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Explaining volatility

Bryce Sanders

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Why you should discuss market volatility and financial planning with your insurance clients.

In a perfect world, when clients put money away, they would only buy insurance. Agents would have the best job in the world! In reality, clients put money into all sorts of things. They buy stock. Bonds. Gold. Real estate. Bank CDs.

The Dow Jones Industrial Average reached a high of 29,551 on February 12, 2020. Then the 10-plus-year bull market in stocks came to an end. Clients discovered volatility. They are not happy. This presents concerns and opportunities for insurance agents.

In the perfect world referenced earlier, insurance agents would only need to sell insurance. Square peg, square hole. Because clients buy stocks, bonds, mutual funds, separately managed accounts and other investments, many insurance agents are licensed to sell those products too. Unfortunately, clients might not know that. You are their “insurance person.”

Yet you are also a trusted advisor. You’ve worked together a long time. You’ve been beside them for triumphs (births, marriage, promotions) and tragedies (death, illness) in their lives. They value your opinion. They are concerned about the volatility of the stock market, low interest rates and the direction of the economy moving forward.

Start by feeling their pain. The stock market declined. They lost money. It’s tempting to say: “You should have bought more insurance.” Consider it a teaching moment instead. What should you talk about? 

Spreading the risk

Stocks might have done well over time. The often-quoted historical annual rate of return on equities is 10%. That’s measured over long periods, like 100 years! The stock market has really good years and really bad ones too. You can’t carry all your eggs in one basket. Buying insurance, buying bonds and keeping money in the bank spreads the risk.

Talking point: If you invest 100% in stocks, your portfolio might decline 30% when the market declines 30%. If you invest 50% in stocks and 50% in bonds, it might decline only 15% if bond prices stayed stable.

Cash reserves

You’ve heard the expression “This isn’t a good time to sell.” What if you need money now? We often think of retirement as a far-off goal. But there were people who retired in February. The stock market was down 30% at one point. What are they supposed to do? Your client should have six to 12 months in cash reserves, short-term fixed income or bank CDs. The stock market runs in cycles. They need those reserves to wait it out.

Talking point: Everyone needs a rainy day fund.

How about a piece of the action with downside protection?

They see the need for principal protection, but still love the stock market. Suppose you could give them the first along with a slice of the second. You have insurance products like indexed universal life insurance where they participate in a portion of the increase if the stock market rises, yet don’t suffer losses if it has a losing year. Indexed annuities might be a good fit too.

Talking point: Have your cake and eat it too. You’ll need to be satisfied with a smaller slice, though.

Taking less risk as you get older

Younger clients starting their careers might find the stock market attractive because they have 40-plus years before retirement. The 60-year-old client is in a different position. They need income in retirement. You might read up on strategies where the client’s asset allocation is a mix between stocks, fixed income and cash, gradually moving away from stocks and into fixed income as they get older. If they retire on schedule, they might still own a little stock, but the majority of their money is producing retirement income. You can see where insurance would play a role.

Talking point: The older you get, the less time you have to recover.

The joy of total return

Perhaps your licenses allow you to sell mutual funds and managed money, also known as separately managed accounts. If you are licensed to sell stock, clients can buy Exchange Traded Funds (ETFs) and stock in individual companies. Many people choose growth. They want companies that will get bigger and bigger, earning more and more.

Others want income and stability. Utilities might sound boring, but people usually pay their electric bills regardless of the economy. Between the two is “total return.” These are companies that pay dividends yet have the potential of at least some growth. Some examples might be in the energy, telecommunications and Real Estate Investment Trust (REIT) sectors. You should be able to find mutual funds or money managers focused on these areas.

Talking point: There’s often a reason why some household names have been around for a long time. They might not grow fast, but they pay dividends.

Look across the ocean

Many investors tend to buy into their own country’s stock market. The company names are familiar. They have confidence. Maybe they work for one of those famous firms. However, many worthwhile companies are based in other countries too. When one stock market declines, sometimes another goes up. International and global mutual funds (and managed accounts) focus on this sector. It can help your client further diversify.

Talking point: Why limit yourself to one market?

Volatility can be scary, especially if your client started investing less than 10 years ago. They hadn’t seen a down stock market or extreme volatility until this year. They’ve come to you for advice. You can show them how you can help them with both insurance and investments.

By changing the blend of what they own, they should be able to participate in the stock market and still sleep at night. You are no longer only “their insurance person” — now you could be a “one-stop shop.”

Bryce Sanders is president of Perceptive Business Solutions Inc. He provides high-net-worth client acquisition training for financial services professionals, and is the author of the book “Captivating the Wealthy Investor.” Contact him at perceptivebusiness.com.

 

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