Virus Poses New Reality and Puts Financial Advice At the Crossroads






When it comes to providing financial advice to individual investors for their personal and 401(k) plans, the financial services industry has always taken a very steady, conservative, and often, unrealistic, approach.

The conservative approach has generally worked when markets were stable and conformed to the advice provided by the tested Modern Portfolio Theory. But when it comes to market disruptions, whether it be related to the 2008 housing crisis, oil shocks, national defaults, flash trading, or the current COVID pandemic, standard financial advice falls very short of delivering credible answers to panicky individuals.

This is the case now. The COVID virus is a profound medical, social, psychological, and economic event. It is a 21st-century plague and like other plagues over the past thousand years, plagues have stopped wars, toppled empires, devastated populations, and wrought a generation of poverty and social change to victimized populations.

Today is no different. So, given the extent of the virus today, financial advisors should develop news messages that encompass this new reality.  As many experts have said, despite the skeptics who dismiss “expert” advice from scientists, doctors, and economists, everyday life has fundamentally changed.

Worse, there is no timetable when we will ever return to pre-virus normalcy.

This “new normal” is what financial advisors should address, but it looks like many are not even incorporating this new reality into their advice.

Time for New Financial and Political Advice

We live in an age of extremes.  This includes extremes that financial advisors should consider if they want to provide credible, actionable advice that incorporates the new virus-dependent reality.

One opinion comes from billionaire investor Leon Cooperman, Republican, who noted on CNBC that the coronavirus crisis will “likely” change capitalism forever and that taxes will need to be raised soon.” He also said, “things like carried interest, capital gains taxes, the ability to roll over real estate sales tax-free, all that stuff is going to have to be eliminated.”  These are far-reaching observations and recommendations. If carried interest is eliminated, as many Democrats have suggested, it would derail the hedge fund and real estate industries that rely on the tax loopholes to defer taxes and boost short-term revenues.

At the other extreme is advice provided by the top investment strategists at a national firm of Registered Investment Advisors. In their report, the investment strategists and economists pointed out that “the S&P 500 index just experienced its strongest 16-day period since 1938.”  (The strategists did not mention the specific 16-day period.)  They continued by writing: “While economic activity is expected to contract sharply in the second quarter of 2020, the recovery outlook is uncertain. It’s dependent on the virus; the development of treatments, medicines, and a vaccine; and the unwinding of social distancing. The economy will rebound, but a full economic recovery is expected to take time, and there will be long-lasting changes in consumer behavior and global trade.”

They then predictably mentioned fixed income activity, and the very popular theme of buying on dips, accompanied by the observation that “exhaustive selloffs [will] be followed by sharp bounces.” Not ones to go out on a limb, these top investments gurus were just stating the obvious in their short, 643-word article.

Sadly, most financial advisors will follow this predictable format.  It is nothing new.  It is boilerplate advice with updated numbers and a new graph. Worse, clients know it is nothing new, and not even close, to the present reality they see in their living rooms and out their front windows.

Time for Advisors to Face Reality

So, the challenge for financial advisors should be this:

Do you present the obvious or, to some degree, adopt the view that the virus has changed American society? How about everyday business practices, your clients’ job prospects, as well as their savings and spending patterns for decades to come? Or, do you ignore client concerns, and suggest they “stay the course” and “buy on dips”?

One way to find out is to ask your clients new questions. Ask if they have faith in the business system?  Are they secure in their jobs? Ask if they feel comfortable about their financial future and the future of their children?

A Nightmare Scenario

These questions will get you answers that are at the core of financial planning.  Most firms avoid these questions for a few reasons: They can be considered political.  Or, they are non-product centric discussions, which means they will not likely generate more commissions or fees, so they are considered a waste of time to the advisor. But this is a great case that shows what is bad for the advisor is often good for the client.

Here is one nightmare scenario: A client who has a small business comes in for advice. He said he applied for a small business COVID loan, but has not received anything because the money went to large corporations. He asks you why that happened?  What do you reply?

Do you say it is due to politics? A bureaucratic mistake? Limited bailout funds? Or, do you say there is something wrong with the political system?

Another nightmare scenario is when a client comes in and starts telling you about all the people he knows who are out of jobs. This is realistic since the unemployment rate is 25%. Then, he says he has been laid off five times in his career due to automation, outsourcing, and recessions. So, what do you do? Tell him how lucky he is and he should start budgeting and saving for a rainy day?

What type of answer is honest and shows that you are a credible financial professional?  Or, is it impossible in 2020 tobe a credible financial professional unless you have the political context to answer questions, as well as a knowledge of markets and investing.

The questions also show that if financial advisors want to be relevant and credible, then it’s time to drop the tired, old updates. Client communications need to be re-invented to incorporate the new, virus reality. Like it or not, the virus, like other plagues since biblical times, has changed every nation’s dominant economic system and power structure, and 21st-century capitalism is no different.

Smart advisors should adapt to the new reality to serve clients and protect their credibility and integrity.  If not, your clients will detect the deficiency. Many already have and they know there is something wrong with the system.


Please enter your comment!
Please enter your name here