By Michaela Scott
There is only one rule of thumb for financial advisors in a crisis: all rules of thumb immediately become less reliable.
As the U.S. and the world continue to grapple with the COVID-19 pandemic and the economic fallout, advisors must prepare to handle more unique situations and a reduction in scalability across their practices. The pandemic will end eventually, but in the meantime, advisors must be creative and compassionate as they help their clients weather the financial turmoil and rebuild.
Leveling With Retirees
Retirees who left the workforce in the past few years, or those who planned to retire in the next few, face some of the greatest threats to their financial portfolios. A shock this sudden and severe means millions of Americans face delaying their retirement or losing it entirely, and advisors who have not already done so should proactively reach out to these clients to review their entire financial game plan.
In these conversations, remember most clients are not trying to become rich – they’re trying to avoid poverty. Lectures about rates of return will probably not land well with clients worried about paying their mortgage or affording medication.
What clients in these situations need is empathy for their individual struggles in what can be an overwhelming amount of information about current and historical trends. To directly address concerns about making ends meet, take clients through a needs inventory and a review of different investment buckets.
Ideally, these buckets should be diverse enough to protect against market volatility and provide income. If not, continue with compassion when broaching the topics of family spending cuts and applying for government aid.
For some clients, usually those who already trusted the markets, seeing the performance of market indices can be reassuring. It’s not that clients feel better about their objective financial position, but they may take comfort in knowing they are not lagging behind everyone else.
Clients who had to be convinced to invest will likely not derive any benefit from this, as they may be more focused on their individual situation.
Addressing Immediate Concerns
While retirees or near-retirees are feeling the most immediate impact from recent market turmoil, clients at all stages of life may be coping with job loss, new healthcare costs or a general sense of panic. Unique historical events naturally spark fear and advisors will need to validate and acknowledge that fear to help clients grapple with it.
March brought about a decline not only in stocks, but also in bonds, commodities and foreign currencies as large investors rushed to buy dollars. Some clients may want to follow suit and get out of the market entirely.
Run long-term simulations for these clients using their current investment balances with a one to two percent interest rate, which is what they would earn with a high-yield savings account. Most likely, such a scenario will not be feasible or desirable, especially against an expected market rebound.
Other clients who aren’t close to retirement may not want to ditch their investment funds but still feel they can’t afford to save additional funds. This might be true, and advisors cannot simply tell all their clients to save.
Ideally, clients can still invest with a dollar-cost average perspective because they have an emergency fund. But most Americans already have less than $250 set aside for emergencies, and more will fall into that category as the crisis continues.
Sit down with each of these clients and determine which expenses are necessary and which they can do without. These discussions must be approached with the utmost care – advisors cannot callously suggest their clients cut cable service if they have kids who need to be entertained.
But clients may be able to cut back in some places – cooking at home more often or using free versions of apps with ads instead of premium ones, along with other small changes, can add up.
As you have these conversations, take in as much information as possible beyond market and portfolio performance, including how clients are coping from a mental health perspective and any personal dynamics that must be accounted for. To make the best plans to move forward, discuss everything as empathetically as possible.
After these conversations, clients may be able to adjust their lifestyle and tighten their belts for the time being. Remind them to keep an eye out for federal and state government assistance. Low-interest loans, direct cash payments and suspensions of utility bills can all help make ends meet. Other long-standing welfare programs including unemployment insurance, SNAP benefits and Medicaid may have loosened requirements depending on jurisdiction.
Unfortunately, though a last resort, some clients may need to withdraw from their retirement accounts. For certain eligible employees, federal legislation has suspended the 10% early withdrawal fee and extended the time period clients have to pay required income taxes.
Like the no-savings scenario explored above, this may be the best – or only – option for some, especially those who cannot afford to take on more debt. Use computer simulations to weigh different scenarios over the long-term to help clients figure out the best financial path available now and in the future.
Resetting For The Future
The COVID-19 pandemic and ensuing recession may cause permanent shifts in American cultures and lifestyles, so advisors cannot plan for a return to normal once the situation abates.
Many clients will not have fully anticipated changes in spending or income, even with an advisor’s help, and will need full asset reviews once the dust settles. Some of my clients, for example, are providing unplanned monetary aid to their children due to layoff’s and/or college children at home unable to find work. Long-term plans that may have been in place for years will need adjustment or even rewriting.
Whether in a few months or over a year from now, the COVID-19 pandemic will eventually end. Until that day comes, and long after, advisors must take care to shelter clients for any financial storms and rebuild in a world and nation that may be permanently changed.
About The Author
Michaela Scott, CFP®, MSFS, leads Borislow’s Employer Retirement Consulting Practice, which offers advisory services through Royal Alliance Associate, Inc. (RAA), member FINRA/SIPC, and not affiliated. She has been an MDRT member for five years. Michaela is a Certified Financial Planner™ and earned her Master of Science in Financial Services with a concentration in Retirement Planning from the American College of Financial Services. She is also a Retirement Income Certified Professional. Michaela co-authored If I Had Only Known – Checklist and Guidance for Before and After Death with Jennifer Borislow and Melissa Marrama. Michaela lives in Hampton, New Hampshire.