“Don’t talk about religion and politics.” That’s an adage you’ve probably heard. But political discussions are difficult for RIAs to avoid — clients often ask and expect an answer.
The key to talking politics is having an approach. After all, it’s fair for clients to wonder how changes in Washington, D.C., or state government might potentially affect their portfolios. Some may expect you to help them understand if any adjustments are needed — so it’s best to be prepared.
“You have to address it (politics),” says Mike Joslin, CEO of Bellevue, Wash.-based Joslin Capital Advisors. Joslin says clients, including high net worth clients, routinely ask him about political matters. It’s important for RIAs to convey they are informed on the issues, but not take a side. “To not address something that is so obvious is to ignore the elephant in the room, and I think that makes it even a more awkward moment.”
Clients are especially interested around the November elections, reminding advisors of the importance of being prepared for questions. Capital Group research confirms market volatility tends to increase in midterm election years, such as in 2018.
Volatility rises in midterm election years
S&P 500 Index annualized monthly volatility since 1970
Sources: Capital Group, RIMES, Standard & Poor’s. As of 8/31/18. Volatility is calculated using the standard deviation of daily returns for each individual month. The median volatility for each month is then displayed in the chart on an annualized basis. Standard deviation is a measure of how returns over time have varied from the mean. A lower number signifies lower volatility.
But while some clients might bring up politics, several leading RIAs have developed ways to respond so they can strengthen relationships with clients. Here are a few suggestions:
Be ready with a response
Front page of Joslin Capital’s letter on Brexit
Source: Joslin Capital Advisors
Capital Group routinely provides data and talking points about topics your clients might ask about, including midterm elections.
All three advisors stressed how long-term portfolios are rarely, if ever, affected by political posturing. Both Smith and Joslin often show clients historical data revealing how rash moves based on politics could have derailed a plan.
Joslin says clients understand this. “With our business owner clients in particular, we’ll ask them how much time they spend managing their businesses based on the federal or local political landscape. With some exceptions, the answer is usually ‘not much,’ for the same reasons that they are managing their businesses for the long haul,” he says.
Smith urged one advisor to keep a diary of the politically motivated decisions one client wanted to make over the years: selling or buying based on news. After showing the client how such emotional trading would have backfired, the client said, “You’ve saved us.”
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Annualized standard deviation (based on monthly returns) is a common measure of absolute volatility that tells how returns over time have varied from the mean. A lower number signifies lower volatility.