Insights

Posted on April 30, 2018

Prepare Your Firm with a Market Downturn Drill

Published by Sarah Cain

It’s a memory we all share. You’re there, sitting in the middle of a math lesson or a lecture on U.S. history, and suddenly the fire alarm rings. Instinctively, you get up from your seat, exit the building and enjoy a few minutes of downtime with your friends as teachers from each classroom count heads.

It only takes a few drills a year for schools to ensure their students are safe should the worst case scenario occur. This practice, standard from kindergarten all the way through high school graduation, helps children and young adults remain calm and think logically about their next steps. It’s a brilliant strategy designed out of real-world necessity.

Let me ask you, when is the last time you did a fire drill in your firm?

To clarify, I’m not talking about preparing for an actual blaze. Instead, I’m asking you to consider running a drill for an emergency situation that will inevitably come – major market downturn. An unprecedented 2017 has given way to a more volatile 2018, sending warning bells throughout the industry. It’s not a matter of if, it’s a matter of when.

Knowing this, I want to help you get ahead of the chaos that could ensue and give you tips on what you can do right now to set yourself up for success. Just remember: Stop, Drop and Roll.

Stop and Take Stock

Your business is not only your livelihood, but also the livelihood of your employees. Surviving a bear market is possible if you take an objective look at what you can improve before a significant down shift. Here are a few questions to ask yourself when fireproofing your firm.

  • Does your company have strong enough margins and financials? We tell our clients to have three to six months of living expenses in the bank in case of a disaster. But, are you following that same rule with your business? Particularly in fee-based practices, profit margins can suffer greatly during a downturn. One of the worst things you can then do is cut staff, ultimately affecting service. Start building a cushion now to prevent loss of valuable stakeholders and clients.
  • Do all of your clients have a basic financial plan? Without a financial plan, your relationship with clients becomes all about performance. This is a dangerous place to be in a bear market. By creating plans for each and every client, you can shift their focus from the short-term to the long-term and keep them concentrated on goals, rather than returns.
  • Are you sure your models will perform as advertised? Whether you have created your own investment models or utilize a third party, examine the history of those models. Have they been through a down market? Do you know how they will respond, or is it theoretical at this point? This research may open your eyes to weaknesses that exist in certain strategies or allocations.

Drop Hints in Client Conversations

A market downturn is just as much of a psychological jolt as it is a financial one for your clients. Proactively bringing up the potential for decline will provide two important outcomes.

First, it will help you gauge how comfortable a client is with risk. They may have said they are an aggressive investor, but when faced with reality, they could change to a much more conservative tune. Listen carefully to their thoughts, and then make adjustments if needed.

Second, frequent communications will help your clients know what to expect. If and when the market takes a dip, they will be less likely to call with panic-stricken voices, having been mentally and emotionally equipped for such events. The foundation of trust you’ve created makes them confident they can fight this fire with you beside them.

Roll Out a New Process

At Carson Group, we preach process. A defined process is the most effective way to react to any situation quickly and without error. Most advisors would say they have a loose idea on how to handle market downturn, but few have a written procedure in place.

Download my sample fire drill process to explore what you need to be ready to implement at a moment’s notice.

The Upside to Downside

Waiting for the market to take a turn for the worse is a little like waiting for a single spark to ignite a series of explosions. There is anticipation marked by dread. But, like any good coach would do, I’ll put a positive spin on this somewhat discouraging topic.

If you run the drills now, make necessary changes and execute at a high level, a bear market could actually lead to increased client retention and referrals. In fact, you could experience record new clients and assets just by showing up when it truly counts. Talk about rising from the ashes!

Prepare Your Firm with a Market Downturn Drill

Share: