Managing expectations in times of turbulence
One of the biggest changes in the financial services industry since I started my career as a wealth manager was one never considered in our education. It had nothing to do with economics, politics, regulations, the dramatic reshaping of the global marketplace or the equally dizzying changes in information technology and research capabilities.No, the most challenging change is more subtle, even psychological, and frankly it is often overlooked — the duty of expectation management.Our team believes that managing expectations is at the core of helping families achieve the financial freedom they expect and sometimes deserve. One of the greatest challenges and privileges is to help navigate the highs and lows of client emotions in an environment of economic and regulatory uncertainty and political dysfunction.Though you will rarely see it, if ever, in the minute-to-minute mania of current business media coverage, keeping a sense of perspective and humor cannot be overstated.I would venture to guess that if a blood-pressure monitor was kept on an impressible investor — or a less-disciplined adviser — during a day of excitable market volatility, it would register unhealthy readings chained to events and movements not clearly understood. More often than not, headlines reflect an immature understanding of history and of the inherent volatility of global financial markets.The recent escalation of political dysfunction certainly tries one’s patience, which is why understanding “political risk” has emerged as an important consideration in our profession. After all, we must wonder what congressional leaders and President Obama were thinking in 2011 when they kicked the can down the road again and created a potential man-made economic calamity. When the first of many so-called “fiscal cliff” deadlines came due at the end of 2012, the revelry of the holiday season was threatened by the noise of the news coverage and the lack of certainty and understanding about what it all meant.Doing the right thingThough we typically start our year-end planning in the third quarter of every year, and we are happily done by the first week of December each year, this past December was different. We were on the phone and glued to our systems almost until the ball dropped in Times Square. We confronted a level of media and market noise that was nearly deafening for the successful investors we serve. We employed the “Thelma and Louise” metaphor as we helped journalists and our clients understand why taxes were almost certain to rise and understand that market volatility would continue.In spite of the political theater, we reminded our gentle readers and clients of an exceptional year of investment returns, of all the crises they had endured and from which they had prospered, and that they had been more than adequately compensated for the risk they had taken over the past year.We serve as a constant reminder that amidst turmoil is opportunity and that patience can truly be a virtue. We expect that, as Winston Churchill once quipped, “We can always count on the Americans to do the right thing, after they have exhausted all the other possibilities.”Colleague Ian Bremmer is a respected political risk specialist and the head of the Eurasia GroupCG. In a recent blog post on Reuters, Bremmer laid out the Top 10 global political risks for 2013. The American entry came in at Number 4, and it has little to do with simple economics.Bremmer wrote, “It might not look like it, but the United States is on the brink of big developments – a domestic energy revolution, the potential for major trade agreements, a rebounding housing sector and businesses emerging from the financial sector in good condition. Of course, the ongoing drama in Washington threatens to derail all of it.”Dr. Bremmer’s recent book, “Every Nation for Itself,” is more than worthwhile. I believe his perspective is invaluable for those of us who need to “think big” for those we serve.We’ve often cautioned that financial markets abhor uncertainty, and our current political process creates a lot of it. It is likely that market volatility will be amplified as a result. Political risk and uncertainty are contributing factors to increased fear and defensive investing. A recent Bloomberg report estimated that since 2009, investors missed out on more than $200 billion in equity gains by abandoning the equity marketAssessing political risk requires dexterity and determination and an almost Zen-like capacity to filter facts and fiction while the media rages on. Market and media noise should not provide an excuse for those who have failed to save or invest in their own future. A little tough love and hard reality readjustment can be just the right treatment.Tom Sedoric, managing director-investments of the Sedoric Group of Wells Fargo Advisors in Portsmouth, can be reached at 603-430-8000.