In times of uncertainty, financial advisors and other investment industry professionals must listen to clients’ valid concerns while at the same time keeping them focused on their long-term plans.
That was the key takeaway from two of the opening speeches and a panel at this week’s CFA Institute LIVE conference in Chicago. Recent economic volatility amid the unknown future of U.S. tariffs and the impact on inflation represent only one of the challenges facing the industry, said Margaret Franklin, CEO of the CFA Institute, the professional development and training organization that certifies chartered financial analysts. For example, she pointed to the rise of private markets and the looming Great Wealth Transfer to spouses and younger generations.
When Franklin began in the industry, large institutional investors were the “dominant” client base and market participants, she noted.
“Today, individuals play a far more central role in capital markets,” she said. “More than $80 trillion is expected to transfer to the next generation, and they’re looking for ethical, informed, professional advice. This is a massive opportunity and, of course, an associated responsibility. Yet, despite this, the talent gap is significant. Not enough professionals are entering wealth management, even as that demand grows.”
READ MORE: Advisors navigate a political divide in client outlooks
Back to the fundamentals
However, neither advisors nor their clients can afford to ignore the macroeconomic backdrop that is driving fears of a recession. Despite those concerning headlines, the “fundamentals are not collapsing,” said Rosie Rios, a former U.S. treasurer who is now chair of America250, a Congress-commissioned organization tasked with overseeing the celebration of the country’s 250th birthday next year, and a member of the boards of American Family Insurance, Ripple Labs and Fidelity Charitable Trust. She’s a veteran ex-Treasury Department official with firsthand experience from the 2008 financial crises and the 2020 pandemic.
Unemployment remains relatively low, while inflation is higher than the Fed’s target but down from its 2022 peak, sectors such as technology, energy and health care are displaying continued strength and the U.S. economy is growing faster than those of Western Europe and Canada, Rios noted.
“We’re in a better position than any economy in the world,” Rios said. “Clearly, we can no longer do things the same. Change is difficult, but we have been through worse. This is not the financial crisis of 2008 and this is where creativity and human capital is going to play a very, very big role.”
Tobias Salinger
READ MORE: Tariffs, taxes and market tumult: Navigating uncertain, volatile times
Evolving through behavioral finance
And that’s where planners can be so important, according to the experts. The many books and concepts discussed in a fireside chat between Peter Lazaroff, chief investment officer of St. Louis-based registered investment advisory firm Plancorp, and Brian Portnoy, founder of behavioral finance training and consulting firm Shaping Wealth, included: the military acronym “VUCA,” which stands for, “volatility, uncertainty, complexity and ambiguity”; “The Art of Choosing” by Sheena Iyenger; and “Your Money and Your Brain” by Jason Zweig.
The latter book marked “the first time that it occurred to me that something other than what I learned in school is impacting the way that my clients are behaving, that’s impacting the way the investment committee is behaving,” Lazaroff said.
“I remember sitting on an investment committee where we’re taking individual stocks, and it was like a hotbed for a behavioral finance textbook,” he said. “It’s just pointing out these behavioral quirks that make us human, that are perfectly normal, totally fine to feel and important to recognize.”
As more advisors embrace behavioral finance through their professional development and services to clients, though, the field of research is expanding beyond simply identifying as many as 190 biases that affect clients’ decisions, Portnoy noted.
“It’s so terribly incomplete, it has led the investment and wealth industry in directions that haven’t been particularly fruitful,” he said. “Basically what we’ve done as an industry is pathologize normal human behavior. We pathologize normal human behavior by saying, ‘You are flawed, you are irrational.’ Irrational is nothing more than an economist’s fancy word for ‘stupid.’ We spend a lot of our time calling our clients stupid.”
READ MORE: Barry Ritholtz writes a playbook for avoiding investing mistakes
Tobias Salinger
Watch out for ‘VUCA’
On the other hand, past financial crises have shown the risks that can flare up quickly — whether in the form of a contagion like the Silicon Valley Bank contagion two years ago and trends that have built up over time, such as the fact that most people are far less likely to spend decades with the same employer, Rios said. That “has major implications for everything — for retirement planning and for consumers to even think about how to spend,” she said.
“The longer you wait, the bigger the problem gets,” Rios said. “And, in a panic, perception becomes reality, fear spreads faster than policymakers can respond, and that’s why you need to respond with overwhelming force to stabilize and restore trust.”
And advisors play a valuable role in such times, Portnoy said.
“In VUCA moments, No. 1, we’re reaching for narrative,” he said. “Let’s never forget that we were not born as calculators. We were born as storytellers. And so we’re always looking for the story that makes sense, especially during VUCA moments. We are looking for control. We don’t like environments where we feel like we don’t have much control.”
He went on to describe emotional intelligence as “everybody’s superpower” in the age of artificial intelligence. Lazaroff agreed.
“Whether you’re an advisor or a money manager or an analyst, we’re often thinking, how do we solve that problem?” he said. “And we’re looking at the behaviors as something to solve. And I’ve always thought you can’t take the ‘human’ out of ‘human behavior.’ You have to build solutions around them or construct them within them, and, in a world where AI can generate a financial plan or an allocation — and maybe you can’t do it perfectly yet — the human edge, as you mentioned, is going to be that emotional intelligence.”
