The Dow Jones recorded its largest one-day point drop in history on February 5, 2018, leaving investors spooked. Wealth managers must reach out to their clients now to avoid rushed decision-making and increased customer churn, according to GlobalData Financial Services.
Monday’s 4.6% decline was sparked by a fast rise in interest rates, with the US 10-year yield trading at a four-year high as stronger than expected wage growth caused inflationary concerns among investors. And the spillover effects didn’t take long to set in, with the Dow Jones being in good company as stock indices across the globe tumbled, and the oil price followed suit.
With the CBOE Volatility Index having jumped 115.6%, markets are set to remain unsettled.
However, long-term prognoses vary strongly. Indeed, equity market forecasts are easy to come by, but their reliability is highly debatable, given that an interplay of monetary, political, and economic factors has been causing havoc.
However, going forward market observers will be watching Powell and the monetary pendulum closely. Even with rising yields corporate profits could remain stable, supporting equity growth alongside a strengthening US economy during the course of 2018. Yet, a faster than expected tightening circle is likely to put an end to the bull market.
Either way, it’s time for wealth managers to reach out to their clients as memories of the 2008 crash are surfacing, which could trigger rushed decision making.
With uncertainty reaching new heights, clients need to feel assured that their wealth managers are monitoring the situation closely and taking the time to communicate with them. Remember: the financial crisis caused a lot of avoidable client churn in addition to the savaged portfolio values.
So far, wealth managers haven’t been doing a good job of educating clients about impending interest rate hikes and the effects on their portfolios.
For example, interest rates started rising in the US in 2015, but data on drivers for cash/near-cash allocation from our 2016 and 2017 Global Wealth Managers Survey shows that clients remained largely unprepared until the Federal Reserve stepped up its pace in 2017.
Indeed, it was only in 2017 – two years after rates started to increase – that an expectation of higher rates and returns was cited as a significant driver for cash allocations: 41% of cash assets were invested with this in mind, as opposed to just 1.6% in 2016.
With central banks in key markets such as Canada, the UK, and the Eurozone having put the normalization of ultra-loose monetary policy on their agendas for 2018, wealth managers need to take a more proactive approach to client education.
Preparing clients for potential downward volatility will ensure they don’t jump ship if markets turn sour, and that requires wealth managers to think long and hard about their communication strategies.