3-minute article

Connecting with clients’ emotions in uncertain times

The COVID-19 pandemic may have left many confused about the present and worried about the future at times. In an uncertain environment, your role as a financial professional is more important than ever. The work you do with your clients can help them successfully navigate these challenging times. It also can forge stronger relationships that will benefit you and your clients in the years to come.

To be truly effective, that work can't focus only on their portfolios — it also needs to focus on your clients' state of mind. 

Feelings before actions

Humans are naturally inclined to respond to threats with action. That tendency helped keep our ancestors safe from predators and other dangers. In times like these, though, the impulse to take action can backfire and push us toward decisions that, in the long run, may be counterproductive.

In the first quarter of 2020, the S&P 500® fell by 20 percent, which caused some investors to pull money out of equity funds and exchange-traded funds (ETFs). Your clients may have been tempted to follow suit. If they had, they likely would have missed out on a powerful second-quarter rally that erased the previous quarter's losses.

Before making any moves, first take time to understand what's driving your clients' decisions. Ask them what's happening in their lives — and really listen. How have they been affected by the pandemic? Have they lost a family member or a job? Has working from home compounded the stress from having multiple generations under one roof? You can then have a better point of reference to explore financial questions. Are they scared of suffering short-term losses? Are they worried that this uncertain market may make it more difficult to reach long-term goals such as retirement or paying for a child's college education?

Connecting with clients on an emotional level can generate valuable insights into how they make financial decisions in good times and in stressful times, and how they tend to react to uncertain market environments. Those insights can help you tailor a financial plan that better fits their needs and goals. Moreover, such connections can help earn your clients' trust.

Behaviors matter

Each of your clients will have their own reactions to market events as well as life events. But the underlying causes of those reactions may be quite similar. The field of behavioral finance focuses on common emotional and cognitive biases that can influence our decisions around financial issues such as saving, spending and investing. Behaviors such as overconfidence and availability bias can be driving factors in a client's decision to sell stocks during a downturn or chase a popular investment trend. These biases also can emerge when it comes to building a retirement strategy: Research conducted for Athene by scholars from the UCLA Anderson School of Management offers insights into how behavioral biases may be keeping individuals from including annuities in their retirement plan.

Realizing the role behavioral biases can play in your planning process will help you understand, identify and address these biases as they occur. Meanwhile, including behavioral finance principles in the planning process can help counter many of the most common biases. For instance, a well-diversified portfolio with a thoughtful asset allocation strategy can help provide protection against market disruptions and other challenges, giving clients more confidence that they don't need to take action in response to short-term market events.

Connecting with your clients' emotions and developing a keen understanding of their behavioral tendencies can enhance the financial planning process. This part of a holistic planning approach can help improve clients' pursuit of their goals and lead to stronger relationships with those clients.

Two things you can do today: