own thoughts and fears, and because someday it will be a fascinating lens of history to look back upon!
What Your Clients Really Need Right Now (Julie Littlechild, Absolute Engagement) - One of the key differences between clients who are merely 'satisfied' and those who are truly engaged with the advisory firm is that the most highly engaged clients see their advisors as not only experts armed with knowledge, but also leaders who provide guidance when times are difficult. In this context, it's important to recognize that excelling with clients in the current environment is not just about providing them expertise (about investments, markets, and the economy) but providing them "leadership". Which means not just trying to give the right answers, but asking the right questions to really understand what they're thinking and feeling (or risk, as a leader, misunderstanding the problem and solving the 'wrong' problem, such as addressing questions about market volatility when the real question is "will I still be OK to retire?"), being able to look at the situation through the client's lens (and not succumbing to the frustration of having the 'same' conversation over and over with the same nervous clients), being 'human' yourself (in recognizing how scary this can be as an advisor, and the need to mind the impact to our own businesses), being ready to walk into the fear to help others despite the fears and risks for yourself, and realizing that true leadership for clients is less about 'fixing the problem' and more about creating a sense of calm and confidence in the midst of the storm. Accordingly, Littlechild suggests that rather than just launching into a conversation with clients about how everything will be OK ("we have the charts and graphs to prove it!"), or asking them how they're feeling about the markets (scared, obviously!?), try instead asking them: Given the current environment... "How confident are you that you will [still] reach your primary financial goals?"; "How confident do you feel that you can [still] positively impact your own financial future?"; and "How clear are you about your [current] plans for retirement?" And explore the conversation that results.
Coronavirus Scams To Watch Out For (Penny Crosman, Financial Planning) - With news of the coronavirus pandemic (and the virus itself) continuing to spread, unfortunately so too are scams related to the coronavirus. Not just in the context of trying to capitalize on scarcity (the New York hardware store charging $79.99 for a bottle of hand sanitizer!?), but more subtle and pernicious ways that hackers and identity thieves may try to take advantage of the uncertainty. For instance, while Johns Hopkins has created a popular COVID-19 dashboard for those who want to stay up to date on the virus, scammers have also created a fake 'corona-virus-map.com' website that claims to provide similar up-to-date information but in reality installs malware/spyware that steals the usernames, passwords, credit card numbers, and other data stored in the user's browser. Phishing scams - where an urgent-seeming email from what purports to be a legitimate provider tries to get someone to take an action that hands over information - are also on the rise, using COVID-19 news in the subject line and a fake 'From' field that appears to be from the CDC or World Health Organization to induce recipients to open and click (e.g., go here to reset your password to get key information about the coronavirus in your area!). Which means from the advisor's perspective, it's a good idea to either suggest credible resources for information (e.g., the right version of the Hopkins map), warn clients about the risks, or simply use the COVID-19 phishing attempts as an opportunity to teach clients (and employees!) more generally about the importance of good cybersecurity practices!
Investor Lawyers Gear Up Amid Market Rout (Mason Braswell, AdvisorHub) - It's not the fault of the financial advisor when markets decline, especially due to external and unforeseeable events like a coronavirus pandemic. However, the reality is that when market losses begin to stack up, investor plaintiff attorneys begin to eye opportunities to sue problem advisors... not necessarily for losses beyond their control, but situations where it turns out clients really did not have appropriate investments in their portfolio (which are sadly often revealed when the difficult times come). Of course, it's not clear what the ultimate depth of the market decline will be, and what will or won't recover quickly... so it may well be 3-6 months before there's time to really see the damage, begin to analyze portfolios and evaluate potential claims, and for lawsuits to begin. Though some cases - such as clients who were clearly over-risked, over-concentrated, or over-leveraged with margin - may lead to legal complaints being made relatively quickly. In fact, spikes in litigation commonly occur after bear markets, and then wane in bull markets, with FINRA arbitration complaints as high as 5,246 in 2009 but plummeting to just 2,363 last year (after having more than double the complaints since 2007 before the financial crisis). And notably, recent trends are that FINRA arbitration panels have been increasing their awards to investors lately (with 48% of arbitration decisions in January resulting in payment to clients, up from 40% to 45% in the past 3 years), suggesting that there may already be growing scrutiny from FINRA arbitrators over problematic recommendations to clients. Which may not be a concern for the advisors who have been doing right by their clients all along, but does suggest that the emerging bear market may nonetheless lead to a fresh wave of lawsuits and a round of 'purging' the bad apples (albeit, unfortunately, only after the harm has already been done!).
Steps For Advisors To Take Care Of Themselves During Coronavirus Volatility (Amy Florian, Wealth Management) - With markets increasingly volatile and clients increasingly fearful, advisors are being put in the position of fielding more phone calls and emails from stressed and even "grieving" clients. Since, as Florian notes, grief is triggered anytime there is a break in an attachment, and most people are very attached not just to their money itself, but also to what it represents (whether security or a symbol of their success)... such that when it feels like their money (and what it represents) is slipping away without their consent or control, they grieve. Yet just as in other situations where one is a caretaker for someone who is grieving, providing comfort can be stressful for the caretaker as well. Especially when it potentially involves venting a great deal of fear and frustration onto the advisor (not to mention the risk of being outright blamed for the losses). Accordingly, Florian suggests that it's especially important as an advisor to be mindful of your own health and state of mind when being a guide and caretaker for 'grieving' clients, which include these tips: be certain to really take care of yourself first (even if it means scheduling on your calendar time to take a walk, listen to music, eat with friends, go to a movie, or get a massage... like all caregivers, you need a break!); if frustration is building, find nondestructive ways to express your own emotions (whether it's physical exercise to work it out, throwing a tennis ball against the wall, writing in a journal, or talking with a trusted friend or group of colleagues); consciously decide to smile throughout the day, as several studies have documented that the actual physicality of smiling actually affects mood and the brain (i.e., we don't just smile because we are happy, we may feel happier because we're smiling!); and try making a list of everything and everyone for whom you are grateful, and every evening read the list, add something good that happened during the day, and make that the last thing you see before a (now more restful?) sleep.
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you're interested in more news and information regarding advisor technology, I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors as well.