What Are You Telling Your Concerned Clients?

In the weeks ahead, be prepared to encounter concerned investors if their candidate doesn't win the U.S. presidential election. Here's how it may manifest during a first encounter with a prospective client. Let's call them John:

"You're a financial advisor? I'm sure we're headed for a recession with everything going on right now, so I'm sitting on my cash. What are you telling your clients?"

Your response may be what turns this first encounter into a follow-up conversation. Rather than debating a prospective client's view, lift the conversation to a higher plane by using an ism—a timeless, pithy sound bite that connects the dots between your foundational beliefs and the advice you give to clients.

Consider one of our favorite isms from Jim Caron, CIO of the Portfolio Solutions Group: "Noise is often confused with signals." That's much more likely to pique their interest than hearing your counter opinion, isn't it? Ideally, John will ask you to explain the ism, which opens the door for you to add a bit of nuance to help disrupt their overconfidence. To help devise a response, let's consider Jim's insights from the October issue of The BEAT:

Jim: "Noise is often confused with signals. Investors often try to find signals in financial markets by oversimplifying complex matters. The result is a narrative that reflects noise instead of signals. Confusing noise with signals can cause investors to measure the wrong data relationships and form a view that leads to suboptimal decisions when managing risk. You can't manage what you can't measure. So, the focus needs to be on measuring signals, not noise, to drive more optimal investment decisions and create a repeatable investment process."

David: "Jim, how can advisors help their clients turn down the volume on the noise of the upcoming U.S. presidential election?"

Jim: "From an investment perspective, why stress over who will be the next president, which party is in control and what the makeup of Congress will look like. Really, nobody can predict that. Let's go with something more certain, higher taxes are coming. The candidate who wins will have to deal with bringing a sizable deficit down as neither party can escape that it's running at an all-too-high level of over 6% of GDP. The CBO projects the deficit will continue to grow over the next 20 years just due to rising interest payments on U.S. debt even if you keep current spending stable. The deficit can be lowered through higher growth, higher taxes or both. Investors should stress less about which political party is in charge and focus on where there is more confidence which is higher taxes are likely." 

David: "Given the likelihood of higher taxes to address the deficit, where should advisors be considering adjustments in client portfolios?"

Jim: "Bond yields have risen, and the recent CPI inflation report shows inflation isn't quite dead yet. This may slow the pace and terminal value of rate cuts, causing yields to rise today and offer a better entry point for municipal bonds. The yield curve is also steepening which makes longer-dated municipal bonds more attractive. Ladders are a good strategy to help clients mitigate the risk of trying to time the market. All this makes munis part of a well-balanced portfolio." 

With this ism in mind, perhaps you respond to John with this explanation:

"The consensus narrative actually harmonizes with your negative outlook. Much of this is noise. What are some signals? Consider the recent CPI report showing inflation isn't dead yet, rising bond yields and the steepening of the yield curve. These are a few signals we're watching that may indicate future financial conditions."

What have you accomplished with this conversation? You have showcased a professional's perspective that looks past the headlines. Your nuanced response may also cause John to rethink his overconfidence and become curious about your potential value.

Bottom line: Turn first encounters into follow-up phone calls when you articulate your isms to pique a prospective client's interest, and showcase your thoughtful perspectives when prompted.