Active investment management’s weekly magazine for fee-based advisors

How advisors—and their clients—successfully navigated 2020

by Jan 13, 2021Advisor Interviews

How advisors—and their clients—successfully navigated 2020

by Jan 13, 2021Advisor Interviews

We applaud the diligence of financial advisors—and their clients—during the very challenging times of 2020. Their collective commitment to finding new ways of working together, reinforcing strong advisor-client relationships, and seeking customized financial solutions was exceptional.

With 2020 behind us, but the pandemic still far from over, we all remain thankful for the outstanding efforts of frontline medical workers, first responders, teachers, and the medical and scientific community at large.

Additionally, our thoughts go out to all who have had medical, employment, or financial issues during this crisis. Hopefully, these individuals and families will see significant improvement in their lives in 2021.

A challenging 2020

However, I want to focus in this article on two wholly different groups that I think deserve some recognition for their resilience and proactivity in 2020: financial advisors and their clients.

As editor of Proactive Advisor Magazine, I have been privileged to interview financial advisors all over the United States, from diverse backgrounds, with practices of all shapes and sizes, and affiliations with many different broker-dealers. They have shared in-depth information on their firms’ missions, client-service practices, investment philosophy, marketing, and other areas.

While it was difficult for everyone to conduct “business as usual” last year, the conversations I have had with many advisors revealed an uncommon devotion to the needs of their clients. While that is generally true no matter what the year, it was especially noteworthy in 2020. It was also gratifying to hear from advisors that the overwhelming majority of their clients were committed to working together in addressing the year’s unique challenges.

Advisors took obstacles in stride

Advisors had to overcome several unusual factors last year, some readily apparent and some not so obvious.

Market volatility. U.S. financial markets had one of the fastest bear market declines in history, followed by one of the most impressive recoveries on record (in the face of multiple headwinds).

Figure 1 shows the time frame in which the market dropped more than 34% in 2020, doing so in just 22 days. In comparison, the mortgage crisis and market crash of 2007–2009 played out over an 18-month period, bottoming with a loss of 57% for the S&P 500. The dot-com market crash of 2000–2002 lasted more than two years, with a maximum decline of 49% for the S&P 500.

For further perspective, according to analysis from Ally Invest, during the 10-year period from 2010  to 2019, the stock market moved up or down by 3% or more 58 times. In 2020 alone, market moves of 3% or more occurred 45 times.

FIGURE 1: SPDR S&P 500 ETF (2020)

Source: Libertas Wealth Management, data through 12/8/2020

Emotional and sentiment swings. Going hand in hand with the markets, sentiment for many market participants and investors swung from “extreme fear” to “extreme greed” in unprecedented fashion. Last year was like a “real-time laboratory” for all sorts of behavioral finance issues.

CNN’s widely followed Fear & Greed Index tracks seven indicators of investor sentiment, which, unlike many other sentiment studies, incorporates several component factors based on quantitative market inputs. As shown in the following illustration, 2020 saw five major swings in this measure (though 2018 and 2019 were not exactly smooth sailing either).

FIGURE 2: CNN FEAR & GREED INDEX OVER TIME (2018–2020)

Source: CNN Business, Fear & Greed Index; data as of 12/14/2020

The day-to-day challenges of the pandemic. Financial advisors have experienced what we all have: concern for elderly relatives, children at home attending school remotely, disrupted plans across many fronts, and (unfortunately for some) health issues—COVID-related or otherwise.

New ways of working and communicating with clients. In the middle of market, economic, and health-care challenges, advisors had to swiftly adapt to largely using remote communications with clients. This was true for financial firms of all kinds and the transition was generally impressive. But I think this successful adaptation was especially critical for financial advisors, who are tasked with the very personal and customized client discovery process, in which they learn about their clients’ specific financial situations, financial objectives, risk profiles, and future aspirations and dreams. This process is particularly crucial for new clients.

Some advisors were well-prepared for the transition, having worked remotely for years with out-of-state and overseas clients. Others have said the transition required fairly intensive staff training, clear and timely communications with clients, and new technology investments.

Adam Koos, CFP, CMT, CFTe, and president and portfolio manager at Libertas Wealth Management Group Inc. in Columbus, Ohio, told our publication,

“As a result of the natural disaster that took the country by surprise with Hurricane Katrina several years ago, we put a disaster recovery plan in place. Everyone at our firm has been ready to operate from home or even a public place if something were to happen to our office—or our city.

“After Katrina, we accumulated tools, such as webcams; increased cybersecurity; acquired higher-quality—and faster—VPN tunnels through our IT consulting firm; and increased our internet bandwidth with an ISP separate to our cable TV provider. All of this helped us work at home but ‘feel’ like we’re working physically in the office.”

Steve Deppe, CMT, is a co-founder of Nerad + Deppe Wealth Management in San Diego, California. He told us recently,

“Clients have had few issues adapting to having meetings primarily over the phone or on Zoom. But my partner and I have added a dimension to it, something we have never done before. Every few weeks we record a Zoom broadcast from the two of us, almost like a podcast, and send this out to clients. We talk about what we are doing in the practice, provide some market analysis, and share what our families are up to. Clients really like the personal side of this, and we encourage them to let us know what is going on with their daily lives.”

Increased demand for a variety of financial services. While changing their practice model, many financial advisors have also seen increased demand from existing and new clients for in-depth financial planning—especially concerning areas such as estate planning, life insurance, disability, long-term-care products, and risk management in general. By all reports, advisors have stepped up to the challenge. This has not always been a pleasant or routine task, with some clients facing job loss, severe budgetary problems, the death of a loved one, or threats to their business.

Michael Mandarino, founder of 123 Investing in Apollo Beach, Florida, reported at the height of the pandemic,

“We have tried to keep our communications as relevant as possible right now and also address what the future might hold related to this unprecedented event. One of our recent webinars was on the topic of ‘COVID-19 and what it means for life insurance in the current environment.’ One of our newsletters addressed a variety of timely personal finance topics: guidelines regarding relief from the IRS, options for student loan payments, travel insurance and trip cancellations, and family members dealing with the sensitive topic of estate planning.”

Advisors have also told me they have gone “above and beyond” in small but significant ways: driving clients to appointments if needed, devoting time to helping clients become more comfortable with new technologies, calling personally on homebound older clients, assisting clients with eldercare arrangements, or reaching out to clients suffering an illness.

Advisor Linda Persechino, located in New Hartford, Connecticut, says she has always made this type of outreach a part of her practice:

“Helping [clients] to invest their money and plan for their future is only one part of our advisor-client relationship. There are many non-investment-related things I do for my clients, such as making homemade soup for elderly clients, visiting clients in the hospital, helping technology-challenged clients find vacations and cars online, and—sadly—sometimes attending their funerals. I believe in being there for my clients through all stages of life.

“Several of my clients and their families have worked with me for many years. We have watched their children go through the school system, go off to college, and some start families of their own. … I am also finding ways to work with the next generation of clients as they start to enter their peak earning years.”

Clients have also ‘stepped up’

This brings us to the other party deserving some praise—the investor clients of financial advisors.

A client or client family can be found on the flip side of just about every point mentioned above. They, too, faced life’s daily challenges in 2020 with fortitude, adapting to their new work, school, and home environments. They have been willing and active participants in new ways of partnering with their financial advisors. Clients are also to be commended for wanting to “make sure their financial houses are in top order during a period of great uncertainty,” as one advisor told me.

Advisor Ken Lubkowski, whose practice is based in Seattle, Washington, says,

“For many of our clients who are nearing or already in retirement, we want to help them develop a comprehensive financial road map that will address several common areas of concern that they often tell us:

“Will we have enough savings and investments to support our current lifestyle when we retire, and how long will they last? How can we better understand the different investment and income options available to us? How should our investments be allocated? How can we protect our family’s investments if the market drops again?

