Investors Demand Downside Risk Reduction With Looming Recession Fears

By VIJAY VAIDYANATHAN 

Almost half of American CFOs expect the U.S. economy to be in recession by 2020, according to a Duke University survey. With growing fears, investors are looking for a way to protect their assets in the coming months and years. Investors are seeking guidance and strategies from their financial advisors to weather the storm, and the best advisors are preparing for that contingency now, by constructing safety nets.

Recession Fears On The Rise

CFOs watch different aspects of the market than investors and advisors, citing tight labor markets and falling optimism as reasons for their grim outlook. Despite the differences, there is a general sense of an impending recession, as marked by a fall in leading indicators, inversion of the yield curve, global economic tightening and U.S. constriction of monetary policy, all of which are strong indicators of recession.

According to Guggenheim's Recession Probability Model, recession looks likely for mid-2020. The Leading Economic Index has decreased with unemployment holding steady for the last nine months and hours worked and retail sales cooling. These trends point to less comfort in economic strength as people and companies hold onto their money.

Also, the U.S. Bond yield curve has inverted several times since early 2019. Yield curve inversion has been viewed as an important indicator of recession as investor fears mount.

The Fed has and will continue to tug at the short end of the Yield Curve through the Fed Funds rate. With little room to play, the Fed may turn to unconventional policy tools, which could make the Fed a political target and further weaken investor confidence.

Finally, Guggenheim and Duke point out that the global outlook is bleak as well. CFO optimism fell or held steady in Canada, Europe and the UK, and Asia. Austerity measures combined with limited ability for monetary tightening may create another hazardous economic outlook for Europe while China is attempting to deleverage itself and will not be in the position to aid global economics as it did in the previous recession.

Prepare For A Recession And Retain Clients

With all these signs pointing toward a possible recession in the next six months to a year, investors have reason to worry about their portfolios. Skittish investors are quick to shift gears if they feel their advisors are not doing enough. Therefore, advisors should proactively conduct life-event as well portfolio reviews and schedule meetings with clients to discuss appropriate safety net levels and the timing of future cash needs.

Most importantly, it is the advisor’s duty to keep clients focused on the timing and levels of their future financial needs – both long and short term and help them decide what an appropriate safety net level should be. Advisors should be helping them resist the urge to make rash decisions based on headlines. Recessions occur several times in an investor's saving lifetime, and portfolios should reflect their financial needs rather than the rise or fall of the markets.

Winning Business During A Recession

Not all financial advising firms will take these precautions. A study by Charles Schwab quoted in the Financial Times,  found that 40 percent of advisors are not preparing their investors for a recession at all. Still, this figure might be an overstatement, since the safety net is used loosely rather than as a precise statement of risk tolerance and a systematic and scientific asset allocation parameter.

According to an article by Investopedia, investors are quick to leave advisors who are falling asleep at the wheel. Investors value communication, especially in times of heavy losses.

Overall, attracting new clients means showing what you can do for them both on the upside as well as the downside. Unless you tell them, clients will often not know that an advisor can configure safety net levels for them through systematic asset allocation and modern FinTech tools that are designed to protect a specific safety net level even in the event of a catastrophic fall in the market or shifts in interest rates.

The Power Of Technology In Providing Safety Nets

Technology is becoming more and more prevalent in advising, and in no aspect is this more evident than in systematic safety net creation. New advanced technology helps to analyze and communicate potential risk and trade-offs, run projections for clients and more. Simply having technology immediately marks you as a standout firm.

The use of technology in advising demonstrates exceptional service. By using technology to run numbers on what you can deliver with a Safety Net, you make your clients less susceptible to heavy losses. It is not only a showpiece; it is a way of improving and demonstrating the quality of your firm.

For advisors, the impending recession may not be all bad. The fear of recession creates opportunities to show investors what you can do outside of when markets are generally stable. It also opens a window to attract new clients who will realize they can do better than their existing firm. If the recession does hit, both your clients and you can come out winners.

Optimal Asset Management is the operator of FutureSafe.io and is an SEC-registered investment advisor specializing in the delivery of institutional-grade investment solutions for all investors. For more information, please visit www.FutureSafe.io.