It's hard to be rational when the world is crashing around you. Mary Beth Franklin welcomes Mark Halloran of Transamerica to the podcast to explain why so many people make investing mistakes during a crisis.
Investing behaviors during a crisis like the coronavirus can be tumultuous. Behavioral finance research explains why so many people make costly investment mistakes during times of stress, but financial advisers can really shine during these challenging times, helping clients overcome short-term fears that can cloud their judgment, while encouraging them to focus on the long-term goals.
Retirement Repair Shop S2Ep1
Tom Halloran
4/29/20
Mary Beth:
Hello, and welcome to the Retirement Repair Shop. I'm your host, Mary Beth Franklin. This podcast series focuses on retirement challenges, and ways to get your financial plans back on track. Today, and throughout the second season of the Retirement Repair Shop, we will be focusing on the coronavirus pandemic and its impact on our lives, our economy, and our finances.
With me today, is Mark Halloran. He's vice president and managing director of business development at Transamerica. Mark is a 30 year veteran of the financial services industry, with experience on both the product manufacturing and retail distribution sides of the business. Today, Mark and I will discuss investing behaviors during a crisis. It's hard to be rational about investment decisions, when the world seems to be crashing around you. Behavioral finance research explains why so many people make costly investment mistakes during times of stress, but financial advisors can really shine during these challenging times, helping clients overcome short-term fears that can cloud their judgment, while encouraging them to focus on the long-term goals.
Mark, thanks for joining me today on the Retirement Repair Shop. Paint a picture for me. How would you describe the overall state of the stock market today?
Mark Halloran:
Yeah, so Mary Beth, pleasure to join you today, and thank you for the opportunity. Um, how do you describe it? It's crazy. It's volatile, it's day to day. Um, it's, it's an amplification of what we see in our typical news cycle, and that is that um, it's hard not to find news about what's happening in the market, or specifically around the pandemic as well. So a particularly stressful time, I think for uh, for investors and human beings in general, frankly, frankly.
Mary Beth:
Right. So what do you think is the biggest challenge for investors and their financial advisors during these times of extreme market volatility?
Mark Halloran:
So I, I think it's important to start with the fact that there's something... In this black swan event, it's a very, very different event, right? And if you, if you start with the premise of what human beings think about and what's most important to us, it, it typically is in something of this order: It's, it's our own health and well-being, it's our family, and then it's our money, and, and pretty much in that order. And when you look at this specific market and these specific conditions, you've got three of the most important elements of our day-to-day lives, all sitting and simmering in the same crucible here.
Um, and so, the stress factor, if it was market volatility alone, that's stressful enough. When you, when you lump in the rest of the elements that are specific to this condition we have that we're experiencing today, it's, it's that much more stressful. And stress is an amplifier when it comes to the investor's behavior, or, or human behavior, for that matter, which is to say that left to our own devices, we're typically not great at making rational investment decisions, but when you throw in stressors to the situation, then the amplification of those bad decisions just ratchets up. That make sense?
Mary Beth:
Yeah. You know I anecdotally, I, I read lots of surveys of how investors are reacting, and at least initially, it seemed that people were not as panicked in the current financial crisis, compared to the Great Recession in 2008, and I wonder if that's twofold. Um, one, they've been through this before in recent memory, in the last 10 years, and they know the market did eventually come back. But I'm, I'm focusing on something you said about the, the order we put our priorities in, and one of them was health, and in that previous downturn, we didn't have concern, a public health crisis like we do now. Do you think that the fact that people are concerned about their health has sort of minimized at least their initial panic about their money?
Mark Halloran:
Yeah. Listen, I think that's a really interesting thesis, and probably correct. Um, and that would fall into, so that this whole aspect of something called framing, right? Which is how we filter information as human beings, and what we typically will look at is those things are most important to us, as you pointed out, and in this case, our own health, the health of our family, and that's you kind of focus on, for better, or for worse, and then uh, uh you know, other things tend to be filtered uh, away from that. In this case, it actually has a positive benefit. In most cases, from an investor standpoint, it doesn't. But I think that's right.
I think that it's, it's different in this regard, and maybe that's one of the reasons, but, but I also think to your other earlier point, um, it wasn't that long ago where we had that other you know, event that never occurred before, right? And, or at least hasn't occurred since the Great Depression, um, and that was a very, very severe and protracted downturn in the market. Um, here, you know, and, and people, those that stayed the course saw that they, from that specific crisis emerged, and probably in fairly fine shape, um, and then other folks probably learned lessons that they wished they hadn't and that they were probably not willing to repeat, during this one as well.
Mary Beth:
Well, I'm hoping we don't have to get used to an entire flock of black swans down the road, two are enough.
Mark Halloran:
No kidding.
Mary Beth:
Well, your specialty-
Mark Halloran:
Well, enough for me, that's for sure.
Mary Beth:
One of your specialties is behavioral finance, identifying these human biases that can affect our investing decisions, things like loss aversion. Talk about that a bit. What is loss aversion, and, and how do advisors recognize these behaviors in their clients, and help to work through that?
Mark Halloran:
Yeah. So, loss aversion may be one of the most powerful of biases in all of investing, right? And that is, we have a natural propensity to not want to give anything up. We don't want to lose ground. And I, I think as we talk about this, it's also important to understand we're not talking about some sort of just transient emotional uh, state, we're talking about physiology and, and a dynamic that has developed over a millennium of evolution here, and it all stems from our fight-or-flight mechanisms that um, we've had since early human beings were walking the earth.
So, you know, the, the loss aversion is, is, you know, you're going to recognize it in your clients when, when markets dip in some sort of violent way, and their solution is, "I've got to get out. I can't, I can't take this, this loss. I can't, you know the pain that this is causing me, just to think about the loss is, is um, sufficient for me to want to cut, cut uh, bait, and, and move on." And in fact, you know, it's, there's, it's well documented uh, in research that from a loss aversion perspective, if you view it from just uh, the emotional state of the investor, the mere anticipation of a loss actually creates seven times more the pain of actually experiencing a loss itself.
Mary Beth:
Wow.
Mark Halloran:
So the, the you know, emotional rollercoaster that, that clients can exhibit during whipsaw markets like what we've seen here, and then still we haven't recovered for sure, that's a, that's a really tough dynamic to deal with. And um, you know, and if you haven't kind of walked into this condition, having set your clients up to understand that these are the kinds of uh, emotions, these are the kinds of feelings they're going to have, um, and that's natural, but we've got plans in place to help you through this, but I think it's a tough road, right? But the good news is, is you can mitigate these things, um, that they take some time and some preparation.
Mary Beth:
And does an advisor... What's the conversation like? Do they acknowledge first, "Yes, I know this is incredibly painful. I know this is unbelievably frightening, but let's take a step back," where you talk about reframing the situation and possible outcomes. Take me through an example of what an advisor would do.
Mark Halloran:
Yeah, so you, you can make a really solid point there, Mary Beth, and that is that the first thing you have to understand about any human interaction, is what's among the most important things of us, is being understood, that you get me as an advisor. And if you don't acknowledge that this is a fearful time, this is creating anxiety, then you're minimizing that element that's really that important to the client. And so, I think it's important to say, "Listen, I, I can appreciate why you're feeling this way. It's natural." I feel this way, right?
Mark Halloran:
It's an anxious time for all of us here, but here's the good news, is that we know that these events take place in the market. They have since, you know, since the markets were formed, and we know, you know, that uh, over time, the markets have behaved in a certain fashion, right? And typically, in favor of those people that rode through over longer periods of time. So, and, and that's why we put our plans in place, and with these kinds of events in mind. We don't know what they're going to be, we don't know what the next black swan might be and what's going to cause the markets to behave like this pandemic is causing this market to behave, but we know something's going to happen. And so, it's preparing for the unknown, and, and in our planning, that's what we've done, is prepared for the unknown.
Mary Beth:
And that's the-
Mark Halloran:
As best we can.
Mary Beth:
... the framing that advisors can remind their clients, that they're not just there as an investment advisor, they're there as a financial advisor that has looked at the possibility of markets going down, as well as up. And that some of it, it's a matter of risk management. We knew this was a possibility, we didn't know to what extreme, but we built that into your plan.
Mark Halloran:
Yeah, yeah, precisely. It's, we've got this, right? And um, again, no one can predict what the market's going to do. We just don't know. All we can do is, is base our information on what we know from historical perspectives, the information that's coming in today, and that you know, we've made some measure of accommodation in our planning to you know, um, measure, if you will, to the best we can, your propensity to withstand these things emotionally, right? And so, that should bear into the asset allocation that we've put in place, that should bear into the individual selection of security put in place, and guaranteed elements of a portfolio put in place, all should be considered into that. But even with all of those things, we still have to revisit that conversation, and I think that's, that's the hardest thing to remember, is that you know, telling somebody something once, that's not good enough. Right? Uh, and to repeat is not being pejorative, it's just, you know, "Listen, remember this? This is the plan that we put in place. These are the things we talked about. We knew something like this could occur. Well, here we are." Right?
Mary Beth:
Certainly-
Mark Halloran:
And let's stay the course.
Mary Beth:
... every client is unique, but there's similar threads depending on their age and stage in life. So for example, how should an advisor talk to uh, maybe a retired client, versus one that's mid-career and still saving for retirement? How do those conversations differ?
Mark Halloran:
Well, interestingly enough, research tells us the people that actually, that have saved and that are in retirement, are typically not as affected as profoundly by negative news, in part because they've lived long enough to see these things before, in part because to your point earlier, particularly in this crisis, we went through one 10, 15 years ago, right? And um, here we are again. But they've had time to see the plan in place as well. But even without that, um, just from a psychological standpoint, we tend to get more positive as we get older. Negative news doesn't affect us as profoundly as it might when we're young. So, yeah.
Mary Beth:
Well, for those younger clients who are still working, this can actually be an opportunity for them, right? How do you explain that in the midst of all the dismal news?
Mark Halloran:
Yeah, and see, that's the irony too, because the group of individuals that are typically most anxious in this times, are the people that have the least, really, uh, reason to be, right? Because as a young individual, the most important element I have that's working for me, is time. I have time to get through these things. I have a 30 year horizon before I even have to think about retirement potentially. And so, it's, it's having that conversation, and it's important to understand that that constituency does not have the benefit of experience.
You're there as the benefit of experience, you are there as the people that can provide perspective and, and a history, lessons in history as well, if nothing else, um, but helping them to understand that time is the element that's going to work for them and in fact, in these conditions, treated properly, you know um, these are great conditions for younger people, right? These are opportunities to bring our overall cost averaging down potentially, if we've got a, a dollar cost kind of averaging situation put in place, and in most people's, young people's place, that's typically the way they invest, right? Because we don't have big lumps of money, sums of money to put into the, into the markets. So yeah it's, I don't know, be a little bit more paternal, I guess in the conversation, I would say, I'd put it that way.
Mary Beth:
But there is one group of clients who truly are vulnerable here, the people who are on the verge of retirement, within a year or two. We know about concerns of that sequence of return risks if they're initially tapping their retirement nest egg in a down market. How do you talk to them about different ways to through this current crisis?
Mark Halloran:
Yeah, so I guess that to your point earlier, it's all dependent. These are individual conversations, right? And how prepared I was coming into this crisis. But it's a tough group, because what you pointed out in terms of sequence of return, that's uh, that's a really tough situation potentially, because if um, if, if there's no intervention, and let's say I'm in a condition where my portfolio has dropped precipitously and um, I'm looking to try and cut those losses, I think you have to have that sequence of return conversation in terms of, if we do this, just let's be clear in terms of what the alternatives are perspectively, because you, you're, you're basically casting the die, right?
Mary Beth:
Right.
Mark Halloran:
So if we sell at this level, this is what we have in terms of assets, this is what your time horizon is to retirement. Well, and these are the things that we had planned in retirement. So the algebra has to adjust here, right? So we've got to work both sides of the equation. If I'm going to adjust my asset base, well, that means that there's two things that have to occur. One of two things, or maybe both, and that is I adjust my standards, which I'm choosing to live in retirement, or I find a way to work longer. And a tough part about that second conversation is that's not always our choice. Either through, it could be my employer's choice, in terms of downsizing, or my, my performance, it could be my health that prevents me from working, It could be any number of things. But if we make decisions now in the moment, let's understand what the consequences potentially could be here as well.
Mary Beth:
Right. So it's reminding clients there are several leve, levers they can pull there, whether it's working longer, or living on less, or making a decision about when to claim social security, or other ways of turning assets into income, and what those impacts will be at this moment.
Mark Halloran:
Yeah. I mean, understanding what the options are, what the consequences are of decisions. I mean, I think that's the best you can do, frankly. Right?
Mary Beth:
I, I want to switch topics for just a second. We've been talking about the investment end of things, but certainly, we have all been affected by technology here. Financial services, I think as much as any other industry, have found that they could pivot, and thanks to technology like Zoom, or Teams, or whatever platform they're using, that advisors can continue to have face-to-face meetings with clients. Talk about the opportunities that this pandemic has created for financial advisors.
Mark Halloran:
Yeah. So I think this is another kind of lessons learned from previous um, markets as well, and specifically, the financial crisis. And what I've observed a very, very different dynamic, specifically with respect to the advisor in this crisis, and their interactions with clients, versus the financial crisis. Um, and let's remember that the people, you know, uh, who were doubly impacted by the financial crisis were those working in the financial services industry, right? So I mean, I might've been advising people, but I also might've been losing my job. Uh We saw institutions go out of business. We saw people that had to move that, that were working for company A, and over the weekend, either they were gone, or they were working for company B. Um, and then so I'm dealing with my own levels of stresses as an advisor, and then I've got, you know, uh, I also have a responsibility to my, to my clients, and um, I'm probably not in the best position to be you know, comforting at that point. Um, and what I saw there in, in that condition, is a lot of just uh, uh, oh boy, just a failure to reach out. And so, it's just, that's just one of those things that compound on other.
And so to your point, looking several years, almost a decade later, what we have here is a much more uh, higher adoption of technology, both in the workplace and at the home. So it's not just advisors that have discovered that they can operate through Zoom, you have to have someone at the other end of the spectrum, but the conversation has the same technology. And one of the, one of the um largest surges of purchases in this particular event here, has uh, been in home technology. Now, a lot of that's gone to home security, but other parts of it will go on to these kinds of uh, uh, mechanisms that allow for that interaction. But even if it's not a face-to-face, and in getting back to that, that younger generation, what we also know is they want the call, they prefer the call. And in times of stress, we have to find ways from the advice community to reach out more frequently. Um, and not just that, "Hey, just touching base," although that's important, or you know, you know "Let me tell you what the market did," it's, it's all kinds of different ways to check in.
Mark Halloran:
But your point is well-taken, the, uh, the, the, uh integration of technology, and when I talk about technology, to me, we typically kind of bucket things in, well, there's technological solutions, and then there's the human solution. To me, it's the synthesis of technology and human that makes it so powerful. Technology is a it's a force multiplier for the advisor, right? It allows for them to be places where they otherwise couldn't be, to react to things more swiftly than they otherwise would be able to be. So I think technology's had a very profound influence over the advisor and client relationship in this particular circumstance that we find ourselves in today.
Mary Beth:
It was an interesting point you made of the difference between the uh, current economic downturn, and the Great Recession from a decade ago, was that because lot of financial advisors were fearful for their own financial future, their employers may have been disappearing, it was essentially a crisis of the financial sector at the time, as opposed to the broader economy, as it is now. And a lot of those advisors didn't know what to do, they didn't have today's technology to reach out and literally touch, touch someone, and we found out that after the fact, many clients fired those advisors, because they did not reach out to their clients. And I think many of the advisors around today who had lived through that, learned that lesson, that clients need to, you have to be in constant contact with those clients. And the fact is, there are now more tools to do it, and better than before.
Mark Halloran:
Absolutely, could not agree with you more. And to your point, listen, those firings didn't take place during the crisis, they took place a year or two later, Mary Beth, when I, as the investor was in a better financial condition, and now I'm reflecting on what happened, right? And I move. I'm going to move, because you weren't there for me. And, and that's actually, again, there's an amplifier here too, in as much as you've got this boomer generation that's you know, hundreds of thousands are, are tipping over into retirement every single day, right? And what we also know is that as we approach that imminent retirement date, you know, a year to six months prior to retiring, and then that year after retiring, there's another dynamic that's going to take place, and we're going to consolidate, right? We're going to consolidate our advice. Um, and we have the strong documentation from a number of companies' research out there that says, "Listen, in that window of time, I typically have some 3.45 advisors in my life, and with a 75% probability, I'm going to whittle that down to one."
So, you know, it's an opportunity for those advisors that have managed through this crisis well, managed that practice well, have good, strong communications with their clients, because they'll be the recipient of that consolidation. Um, but if you think you've managed through this, and potentially, in this time, you felt your clients have been okay because they're not calling you, well, I think that's um, it's folly to think that there's not going to be some sort of consequence, that results of this over time.
Mary Beth:
I think that's a great point. Do you have any final thoughts or guidance for advisors on how to come and reassure their clients during these tough times that could last for quite a while?
Mark Halloran:
Yeah. So they could, and, and I think as I said, I may have mentioned earlier, maybe I didn't, but acknowledging that it's okay to feel this way, right? It's a natural condition for you to be feeling this way. I feel this way. It's tough on me working at home. It's tough on me, I'm dealing with my family. My kids are home... Well, not mine, I'm much older, but you know, people are living in conditions that they've never lived in before. Um, schools aren't open, we're homeschooling, and that's a job, but I'm, um, I'm probably working from home too, and that's a job, right?
So it's acknowledging that, "Listen, I'm going, we're going through this together. I've got you. I acknowledge the, the concerns that you have. I have some as well, um, similar to you, but let, let me assure you that when it comes to the finances, we've got this, all right? We'll get through this, and that's why we put those plans in place." So yeah, get out there, acknowledge, be frequent in your conversations or in your contact. I think what most of us fail to recognize is that the expectation, and by the way, it logarithmically increases as your wealth increases, but the expectation of the frequency of communication is far, far higher from the client's perspective that I think most advisors acknowledge.
Mary Beth:
Oh, that's an excellent point.
Mark Halloran:
And there are-
Mary Beth:
Yeah. I'm going to quote something back to you that you said to me in an earlier conversation, because I thought it was so significant, that you said, "People may not remember what you said, but they will remember how you made them feel." I think that's such an important message to financial advisors.
Mark Halloran:
Yeah, it's funny um, if you think about this, the father of behavioral finance, Daniel Kahneman, he won the Nobel Prize in Behavioral Finance in 2005, and this is from a gentleman who never took a course in behavioral finance, a course in economics, in this life. He was a professor at Princeton University at the time, of psychology. Right? And I'm not suggesting that you know, as a, ah, as advisors we need to be psychologists, but I think what we have to acknowledge is that we're dealing with human beings, and human beings behave humanly, right? We have human behavior.
And to, thank you for quoting me back, but we're feeling human beings, and we remember those experiences and how they made us feel. We really remember the words, but you can think of it, you know, the most uh, profound experiences you might've had as a child or young adult, and it was really more about how you were feeling in the moment, and these are the moments that can make or break a career, right? These, these are the times where if you are wise enough to acknowledge what's going on in the minds and the hearts of your client, um, and you deal with that and react accordingly, in a human way, then that will be remembered, and people will talk about that. They'll talk about you in, in favorable terms, and you know, not to, not to sound overly self-serving, but that will have financial benefits long term, not just for your clients, but for your practice as well.
Mary Beth:
There's probably nothing more valuable than the referral of a, a favorite client of their advisor.
Mark Halloran:
Yeah.
Mary Beth:
So we should all be mindful of how our reputations can play into um, our future successes. Mark, thanks for being my guest today on the Retirement Repair Shop. I appreciate you sharing your insights and your guidance on how to recognize the impact of emotions on investment decisions, and how to help clients overcome them, so they stick with their long term goals. Thanks so much for being here and for sharing your ideas.
Mark Halloran:
It was my pleasure. Thank you, Mary Beth.
Mary Beth:
If you have a story you'd like to share about a retirement hurdle you're facing, or if you have a question that you'd like to ask one of our experts, contact us here at the retirement repair shop. That's investmentnews.com/repairshop. And you can subscribe on Apple Podcast, Google Play, Spotify, and Stitcher so you never miss an episode.
A big thanks to Transamerica for making this episode possible. With a history that dates back more than 100 years, Transamerica is recognized as a leading provider of life insurance, retirement, and investment solutions, serving millions of customers throughout the United States. Recognizing the necessity of health and wellness during peak working life, Transamerica's dedicated professionals work to help people take the steps necessary to live better today so they can worry less about tomorrow.
Transamerica serves nearly every customer segment, providing a broad range of quality life insurance and investment products, individual and group pension plans, as well as asset management services
Speaker 1:
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.
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