How to Keep Clients From Acting on Fear and Greed

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This interview was recorded shortly before last year's midterm elections. This is Greg Bartellus for Barron's The Way Forward. Today, we will be speaking about behavioral finance and working with clients in a down market. My guest is Scott Tyrus, president of Houston-based Tyrus Wealth Management, a private wealth advisory practice of Ameriprise Financial Services. Scott, welcome.

Thank you.

Well, thanks so much for joining me. You know, topic A amongst investors, advisors is clearly the market. So much has gone wrong for stock and bond investors this year. And I know anecdotally and otherwise that a lot of advisors are fielding panicked calls, probably panicked texts, panicked emails, often just panic, however it manifests itself. And given your decades of experience, in the field and a real interest and expertise in behavioral finance. I would love to dig into the importance of behavioral finance and more specifically, you know, what are you telling clients? How are you navigating these choppy waters?

Yeah, well, first thing I tell them, I'm sure that they can imagine, but my job's a whole lot more fun when the markets are going up again instead of going down. But after doing this 34 years, unfortunately, you know, I've been here before and Many of my clients have been here before as well. And so our message is consistent. And, you know, and sometimes if we take a big step back, we just remind our clients that, look, all I know is every single time the market has gone down, it's gone back up. And at some point in time, it hits a new high. The issue is I just don't know exactly when it's gonna hit a new high this time. But I tell them that in my opinion right now, I don't think it's gonna be this year, but I think it's gonna be a 2023 thing. But it's something we're going to continue to communicate with them.

Okay. And in terms of achieving success, in terms of having them buy in or accept what you're telling them, do you find that there are particular ways to present information that are more effective? So for example, a visual element of a chart where you can actually see that bull bear markets tend to be quite short in duration relative to bull markets. And when you look, when you open it up to like over 90, 100 years, those bear markets don't look so scary, right?

No, that's exactly right. And the one thing that we know is that we need to over-communicate in times like this. And by over-communication, I mean is that we've got to stay in front of it. You can't wait for your clients to call you and tell you they're upset or worried about something. So what we do is we will send emails with, you know, pertinent information about what's happening now. We'll send emails with, you know, some of those charts and graphs again that you just mentioned and pointing to a particular part of that piece that we think is informational and needed today. We also will do individual videos. Well, I will do a video, I try to keep it under 2 minutes, where they actually get to see me and I present on a specific topic that is current. And then we have ongoing check-in calls, either through myself or individuals on my staff. And then we also have more frequent one-on-one meetings again with our clients. It's, you know, clients don't want to be ignored. And some of the clients that are calling you you're the ones that are nervous and they're calling you. But there's a lot of clients that aren't calling you, but they're still just as nervous. And so we're trying to get in front of those as often as we can.

I'm just curious, can you speak to any— in terms of communicating, the methods, are there any apparent pros or cons?

Yeah, I mean, one-on-one meetings are always going to be the best for you to give somebody individual attention and sit with them for an hour and go through all the different charts and graphs, you know. But, you know, but time is limited. And so sometimes what you've got to do is send out information more of, uh, in a broader way, again, to get in front of more, you know, more clients. And I think what a lot of clients seem to like are going to be the individual videos, again, that we're doing. They're easy to do just with a, uh, like with an iPad, uh, 2 minutes, and you can integrate charts and graphs in there, again, if you, if you choose to. But, but some clients like to see you, uh, or me, uh, on the, on the, on the video. It feels more personal. But other clients, I've got a lot of engineers, for instance, they just want the data. And so they would rather read the information and the more the better. And so we want to communicate in many different ways, you know, based on the type of client that we have.

And you mentioned earlier the importance of overcommunicating. What would you characterize, and I know this is kind of wobbly, it's hard to be precise, but like what constitutes undercommunicating in a bear market? 'Cause someone might be just trying to get a firmer grasp on, is it weekly, is twice a week, once a month? Like what constitutes maybe, you know, clearing a bar or, and it's contextual, granted, in a bull market there's less need to be reaching out as much.

Yeah, so I mean, in a bull market, we're gonna reach out to our clients, you know, quarterly anyway, in one form or another. In a bear market, especially when you're getting a lot of volatility, it's probably once every couple of weeks again that we're sending something out, we're reaching out, we're calling, you know, trying to set up a meeting of some sort. But then when you have, days like today, you know, where the markets are up, or if you have a week again where the markets have done well, then it kind of buys you a little bit more time because clients aren't as concerned when they see the markets going up. They're much more concerned when they see the markets going down. And so we'll overcommunicate a little bit more when we're seeing negative volatility. We'll overcommunicate a little, a little bit more also if we know that we've got a negative monthly statement coming out. And so we have to time all the above again to determine the type of communication that needs to take place.

Okay. And you mentioned you've been in business for 34 years. That means you've seen cycles, you've seen bull markets, you've seen bear markets. I'm curious, given that you're up close with the clients, how has their behavior changed in that time, assuming it has at all? So the fear and the greed, that is clearly timeless, but in terms of actual the manifestation of their behavior? Like, are— do they have quicker— are they more likely to sell, or have they learned lessons in the aggregate, and are they more patient and more better about accepting advice? I'm just curious about that, if there's any change.

No, no, that, that's a great question, actually a great point. You know, for the clients we've had for a long time, we feel like that they're a little bit better trained because they've been through this before. We've given the same, uh, speeches, if you will, show them the same information, you know, time and time again. Going back to the early '90s. But 2000, 2002 was tough, and 2008, 2009 was brutal, but we came out the other side. And so we mentioned to them, hey, 2008, 2009, your accounts, believe it or not, were down 34%. Right now you're down 13%. So we've been here before, and we just have to get past this as well. The challenge is that there are a lot of my clients that I had back in 2000, 2002, or 2008, 2009, again, who have now reached the retirement age and they're no longer working. And sometimes the volatility is a little bit more scary to them, again, when they're no longer working and bringing in a paycheck. Or sometimes what we'll hear them say is, "Yeah, but Scott, back then I didn't have nearly as much money, again, as I have now." And so, even for some of the longer-term clients, we're having to have conversations that we necessarily weren't expecting, but because they feel different, they feel a little bit more nervous because of the time in their life this is occurring. Versus what happened 10 or 15 years ago.

Right. And I can imagine that what the bond market's done this year is really historic. I mean, it's almost its worst year in what, 90 years or so? So there are a lot of people, I think, who saw bonds as ballast to stocks and almost assumed, well, you know, in a way that if you read the directions, if you will, it's like, all right, rates went up. Not a surprise what happened with bonds, but it is still kind of sobering and probably a shock to many investors, particularly retirees who may be looked at bonds as being perhaps assuming they might have held up a little bit better?

Well, because we've told our clients over the years, you have, you know, stocks inside your portfolio for capital appreciation purposes. You have bonds inside your portfolio for capital preservation purposes. But this year, again, bonds haven't done their job. They've done their job better than stocks, especially if you've had shorter duration bonds, which we were lucky enough to have. But even those are still down, you know, 3, 4, 5%. And when usually those are going to be up 3%, 4%, or 5% when the stock market's going down. And so, it's been difficult on both those fronts. But at the end of the day, you know, we also remind our clients that in a 60/40 portfolio, for instance, is you have 40% of your portfolio that has nothing to do with stocks. You know, and worst case is we could live on that for a decade if we had to. Hopefully, we don't have to, but we could. And so, bonds are still a very important part of the portfolio. Because they have preserved their capital much more than stocks have.

And just going back now to the messaging, be it email, video, etc., are there any particular themes that resonate with your clients?

Yeah, I mean, you know, the fact is that we've been here before and, you know, unfortunately, again, we're going to be here again. You know, bear markets happen every 4 or 5 years. And so there's another one coming at some point, you know, but there's always 10 things to worry about. And right now we've got 10 things we've had to worry about for a while. But after these get digested, there'll be 10 other things to worry about. And some are gonna be a catalyst to the next bear market. But the worst thing you can do is really sell into the volatility because that's really where the money is lost. The money's made actually by not selling into the volatility again and just making sure that you're positioned well enough into the volatility to where once we get out of it again, that you're still gonna have the assets again that you'd expect to have.

And I wanna ask a question about retirees. So it's obvious that they would feel more vulnerable to a down market given that they're not working. What is the role of increased lifespan? How does that play in?

Well, we have longer lifespans. It also depends on when a client might retire, right? So there's a lot of studies that show if you retire early into one of these bear markets, then sometimes the stats aren't necessarily on your side. But we follow, again, what we call the payout ratio very, very closely. And so what we tell our clients is that As long as your payout ratio, in other words, the amount that you take out on an annual basis, is 5% or less, then there's a really, really high probability your portfolio is going to last longer than you. We don't just make that assumption, we continue to follow it with them closely in each year. But the odds are really, really high. What clients also sometimes don't realize is that when they're in their 60s or 70s in retirement, they can travel, they go have fun. But I have a lot of my clients that are in their 80s where it's just too much trouble to travel and have fun and their spending goes down. And again, as long as they've got some protection for a long-term care stay, then they're going to be fine. So we don't mind the payout ratio being closer to, say, 5% versus the 4% sometimes we read about early in their retirement because we think their spending will probably decrease again once they get there in their 80s and 90s.

Okay. And in terms of market volatility, given the absence of an actual crystal ball, what are you telling them that you see going forward?

Well, our view is, and all we can do is be honest with them, is that we don't believe that there's a catalyst, a short-term catalyst, catalyst to have the market snap back in a sustained way again this year. This is an inflation story, and it's a supply story, and there's really nothing we can do about the supply. So they've got a blunt instrument, which is really their sledgehammer, raising rates. And it's going to take time again for that to have its impact. But it will. We do believe it will have its impact. But it's probably not going to be until, again, 2023 where we begin to see that. And the stock market being a leading economic indicator. It's always looking, you know, 9 to 12 months in advance. Right now, as the market looks 9 to 12 months in advance, it can't really value itself because, because there's just not enough definitive information in terms of whether we're going to have a recession, a soft landing, a deeper recession. And that's why we're seeing all the volatility. And we're seeing the volatility both up and down. It's our view that the worst is behind us, which doesn't mean that we don't drift down another 5 or 10%, because we certainly could. You know, but, but certainly not our view that we're going to go down another, another 20 at this point. But, but there's just not a short-term catalyst, again, that we see to have the market snap back very, very quickly.

And what are you looking for? I mean, is it the Fed pivot?

I mean, what I mean— yeah, I think it really is. It's all about the Fed right now. It's not about the midterm elections necessarily, but the stats are strong that the markets typically do well after a midterm election. So that certainly doesn't, doesn't hurt. But it's gonna be the Fed making a statement that they think that they can begin to slow down, which they have not said yet. So right now they're signaling again that they've got 75 and maybe another 75. But if they begin to signal that it's 75 and 50, I think the markets are gonna wanna snap back very, very quickly. I'm just not sure that's what's gonna happen.

[Speaker] Okay, so I have a question about account performance relative to market performance. Let's say you have a client their portfolio is down 20% and let's say, you know, S&P 500 is down 25% and acknowledging that their account's not going to be stock only, right? It's going to be a blend of assets, of course. When they are outperforming in quotes, to what extent is there solace or peace of mind or a sense of like, oh good, that's great. Or is it more like they don't really see that and it's like, I don't, I get it, but I'm still down 20%. How, You know, how do they, I guess, process that?

Well, I think you've got to communicate in a number of different ways, some of which I had mentioned. But it is, that is something that we do is that we will explain to our client is that, look, the S&P is down 25%, the NASDAQ's down 35%, and you're down 16%. And so on a percentage basis, this is your capture again of that. Typically, and you'd mentioned this earlier, typically we would have a lot less downside capture because bonds will help us. Bonds have not helped us out But they've given us some help, right? So we're not down 25% or 35% because we do have some bonds, and bonds have done better than NASDAQ, right? So we will go through that with them. And sometimes some of the clients respond favorably to that point, but we can't just use that point all by itself. You've got to integrate that point into many of the others that I had mentioned.

So you mentioned earlier some of your clients, I forget if you mentioned they were engineers or whatnot, but some people are just more really numbers-oriented, which is great. So for those clients who are, I guess, maybe of a more analytical bent, what are your favorite pieces or ways to speak to them in a compelling and effective manner?

Well, I mean, for those individuals, there's a lot of good charts and graphs out there, again, that are statistically oriented, and we will pull those out. And for those individuals, the one-on-one meetings are going to be much more helpful because there may be 4 or 5 of those. Again, that I'll need to pull out, which it goes back to the chart you mentioned earlier about how bear markets are much shorter than bull markets. Or, you know, there's charts that say that, you know, any given day the stock market's got a 53% chance to be higher, right? 50/50, you know. But over 10 years, it's 97%, you know. So showing them statistics like that, I think, resonates very well with them, uh, because they're, they're number-oriented and they're, they're gonna be much more black-and-white-oriented. They need to see those numbers themselves versus me telling them that's what the numbers are.

Given that stocks, bonds have been crushed this year, where do you see the most relative value? Or are there things that you just are steering clear of? I'm just trying to get a general hierarchy on that level.

Yeah. I mean, right now, again, we are a little bit more defensive. Again, we've had a lot more in shorter duration bonds and higher quality bonds. So we've been fortunate. We're also a little bit less optimistic internationally. We think that if there is going to be a recession, we think that Europe is going to probably get the brunt of that. And so, we're very underweighted internationally as well. And probably a little bit more overweighted in the dividend sector or the value sector. But look, NASDAQ's already down 35%. And we think there's some really good values there, especially some of the very large-cap technology stocks. And so, we're not shying away from that, but we're still overweighted the dividend area currently.

Absolutely. We're near the end of our time, unfortunately, but I did want to ask for an actionable idea for advisors who are listening and who maybe have, let's say, that one client who maybe just keeps calling or just the advice isn't exactly resonating. Is there anything maybe extra that perhaps they haven't thought of that you might recommend?

I think that they appreciate honesty. The easy thing for us to do is say, oh, it's all going to be fine and it'll be fine, you know, by next week, you know, give them some short-term hope. But, but, but instead, I think if you say, you know what, we do expect this volatility to continue. And so we need you to be patient. We need to be patient because we don't think it's a 2022 thing. This is a 2023 thing. And, and but we're going to continue to watch everything very, very closely and make adjustments as necessary. But, but we don't expect the markets to rebound in a significant way until sometime next year.

And I guess with that, you must be genuinely empathetic, right? It can't just be like that phoned-in script because they're going to see through it. They won't feel that you're speaking earnestly.

Yeah, absolutely. And, and, but I think if they hear you, um, you know, be honest to say, you know what, I wish I could tell you that I think by the end of the year the markets will be either rebounding and hitting all-time highs But I, but I can't tell you that because that's not my belief. My belief is, is that it's going to happen next year. But next year is still close enough to where I think that the most clients would be able to hang in there and have the patience that they need to have.

Excellent. Well, that was all very sound advice, and I really genuinely enjoyed our conversation.

No, this was great. Thanks for having me.

Well, thank you very much. My guest was Scott Tyrus. For more advisor-specific podcasts, please check out Barrons.com/podcast. For The Way Forward, I'm Greg Bartalus.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.