How to train investors for uncertainty: Booth, Morningstar

Even though a legendary investor says there is “always reason to have plenty of anxiety” about portfolios, financial advisors can help clients avoid costly mistakes tied to those concerns.

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“One of my favorite advisors once said that, ‘I don’t have clients with investment problems. I’ve got investments with client problems,'” Dimensional Fund Advisors Chairman David Booth said at last week’s Morningstar conference in Chicago. “I think that kind of summarizes it. It’s working together when you’re not sure exactly how the world’s going to unfold.”

To a pioneer of index funds taking a rules-based, systematic approach to small-capitalized and value stocks whose company recently passed $1 trillion in client assets and 45 years since launching out of Booth’s Brooklyn apartment, U.S. equities and bonds deserve “a ticker-tape parade,” he said. 

Despite the noise of a bad day for stocks, the painful losses in periods like the Great Depression and the valid fears these days about overheated Wall Street valuations, the main difference between today and the days when Booth was studying at the University of Chicago in the early 1970s is that, “You could feel like you’re getting a fair deal when you go to the marketplace now,” he said. “I think that’s so important that people can get that, understand that, so that they can come up with a sensible investment program for themselves.”

If investors let biases such as loss aversion dictate their actions, though, they could miss out on rallies that have wiped out 19 market crashes to generate more than $35,000 in inflation-adjusted value from $1 placed in a U.S. stock index in 1871. So sessions at the conference with roughly 2,000 attendees at Navy Pier provided advisors with some helpful behavioral tips to keep clients focused on the long term and engaged as customers. The customer service component may represent an overlooked part of that to some advisors. 

In the mind of former Eleven Madison Park co-owner and author of the 2022 book “Unreasonable Hospitality,” Will Guidara, advisors work in “one of the biggest relationship industries that doesn’t understand they’re in a relationship industry,” he said in another keynote. When asked for the most applicable takeaways for advisors from his experience operating successful bars and restaurants, he said they should find “a touch point that you’ve never thought of before, and ask yourself, ‘How can we make this part of the experience a little bit more awesome?'” and “gift outside the gifting cycle” to their customers.      

“The reality is that, when you all do what you do, you are literally walking down the road of life alongside your clients, and you are there to celebrate alongside them, to hold them during the hard moments,” Guidara said. “There is nobility in that, and you’re doing something steeped with such nobility. It’s almost irresponsible not to imbue it with some magic.”

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Avoiding bad behavior in down cycles

That level of service delivers the so-called peace of mind that research suggests many investors are seeking from advisors, and accompanying behavioral coaching that guides them away from harmful decisions also drives a lot of the value that their planning provides to clients.

To bring that to bear, advisors need to take a thoughtful approach toward preparing for how they’ll talk to clients in dips or sustained down cycles, aid them through and evaluate their effectiveness, according to a third presentation by Samantha Lamas, a senior behavioral insights researcher with Morningstar, and Danielle Labotka, a behavioral scientist with the firm. They shared the findings of research they conducted, based on interviews last year with about 50 advisors in the U.S. and three other countries, on guiding clients in volatile times.

Strategies such as education on capital markets, reviews of financial plans, strong listening skills and reassurance can enable advisors and their clients to reduce errors and take advantage of opportunities, Labotka said. 

“You need to have a plan in place to ensure that you are helping clients achieve their goals, even when things get rough,” she said. “You have to have a plan that reflects strategies that are going to make a difference.”

One “simple trick” that “may be a tough sell for clients” but is nevertheless successful in doing that revolves around convincing them to check their account values much less frequently, according to Lamas. She recommended getting ahead of possible drawdowns well in advance with educational aids such as the analysis by Morningstar Director of Research Paul Kaplan that charts the upward rise in U.S. stock values despite the many trough cycles over the years.

“What I find very powerful is the use of visuals,” Lamas said, noting the compounding returns of just $1 over 150 years. “Thats incredible, but along the way, there were plenty of bumps and dips and scary times.”

The report by Lamas, Labotka and Morningstar’s global head of behavioral science, Ryan Murphy, came with worksheets for advisors to fill out with their plans for before, during and after a down cycle.

“Behavioral coaching is one of the most valuable things you can provide to your clients,” Labotka said.

At the same time, such materials may just act as a supplement to what advisors are already doing. Labotka and Lamas began their talk by asking any advisors in attendance to raise their hands if they had heard from panicked clients during a downturn. The fact that many advisors did so gave “proof that you are all already behavioral coaches,” Lamas said.

“We know this is a complex skillset and one that is continually evolving and shifting,” she said. “There’s no one hard-and-fast rule or tactic that’s going to work for all of your clients.”

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Matthew Gilson Photography/Morningstar

‘Stay calm’ and customer-friendly

Those duties around managing investors’ expectations and assets still clearly intrigue Booth after all these years in the business — if his response to a question about news reports that Dimensional is exploring a sale is any indication. He cited the firm’s trillion-dollar milestone. 

“All of a sudden you’re in the spotlight and people are calling you a lot and then rumors start flying,” Booth said. “In some ways, that’s kind of cool. All I can tell you is, I’m still going to work every day, and I love working with our clients and our employees.” 

He displayed much less reticence in discussing his upcoming new book “Stay Calm: Learn to Embrace Uncertainty in Investing and Life,” which will hit shelves in September, and how to adapt those lessons in the field. Data amounts to “the essence of dealing with uncertainty,” and it leads to “your best guess going forward, based on the science,” of what will happen next, Booth said. But it can only go so far toward removing any doubts or fears.

“You have a sensible plan, then you pay attention to what is happening — what happened today, what happened last year, what’s happening in my life outside of investing, my job, my family, so forth,” Booth said. “You’ve got to pay attention to all those things, and just don’t think that you’re going to be able to predict where you’re going to be 20 years from now.”

Even without any crystal ball, however, advisors can boost their odds of retaining those clients by embracing their duty to protect their customers from their investment biases and getting a bit creative with how they provide that service to them.

“In most organizations, we actually don’t know what every touch point in the experience we’re serving is, because we’ve never paused for long enough to genuinely understand the experience as a whole,” Guidara said. “Sometimes the slightest enhancement to the most overlooked touch points can have the greatest impact on the experience as a whole.”