Do you remember lying in bed as a kid, trying to fall asleep? You were already feeling small and vulnerable, then, suddenly, you heard a sound coming from your closet. Instantly, all your fears were amplified. Your mind started racing, “What was that? A monster?” You tried to ignore the sound, but then you saw an unusual shadow lurking outside your window.
If you couldn’t build up the courage to walk across the room and turn on the light, these shadow monsters continued growing in your mind.
Today, there is no shortage of potential shadow monsters creating unknown sounds in our clients’ financial closets. Every day, our clients see headlines about what could cause the next stock market crash. Politically, each party messages that our country will fall apart if the opposing candidate is elected. Then, clients hear that the next government spending bill will add billions of dollars to our already bloated national debt. They wonder, “How will this affect me?” After hearing these things on the evening news, they attempt to forget all these potential shadow monsters to get a good night’s rest. But the noise is still coming from the closet.
Financial shadow monsters are frightening because there are real dangers in our world, just as there are real risks to investing. That being said, an important role of the financial advisor is to help clients build a financial plan that minimizes opportunities for shadow monsters to grow.
As our clients near retirement, these potential shadow monsters are more difficult to ignore. If advisors fail to confront the shadow monsters, clients could take irrational actions, potentially damaging their future financial lives.
The typical response I hear from our industry is to remind our clients that retirement planning is a long-term strategy, so they shouldn’t worry about short-term events. To me, that’s like parents telling their child that the sound in the closet will go away if they just wait long enough. It may be true, but it doesn’t help the fear they are feeling now.
I believe there are two ways to help our clients face the shadow monsters in their financial closet. The first step is to help them have a better understanding of where their money is invested and how their financial product reacts to all kinds of market events. One of the tools we use when implementing the Portfolio Waterfall strategy is the “Anatomy of a Mutual Fund.” This simple graphic shows the internal structure of a mutual fund share. This knowledge often helps the client take their eye off their account balance and shift more to an owner-of-shares mindset. Prices can fluctuate daily, but they now understand the number of shares remains the same, even when the market drops.
The second step is to have action items to consider for each stage of the market cycle. This is one way we use our financial planning software, Asset-Map. We have found it helpful to make notes – visible to the client – for each investment account. The notes communicate what actions should be considered when the market goes up or when the market goes down. The client sees these potential action items every time they look at their personal Asset-Map. It is a simple strategy that helps the client identify potential opportunities in every phase of the market cycle. This simple communication often translates to more peace of mind for the client.
In summary, I believe advisors should develop a proactive approach to dealing with financial shadow monsters. These issues generally behave like most other issues. When ignored, they tend to become larger. By proactively addressing them, we potentially deliver more value to our clients and deepen the relationship by helping them courageously achieve their financial goals.
If you would like additional help in developing your strategy for proactively facing the shadow monsters for your clients, please contact me using the information below.
