Brinker Capital's Daniel Crosby talks about the balance of managing client emotions

In a year so far marked by a global pandemic that triggered a bear market and economic recession, financial advisers are having to adapt to the realities of holistic planning, which includes a healthy dose of psychology.

With that in mind, we spoke with Daniel Crosby, chief behavioral officer at Brinker Capital, about keeping clients on track and managing emotions at a time when nobody really knows what is coming around the next corner.

Jeff Benjamin: What levels of fear and anxiety from clients are advisers generally dealing with during this pandemic and market downturn?

Daniel Crosby: The reports I’m hearing suggest that most clients are staying calm and maintaining perspective, but in almost every practice there is at least a small subset of clients who can be unsettled by this level of volatility.

Interestingly, I’ve heard that some clients have shown a level of concern that’s fundamentally disconnected from what is at this point a relatively minor drawdown. For instance, one advisor mentioned getting a panicked call from a client who had been very plugged into the news, only to inform them that their account was only down single digits percentage wise, which surprised the client.

The news around COVID-19 has been so pervasive and so negative that I think many people assume that the markets are down much more than they actually are. This is absolutely supported by the behavioral research that shows that negative news tends to be about 2.5 times stickier than positive news, meaning that many folks tuned in for the market crash but fewer are aware of the subsequent rebound.

It’s just one more reason why clear, measured communication is so essential at this time. 

JB: Can you compare or contrast this period with other things you’ve seen throughout your career?

DC: One of the hallmarks of human behavior is that we tend to project the present moment into the future indefinitely.

This is fundamentally different than markets, which tend to be forward looking and anticipatory. So, just like we saw in the Great Recession, many people assume that the pain of the present moment is never going to go away, that the world of work will always look like it does now, and are baffled by the recent uptick in the market.

Our psychology tends to calcify the current moment whereas markets tend to be mean-reverting in the medium term. That’s the same today as it was in the Great Recession. 

But there is something different about this crisis and it’s that people are scared for their health as well as their wealth. Therein lies a unique opportunity and challenge for advisers.

The challenge is that there’s a bit of stress contagion. Even though markets are no longer down that dramatically, there is a spillover effect because the health anxiety tends to generalize to all facets of life.

The opportunity is for advisers to become life advisers more broadly, offering solutions, referrals, and providing value in new and far-reaching ways.

Advisers who take this opportunity to help ease their clients fears, provide them with good information, and help them search for solutions broadly will be remembered and appreciated for years to come. 

JB: What can advisers do to help their clients avoid a full-blown panic?

DC: Years back, Brinker Capital commissioned me to do some work around giving advice that sticks. Fully 40% of Americans now receive some sort of financial advice, but less than half of them take the advice that they are given. We found three primary factors that increased the likelihood of advice getting implemented: purpose, proof and process. 

Purpose is re-centering the client on their goals and long-term objectives. One of the realities of a stress response is that it makes people myopic as the body marshals all its resources to the here-and-now, preparing us to throw a punch or run away.

A short-term focus may be fine for escaping physical danger, but a myopic approach to investing is deadly, and good advisers begin every conversation by aligning a client’s gaze with their goals. Simply put, clients need to be reminded of a yes that’s bigger than the no of fear. 

Proof is giving them actionable advice that’s steeped in evidence.

People who are panicked want to know that they are in the hands of an expert and so it becomes crucial that you are giving them advice backed by other experts in the field. It actually becomes a form of righteous peer pressure to show your sources and demonstrate that other smart people agree with you. Turns out that herding isn’t all bad.

Finally, process is about giving clients homework that helps them feel listened to and as though they are making forward progress.

Many advisers understandably encourage clients to just hang on at times like these, and while that is entirely sensible advice from a fundamental perspective, it’s hard to implement from a behavioral perspective.

I prefer offering replacement behaviors that help the client engage with the process, think tax loss harvesting, rebalancing, assigning reading material, or putting in crash bids for high quality shares that may have historically been too expensive. 

JB: When people are at home with extra time to focus on the news and their investment portfolios, what can they do to avoid falling into depression from all the negative information?

DC: The first key is to use news for what it is good for: preparation. News can inform up to a point, but it can also incapacitate and amp up anxiety.

The key is to inform yourself to a reasonable degree and then turn it off.

A second key is to become an informed consumer of media. My advice here is to evaluate sources, examine tone, consider motives and check the facts.

It’s worth remembering that while the media is an important part of keeping us safe and informed, they exist primarily to sell advertising and not to help you make great financial decisions. 

JB: How are you staying positive?

DC: I can’t think of a single time in my life when the people of the world were so singularly focused on a common objective.

The smartest people in the world are looking for a cure. The best people in the world are treating the sick, delivering packages and staffing grocery stores. Seeing this fills me with positivity.