Volatile periods such as the one we are experiencing as a result of the Russia-Ukraine conflict offer an opportunity for financial professionals to demonstrate their value. Head of Defined Contribution and Wealth Advisor Services Matt Sommer explains how incorporating behavioral finance can help clients cope with market volatility and stick to their long-term investing plans.

On February 22, 2022 the S&P 500^® Index entered correction territory (defined as a decline in stock prices of at least 10% from the previous high) for the first time since February 2020.¹ The 2020 correction was, of course, driven by fears of the COVID outbreak, which was soon to be declared a global pandemic by the World Health Organization.

This latest correction – driven by the Russia-Ukraine conflict – may feel like déjà vu for investors who still recall the unnerving speed and severity of the COVID downturn and subsequent volatility. Some investors may be tempted to liquidate their equity holdings, while others may be susceptible to overtures from other institutions or financial professionals.

Volatile periods such as this offer financial professionals an opportunity to cement their most important client relationships. We believe behavioral finance can play a key role in helping clients cope with market volatility, avoid irrational decisions and stick to their long-term investing plans.

The Changing Role of the Financial Professional

While the advisor-client relationship has historically been built on the transfer of information, more recently there has been the acknowledgement that financial professionals do much more than provide technical advice and recommendations.

One tool that can be useful for incorporating behavioral finance into client interactions is the MINDSPACE framework, which covers key tendencies that drive behavior across a variety of contexts. The table below outlines five of the effects from the framework and provides suggestions for how financial professionals can address each effect with clients.

Source: Vlaev, I., Nieboer, J., Martin, S., & Dolan, P. “How behavioural science can improve financial advice services,” Journal of Financial Services Marketing, March 2015. This table is a modified version of the MINDSPACE theoretical framework. The first two columns come directly from the framework, while the third column has been modified to reflect current market conditions.

The current market environment is trying, both for financial professionals and market participants. Nonetheless, we believe that these periods of volatility offer an opportunity to learn new techniques that can strengthen relationships and build trust by helping clients gain perspective on long-term market trends.

 

¹“Stocks hit correction territory as governments announce sanctions against Russia.” The New York Times, February 22, 2022.
²“Putting a value on your value: Quantifying Vanguard Advisor’s Alpha.” Vanguard Group, 2019.

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