How To Talk to Clients About Market Volatility

The stock market tends to go up in the long run. However, the long term has been punctuated by horrific dips and dives. How should you counsel clients who might overreact during these times?

Whether markets are turbulent or relatively peaceful, financial advisors need to be farsighted enough to ensure their clients know what to expect should volatility occur. We contacted standout advisors throughout the U.S. and, below, give you the best advice on helping clients when volatility strikes.

Get Out Ahead of the Bad News

If volatility is beginning to rock the markets and you're only now talking to clients about volatility, this means something has gone wrong in your advising relationships. "For the most part, talking to clients about market volatility during times of market volatility is too little, too late," said David Flores Wilson, a certified financial planner at Sincerus Advisory in New York City. "A better approach is to talk about likely future market volatility when they are first engaged as clients."

Lora J. Hoff, a certified financial planner at Investment Planners in Dallas, Texas, agreed. "It is critical to set expectations early and often. With every new client and at every client review, I discuss normal market returns and volatility. Whether the client is coming off a great return period or a downturn, I talk about how this will be a part of the overall roller coaster ride to achieve a long-term reasonable positive return," she said.

Wilson gave an example of how he prepares clients from their first meetings: "We illustrate, based on their risk tolerance, what they could expect regarding potential downside. For example, we might propose a diversified portfolio that can be expected to go down 18% in any given year within a 99% confidence level and then get their feedback on this potential downside risk. If this worst-case scenario is too jarring, then we’ll adjust."

In this example, Wilson prepared his client for what volatility would look like, and now the client has signed off on the risks involved.

Benjamin Burkhart, a financial advisor at LPL Financial in Red Lion, Pennsylvania, said he looks for relatable analogies to explain market movements. He tries to get across how success in the market over the long term often means some retrenchment. Burkhart said he might tell a client, "Think of a healthy market like a balloon. You don't want to blow up the balloon quickly until it pops. Instead, you blow it up, let a little air out, then blow it up more. Letting the air out allows more room to grow." "We've found that using analogies with an optimistic and positive tone to explain volatility and pullbacks has been very effective."

Listen Far More Than You Talk

During market downturns, when portfolio values have plummeted, clients may face losses equal to years of savings, pushing their financial goals and dreams further out of reach.

It's crucial to get in touch with all your clients during volatile economic conditions—or they might not be your clients for long. Matt Bacon, a financial advisor at Carmichael Hill in Gaithersburg, Maryland, said, "We've picked up many clients who were dissatisfied with the amount of communication they were getting from their advisor." This often matters more than the fact that the market is volatile. "Clients understand that markets go down from time to time and that we can't control a bear market. They're much less forgiving when they don't understand why it's going down this time, how their portfolio is affected, or what they should be doing going forward."

Empathetic communication is thus key. "During times of market upheaval, my approach has always been to reach out to clients to talk with them about what may be on their mind before they begin to worry themselves about all the things that can go wrong," said Alyson Claire Basso, managing principal of Hayden Wealth Management in Middleton, Massachusetts. "I make a point to discuss past market experiences and potential future market volatility."

"This way, they know that volatility is something we’ve planned for," she said.

Reach Out Before They Have a Chance To Call

Pick out clients who are more at risk and ensure you speak to them first if market events are sudden and moving quickly. Let your clients know you're available to discuss any concerns and consider scheduling meetings to review their portfolios and financial situations.

Avoid the Numbers For Now

However, this is not the time to wax on about asset allocation and standard deviation or fall back on technical descriptions of recent market gyrations. Focus on the human element rather than technical discussions—more data might freak them out (since all the numbers are generally bad) and is less needed than hearing their concerns.

"Advisors should be hesitant to discuss numbers and data during a financial downturn because the client's fears are very emotional and irrational at that point," said Brian M. Schmehil, managing director of Wealth Management at the Mather Group. "Lead with numbers throughout the year, but when volatility occurs, it is important to empathize." If needed, you might have to "call out some extreme views or expectations the client may have."

Even though, as a financial expert, your instincts will lead you to think a sober review of the number is in order, listening is more crucial now. "Understanding what is giving them stress and anxiety, but then explaining why those feelings might not be rational, is a great way to pull clients from the edge of making a bad decision," Schmehil advised.

It also helps you bank trust that you're going to need if the volatility lasts longer than expected. "It's all about communication," Basso said. "It's not just about whether they're making money or not, but how well you're keeping them in the loop. It is crucial to manage expectations, especially when things get rocky. By being there for clients, listening, and keeping them informed, we build trust and loyalty, even when the market is unpredictable."

Remind Them of the Long-Term View

Schmehil said that when the market starts to swing, "It's the advisor's responsibility to educate the client on the value of taking risks and having a long-term perspective." As long as the advisor secures the client's short-term cash needs, the client should be willing to listen as the advisor notes the relationship between risks and rewards.

"This doesn't mean the client should like losing money, but they should expect most of their portfolio not to go up in one straight line." It's important to let the client know they "will still be successful so they continue to have a long-term perspective," he said.

Talk About Previous Pullbacks and the Bull Markets After

Once a market rallies from one of its nosedives, the financial media are typically full of sobering stories about investors who sold at the bottom, only to miss out on the recovery. "Regularly reminding them of how much markets went down in prior pullbacks like the 2008 financial crisis, the COVID pullback in 2020, and the 1998 Asia debt crisis helps them mentally prepare for inevitable market volatility," Wilson said.

Depending on how long they've been clients, you might show them how their portfolio has performed since they started investing. Reviewing a decade-long period, for example, might make the declines seem less significant. There's a reason people examining data suggest "zooming out": you can better see the long-term trend instead of myopically concentrating on the smaller, current movements.

Ask Them What Would Ease Their Stress

A good question to ask a client looking to cut their exposure to stocks is, "If we sell now, when will you get back in?" While most clients understand that timing the market is nearly impossible, many struggle to reconcile the data with their emotions.

Michael Resnick, senior wealth advisor at the Alera Group in Deerfield, Illinois, gave an example from the beginning of the pandemic. He had a client who couldn't sleep because he couldn't stop thinking about how market volatility was hurting his savings—stocks were dropping fast as news of the potential economic shutdown was taking hold.

The client asked Resnick to liquidate his portfolio so he had the security of at least having his funds in cash. "I knew that would derail his plans for retirement. Instead of moving everything into cash, I asked him, 'How much do we need to move into cash for you to sleep better?' His response was an additional 20% into bonds. ... This gave him peace of mind and saved his portfolio, as well as his retirement." In this way, a small intervention moved his client away from selling off everything, and instead, he adjusted his bond holdings.

Keep Things in Perspective

Given this last example, Resnick said that when helping clients through bouts of volatility, "The importance of behavioral finance cannot be overlooked." Behavioral finance suggests not just the obvious—that human beings are not prone to being the rational actors depicted in Economics 101 textbooks—but that the market itself is better understood through such behaviors. For clients facing a market upheaval, common insights taken away from the field would suggest that during periods of market turbulence, clients typically rely on cognitive biases.

One of the most likely biases an investor might face loss aversion, where the pain of losing money is more intense than the pleasure of gaining an equivalent amount. This can lead to panic selling or abandoning a well-structured investment plan. Neil Waxman, managing director of Capital Advisors in Shaker Heights, Ohio, suggested that advisors talk to clients about loss aversion and other cognitive biases so they can better stick to long-term investment strategies.

Waxman said recency bias is another issue that's likely to arise when there's volatility. "Recency bias is the tendency to base decisions on what has occurred most recently and project it indefinitely into the future. Bear markets can lead investors to continue to think the worst, even when the markets eventually recover," he said.

Behavioral finance also highlights the role of framing, which involves how people respond differently depending on how information is presented. Advisors can use positive framing to help clients view market downturns as a chance to look for prospects likely to head back up once funds start moving back into the market.

Helping clients keep recent market news in perspective is essential, especially during periods of volatility. For Waxmans, this means "providing clients with insights" on cognitive biases or common tendencies and a "vision delivered by a sound financial road map."

Focus on The Plan

Being a good advisor isn't just about how you react to changing stock market conditions but how you have already factored in potential volatility for your client from the get-go. As Schmehil put it, "It is the advisor's responsibility to put clients in a portfolio that isn't too risky to force a knee-jerk reaction from the client.

Ideally, once volatility occurs, your clients' portfolios will have already captured prior gains. However, if your clients think there is too much risk in their investment holdings, it may be suitable to adjust their portfolios.

When deciding what to buy or sell during volatility, ensure your clients know the long-term ramifications of their actions. Shedding a risky asset may temporarily relieve their stress, but realizing that you sold a high-potential asset at its lowest price might haunt them ever after. Your role is to ensure your clients remain true to their long-term financial goals.

Remind your clients that neither financial advisors nor clients can predict or influence the market. All you can do is prepare as best you can before major events occur.

The Bottom Line

As a financial advisor, you truly earn your keep during plunging market conditions when volatility can be high. It's easy to share good news when a client's portfolio is thriving, but it takes skill and empathy to navigate conversations when trading screens are littered with red and many charts have chart lines going down and to the right.

Remember, providing advice is as much about managing client behavior as allocating assets and building portfolios. If your clients are spooked, it may be a sign that you haven't communicated enough or properly educated them about market fluctuations and volatility.

Even if your clients understand that certain risks are inevitable and can't be mitigated entirely, they still want reassurance from you, their trusted advisor. If you don't reach out to them during turbulent times, someone else might, and you risk losing a client in the process. By prioritizing regular communication, setting clear expectations, and focusing on your clients' long-term financial plans, you can help them weather declines and periods of negative market volatility with confidence and peace of mind.