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Equity markets have been taken out to the woodshed in recent weeks and bond markets are spooked about the potential for inflation. As such, volatility has returned from a prolonged period of hibernation. With the VIX curve in an unusual state of backwardation—the spot price is more expensive than a futures contract—we are meant to infer that volatility is likely to persist in the near term.
So what’s an investment manager to do?
Let’s remember that as economics students, we build models that assume people are rational. As psychology students, we learn that they are anything but. When equity markets are capitulating, it’s probably best to be less of an economist and more of a psychologist.
Assume the worst: your clients are likely watching some fear-mongering program on television or being suckered by clickbait headlines into reading doomsday articles. Don’t fool yourself into thinking that your clients are too sophisticated for this. It can happen to the best of us.
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We recommend that you mitigate your client’s irrationality with proactive outreach instead of waiting for them to call you. If volatility does not abate in the short term, these phone calls will pile up quickly and you’ll have bigger problems than choppy markets. According to a study published last year, 65% of HNW baby boomers would fire their financial advisor for not returning their calls promptly. While this figure declines for both Gen X’ers (58%) and millennials (52%), it’s still substantial enough to merit your attention. Asset managers are also at risk of being fired by institutional investors absent a certain level of responsiveness.
The problem here is that depending on the relationship manager’s client list, this may require anywhere between 100 and 300 phone calls, and there is only so much time in day. So while 1:1 communication will go a long way towards quelling an investor’s irrationality, it can be an inefficient use of one’s time.
Instead, we recommend a 1:many approach that digital communication allows for. It is a much more efficient use of time to email clients and or to write blogs about your reactions to the markets. The latter will not only help to ward off client defections, but it will also help you poach new clients that are dissatisfied with their current manager’s lack of communication. So you might look at volatility as a great business development opportunity.
Perhaps we can be economists in a bull market. However, in periods of market volatility, we stand to benefit from being psychologists.