Manage risk in decumulation: As in any period of market turmoil, older retail investors with less time to recover any losses potentially have the most to lose. Older generations also have more to invest and any crisis of confidence among this group could have significant consequences. To manage risk in decumulation, it is vital not only that the investor is advised accurately around their needs and capacity to take on risk, but that investments are actually managed to that risk every month. The adviser must be aware of any change to personal circumstance so that it can be addressed in the decumulation phase.
Getting the client back on track
There are some key considerations for the adviser to be cognisant of when helping their client get back on track.
Consider changes in vulnerability: Changes in mental and physical health, emotional resilience and big life events can make all clients more vulnerable, and the pandemic is likely to have increased the prevalence of all of these factors in clients close to retirement. While we are all susceptible to bouts of vulnerability, it is important for the adviser to notice this as soon as possible in their clients. Frequent discussions around vulnerability can allow advisers to better prepare their clients for challenging life events, while also allowing the adviser to predict how their clients may react to market volatility.
Provide reassurance around future market dips: In many ways, COVID-19 has brought to light natural tendencies that have the potential to undermine good decision-making habits, in particular an inclination to give weight to recent experiences - referred to as recency bias. By encouraging the client to take a longer-term view of the situation, the adviser can help avoid short-term, reactive thinking.
Build rapport: For all clients, the adviser should be a coach who provides encouragement and support, particularly during times of extreme market volatility such as the pandemic. Advisers must also seek to understand the personality traits of each client. For those clients susceptible to rumination (focusing on negative thoughts and feelings), for example, adaptive emotion regulation strategies like cognitive reappraisal can be key to managing negative emotions. Our 2020 research project with Henley Business School found that individuals who had previously worked with an adviser were more comfortable with taking risk and generally more resilient, despite the impact of COVID-19 on markets.
Build greater resilience into the retirement plan: Difficult periods can prompt clients to address some difficult questions they may not have already thought of. What would they do if they lost their job? How would they cope if they got ill? What would happen if their house lost half of its value overnight? By taking advantage of this opportunity to help the client understand the different paths their lives could take and look at their investment decision-making in an objective manner, the adviser is able to ensure that they are adequately prepared for the future. At the same time, the adviser can encourage the client to build a diversified portfolio, with their money spread across different asset classes, industries and geographies, to boost resilience during future market downturns.