“Do we have adequate insurance coverages in place, especially for long-term care? Are we maximizing the effectiveness of our benefits planning, including Social Security, Medicare, and retirement-plan rollovers? Are we being smart from a tax-efficiency perspective, and how can we effectively leave assets to our beneficiaries?”

What is particularly impressive is that advisors say their financial and investment educational efforts paid off in real time last year. Few advisors say they received phone calls or emails expressing any panic or distress over plummeting markets in February or March. That is a tribute not only to the advisor-client relationships that have been developed but also to the well-constructed financial plans, well-diversified investment allocations, and (for most advisors I have spoken with) a bias toward risk-managed investment strategies.

These factors have been supplemented by robust communications programs implemented by advisors, which were especially prevalent during the market decline. It is interesting that several advisors have said that their clients were voicing less concern during the first-quarter market plunge than they are now with an equity market that has defied belief (to the upside) for many. Advisor communications, as one advisor told me, continue to focus on “behavioral adherence” for clients to their investment plan, and clients are advised to try to filter out the ever-present noise from the financial press and airwaves.

Mr. Deppe expanded on this concept in comments to our publication:

“Our overall investment philosophy is to help our clients meet the minimum annual return necessary to achieve their stated financial objectives with a sustainable level of risk or volatility in their portfolio. … Risk management is a vital component of our process since it helps encourage behavioral adherence to the underlying strategy.

“Everyone wants the S&P 500’s current trailing 10-year annualized returns, but few can behave through the hard times—the 10 years before this period—in a way that would have allowed their portfolio to prosper. Prudent risk management optimizes the likelihood of behavioral adherence, which, in turn, optimizes the likelihood of investing for success over the long term.”

The value of risk-managed strategies

Last year presented financial advisors and their clients with several challenging market scenarios.

In general, advisors have told us that they are most interested in how strategies are performing for clients, no matter what the market is doing, and if they are managing risk in the way they were structurally designed.

Richard Grant, NSSA, ChFEBC, and founder, CFO, and managing member at RFG Capital Management LLC in Gilbert, Arizona, said he was pleased with the efforts of his third-party investment managers in 2020:

“Our fee-based asset-management platform provides a variety of risk-managed investment choices to help retirees secure a better retirement. We believe in tactical asset management, where strategies can go ‘risk-off’ to cash, taking advantage of trends in the equities market whether it goes up or down. We can also potentially earn money for our clients if interest rates increase or decrease, through tactical money management.

“I am also very interested in any tools that our managers can provide related to reporting and illustrating to clients how their portfolios have performed during this difficult and volatile market period. One of our managers has a user-friendly illustrative tool for each client’s portfolio performance, tracking their investments versus a predetermined personal benchmark. As I reviewed first-quarter performance with clients, they could see not only the overall trend for their investments versus the benchmarks but also how their portfolio allocations may have changed since the beginning of the year. That is very reassuring and easy to understand for clients.”

Sunny (Shuai) Wang, founder, president, and principal financial advisor of Essence Wealth and Insurance Services in Santa Clara, California, provided this assessment last spring:

“I use a third-party unified management account platform that has a good number of tactical managers. I have been very impressed with most managers’ performance. When the market was performing strongly before COVID-19, my clients were generally outperforming the overall market indexes. Since the decline started, their drawdowns have been less than major indexes.

“Some managers have been doing very well in this market, not just mitigating losses but seeing positive returns. Working with several different money managers allows clients to have exposure to sophisticated investment philosophies and different strategic approaches, all developed by some experienced and capable people. That is, in my opinion, a way for me to add value for clients.”

***

With the rollout of COVID-19 vaccines over the past month, and the ongoing emphasis on health and safety measures, there is reason for optimism for 2021. While we applaud the diligence of financial advisors—and their clients—during the very challenging times of 2020, we look forward to their continued strong partnerships in the days and months to come.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.

David Wismer is editor of Proactive Advisor Magazine. Mr. Wismer has deep experience in the communications field and content/editorial development. He has worked across many financial-services categories, including asset management, banking, insurance, financial media, exchange-traded products, and wealth management.

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