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When politics meets portfolios in wealth management


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In an era of deeply divided partisanship, how should financial advisors respond when clients bring up politics or current events?

The mounting legal woes of Donald Trump, the intense debate over how to handle the banking crisis and the looming battle over the debt ceiling ensure that partisan politics are never far out of mind and continue to generate widespread concern among investors. 

Presidential elections have been another source of investor anxiety, as supporters of one party fear stock prices will tumble if the candidate of the opposing party wins the election.

Depending on where they fall in the political spectrum, some clients may be drawn to funds tilting towards environmental, social and governance policies, while others may be attracted to funds like the “God Bless America” ETF.

Advisors say that the starting point in conversations with clients that involve ideology should be objective, historical data.

“There is usually no correlation between election results and market performance, and if there is, it’s usually very short term,” says Brant Cavagnaro, a senior advisor and director of investment policy at New York-based Wealthstream Advisors. “It doesn’t matter who is in office. Some people thought markets would decline when Obama was elected; others were convinced there would be a bloodbath when Trump was elected. Neither happened. Earnings growth drives markets, not politics.”

Empathetic listening is also critical, notes Julia Kramer, a financial behavior specialist for Signature Financial Planning in Pittsburgh.

“Honor the client’s fear,” Kramer says. “Sit and listen and try to understand their underlying concerns. Don’t jump in with facts and statistics before you hear the client out. Sometimes they know they’re overreacting and need to talk to an advisor to get it out of their system.”

After clients have opened up, try to accommodate their values, says Jake Weber, wealth advisor for Willow Creek Wealth Management in Sebastopol, California.

“Clients may want a portfolio representing their values,” Weber explains. “The discussion should be around what that means for them and their investments. It shouldn’t be a battle about should we do it or not, but how can we do it, using standards that meet our investment criteria.”

Framing is also useful when clients want to align their political preferences with their portfolios.

“When it comes to ESG funds, for example, Willow Creek stresses “sustainability” instead of the “social” aspect of the category,” Weber says. “Bay Area and rural Texas clients may view the same funds through very different political filters. Talking about climate change is more positive and less political,” Martin explains.

The debt ceiling crisis should also be approached non-politically, says David Sterman, president of Huguenot Financial Planning in New Paltz, N.Y. 

“Clients may be genuinely fearful even though they know it’s not rational,” Sterman says. “Instead of addressing the crisis with an explicit political framing around Republican versus Democrat, framing it as an issue resulting from an unstable environment is better. Clients usually seek help to get past a crisis and motivation to take a step forward.”

After discussing the debt ceiling crisis with her clients, Lori Van Dusen, CEO of LVW Advisors in suburban Rochester, N.Y., focused on offering a variety of investment strategies that would assuage their concerns. 

“We use history as a guide to see how the markets have reacted in similar circumstances,” Van Dusen says. “We stress test the portfolio and offer a multi-strategic sleeve that includes cash, high-quality fixed income and hedging.”

Willow Creek has tried to assuage client concerns about a debt default by mitigating potential losses and making clients feel more secure, Weber says. “If they’re nervous about being in a Treasury money market, we’ll move them into a corporate money market if it helps them sleep better,” he says.

Clients preoccupied with current events also have to realize the events that are often the most impactful are the ‘black swans’ that haven’t been anticipated, like the Russian invasion of Ukraine, Sterman notes.

Key in any decision is making clients aware of the risks involved when they interject their beliefs into their investment decisions.

“If a client’s values are a priority, they have to be OK with not meeting benchmarks,” says Cavagnaro. “The tracking record [of the client’s preferred security] will not have the same returns as an index fund.”

Clients have to understand the “opportunity cost” of politically motivated investments, Kramer says. Sometimes, Van Dusen adds, clients “have to be comfortable with making less.”

But smart financial planning isn’t always about making the most money. Advisors need to be mindful if a client feels better with investments that may not represent alpha in their portfolio but does reflect their values.

Advisors should also be patient with clients who may not be willing to accept their assurances that the impact of political events on markets is usually negligible, Kramer says.

“If clients see that advisors don’t dismiss their concerns as unreasonable,” she says, “the client may be more likely to follow the advisor’s guidance the next time there’s a crisis.”

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