To Weather The Storm: Advisors Tackle Recession-Proof Planning

When the markets take a dive, it’s easy for investors to panic and worry what effect the changing market will have on their money.

To ease clients’ worries, advisors should be ready with a recession-proof plan.

As Dennis Nolte, vice president of Sea Coast Investment Services points out, financial advisors are the doomsday preppers of the financial world, so when markets change, advisors have an opportunity to exceed their clients’ expectations.

“Financial planners are risk managers first and foremost, so we always hope for the best, but plan for worst-case scenarios,” said Nolte. “Recession isn’t the worst case, but it’s bad.”

Remember advisors, this is what you’ve trained for, so don’t let your clients go running for the bunker just yet.

Mackenzie Richards, senior financial consultant at Bank Rhode Island Investment Services said when heightened market volatility occurs, advisors must help clients separate their emotions from their actions. “It’s not the time for knee-jerk reactions,” he said.

Prep For ‘What-Ifs’

It’s easy for investors to disregard potential downturns in the market when it’s performing well, but having contingency plans can lessen the shock when volatility increases.

Having a “what-if” plan in place before a dip in the market is the best practice, but for some investors, the shock of a drop is enough to spur them into action. “Sometimes, a nice 5, 10 or 15% drop in the market is the wake-up call people need,” Richards said.

Richards offers some questions that advisors should ask their clients to drive home the need to be prepared for any “what-if” scenarios before they happen.

• Debt: How much of your income is going toward paying off debt? What would happen if you or your spouse lost your job in a recession? Can you still keep a roof over your head?
• Essential expenses: What does your day-to-day living look like with reduced income? Can you keep the lights on and your family fed?
• Emergency fund: What’s the status of your emergency fund? Do you have enough easy-to-access cash to tap in the case of a necessary car or home repair, medical emergency or other unforeseen expense?

The Dos And Don’ts Of Recession Planning

Although prepping really is the most important part of recession planning, advisors shouldn’t overlook these dos and don’ts when planning for a market downswing.

Do:

• Review your clients’ debt-to-income ratio and financial picture with them.
• Make sure your clients have a well-stocked emergency fund.
• Be proactive and review your clients’ investment plans often – matching longevity risk with investment risk.
• Communicate with your clients about market changes and the need to make adjustments to their investment strategy.
• Answer clients’ questions and address their fears.

Don’t:

• Let investors panic or act on impulse when the market changes.
• Assume that investors have as much knowledge of market behaviors as you do.
• Wait for a client to come to you before reviewing their portfolio in the face of a changing market.

AdvisorNews Managing Editor Cassie Miller may be reached at cassie.miller@Adnewsfeedback.com. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.