Kitces amp Carl Ep 30 Conveying Rational Overconfidence In Talking To Clients About Coronavirus Fears

19 Mar    Investing News

As financial advisors everywhere are fielding phone calls, emails, and meeting requests from clients who are stressed out about the current global economic and health crisis, and (understandably) the safety of their retirement accounts. Putting advisors in the position once again of conveying confidence and are reassuring their clients that the best course of action, as history has proved itself time and time again, is to stay the course and stick to their financial plans. But given the seemingly unprecedented nature of the coronavirus pandemic, how can advisors convince their clients to stay the course if they themselves may have their own (natural) nagging doubts and concerns, not only for their clients, but the viability of their own businesses, and whether the coronavirus pandemic really will be resolved in a timely manner and not compound into something even worse?

In our 30th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards talk about their experiences in dealing with past bear markets and financial crises, and that no matter how different these events have started out in the beginning (with each event’s seemingly ‘unprecedented’ nature at the outset) or how destructive the events may have been as they ran their course, history has consistently repeated itself with respect to how these events have always ended: they eventually wind down and pass, things regrow, and life returns to normal. Yet, even so, especially in times of crises, it is sometimes impossible for individuals – even and including us as financial advisors ourselves – to be 100% confident that, even in the end, things will turn out okay.

In other words, it is normal for even many advisors to experience at least some small level of doubt and fear about our now-more-uncertain future; yet, even so, we persevere through that doubt and continue to reassure clients that things will ultimately be okay,  trusting in the likelihood of a good outcome (based on the weight of historical evidence) much more than the fear of a bad outcome.

This practice of ‘rational overconfidence’ – being perhaps a little “overconfident” based on the available facts and still-limited historical data, but rationally so as a way to be a leader for our clients – is often best simply because for unprecedented events, there usually is no truly feasible alternative plan than staying the course, making the originally planned course (based on 95+ years of stock market data) the most logical (or “only” viable) course of action.

Which means that while it may not actually be possible to completely quell the doubts we as advisors may still have about future uncertainty, it doesn’t have to stop us from trying to convey confidence to clients to help them stay the course, and recognizing that often doing so is still better than any other potential alternative. In fact, asking questions such as, “How frequently in the history of modern markets, has that [alternative] solution ever really made sense? And would it really make sense to forsake the original financial plan, which can involve a whole restructuring of goals and long-term assumptions, for something that makes sense for probably just a fleeting moment in history?” can help both advisors and clients re-focus and dampen some of the alarm.

Ultimately, though, the key point is that advisors are just as prone to fear and doubts as their clients, and it is perfectly normal and okay to have those feelings of fear and doubt in the face of such uncertainty. More importantly, it is critical for advisors to acknowledge those doubts, to give them space as valid concerns, and to understand that while doubts are a natural human response to uncertainty, advisors can (and should) practice some level of “rational overconfidence” with their clients. Because in the end, clients rely on their advisors to be a confident leader during difficult times!

Read More…