It’s pretty hard to avoid financial market and economic news these days. Financial news is everywhere — radio, television, print, web — often appearing in articles and news broadcasts that might normally be reserved for other topics. Today, your clients are hearing, seeing, reading and surfing for more financial news than they ever have before. And right now, most of it is bad. We can’t make the bad news go away, but we can provide some perspective on the news that will help our clients deal with it and ultimately keep them on track to meet their financial goals.
First, the disclosure: I am an occasional contributor to the financial and economic press insofar as I am periodically interviewed by the media. Nevertheless, I find myself sometimes at odds with the media’s coverage of current events. I say this for three reasons:
1. Much of today’s financial market and economic news is reported in the most dramatic fashion possible. How many times have you heard the words “the worst since,” “unprecedented” and “getting worse” in recent months?
I understand reporting is a competitive business and making the news bland probably isn’t going to attract a growing audience, but the notion that current conditions are unprecedented in every way simply doesn’t hold water. Each crisis indeed has its own twist: In the current situation there are a number of uncommon aspects — the lack of appropriate risk assessment among many financial market participants, the unprecedented, real time and around-the-clock coverage of market events (in some cases by a new array of “expert” commentators with questionable expertise) and globalization, to name a few. But many of these current difficulties are by no means novel, a fact that doesn’t always come across in the reporting.
2. The reporting on current events often provides little in the way of needed perspective for the average viewer. This is an adjustment process (admittedly, a very difficult adjustment process), one that we all wish we didn’t have to go through. That said, all adjustment periods have an ending, an outcome.
I believe the outcome of this process will be a scenario that is much improved, relative to what we are currently seeing. In addition to housing and financial market corrections, there are some fixes at work to deal with longer-term problems, not the least of which are U.S. consumers’ spending and saving behaviour.
Placing today’s headlines in the context of this longer-term adjustment process is crucial to helping our clients understand where we’ve come from, where we stand today and where we are headed.
3. We all make mistakes. To be fair, the press is remarkably accurate given the volume of what is reported, but in light of its accessibility, its speed and the credibility it holds with our clients, the occasional mistake in the press can have serious effects on your clients’ investment decisions and the financial markets at large.
To illustrate, recall that in early March, the Bank of Canada lowered its benchmark interest rate — the target rate for overnight funds — to 0.5%, the eighth cut made in the past 15 months. Obviously, this brings the rate close to zero, which is the bottom limit. Following this cut, the press in one or two instances reported that once the Bank of Canada benchmark interest rate gets this low, there is little more the central bank can do to help financial markets and the economy return to a more normal state of performance.
This is wrong. Not a little bit wrong. Not a matter of differing opinion among economists. It is simply wrong. In fact, there is a lot more that the Bank of Canada can do. It has been giving liquidity support by providing loans to financial institutions virtually since the sub-prime mortgage crisis started a year and a half ago. It has also indicated it will provide quantitative and credit easing to raise the levels of cash in private lenders’ hands. Furthermore, many of these activities are already being pursued by central banks around the world. A client who reads that the Bank of Canada has run out of ammunition in the battle to cure current market and economic problems could end up feeling pretty despondent and might make inappropriate investment decisions as a result.
Behavioural finance experts have used the term “frame dependence” to describe the process by which a person places inordinate weight on a piece of information based on where it came from. The media (and all other market and economic commentators for that matter), must therefore pay particular attention to detail when reporting on the sometimes esoteric world of financial markets, particularly during these volatile times.
So what is the advisor to do? Suggesting to your clients that they ignore the financial press for the next few months might be tempting, but it isn’t likely to work. I think there are two lines of defence:
1. Anticipate. You might think of this as an informal extension of the “know your client” rule. It simply involves your anticipating how certain news developments might raise concerns with clients and being ready to provide them with a reasonable and meaningful response when it’s needed.
I know of one advisor whose weekend reading list includes an expanded selection of newspapers and online sources that he knows are popular among his clients. He’s done this in anticipation of the now common Monday morning phone calls he receives, full of nervous questions about something printed or posted the previous week or over the weekend. As a result, he says, he’s better equipped to comment directly and decisively on particular topics, which allows him to more easily put his clients’ minds at ease.
Of course, this practice should not be limited to a reactive role in information sharing, which brings me to my second point.
2. Be proactive. Get to know and regularly read sources that offer the best knowledge and perspective, and occasionally share a selection of useful items with your clients. If there were a simple list of sources you could use and ignore the rest, I would provide it, but I don’t think it is that easy.
It is important that you invest enough time to evaluate the information and get comfortable with your go-to sources. You don’t pick an article of the day and fling it at clients. Rather, you contribute to a consistent, ongoing dialogue with your clients using your own monitoring and review of information sources to provide clear, contextualized and accurate perspectives that your clients are searching for.