Market turbulence and economic uncertainty can be a source of stress for anyone. Investors grow concerned about their financial futures, and advisors worry how macro events may impact firm health.
However, with the right approach and tools, a volatile market can also present you with an opportunity. Market risk analysis empowers advisors to address risks proactively, contact clients with expert guidance, calm fears and prevent panic selling, and differentiate your firm from more reactive competitors.
Technology designed to support comprehensive market risk management and analysis can help you address concerns on the client side and in your boardroom. Here’s how you can leverage risk tech during times of market volatility.
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1. Run Stress Testing To Immediately Reduce Panic
Headlines about macro risks can send clients into a tizzy. When they call you in a state of distress, it’s helpful to have information readily available to diffuse a tense situation quickly.
Stress testing scenarios can help you address those fears in real-time. Say your client calls concerned about lingering inflation. A risk analytics tool like Orion Risk Intelligence allows you to run their holdings through a pre-built scenario, like Inflation’s Next Peak, one of over 100 scenarios in the stress testing library.
The stress test immediately produces data about hypothetical upside and downside risks, providing a jumping-off point for deeper conversation. Even if the hypothetical downside risk is steeper than your client is comfortable with, you now have information with which you can make more informed recommendations and adjustments.
Knowledge is the antidote to fear, and providing your client with data points to ground your conversation can be enough to quell that initial sense of panic.
2. Maintain Open Lines of Communication
Once you’ve addressed your client’s initial fight or flight response to macro volatility, market risk analysis remains a valuable tool in keeping the lines of communication open.
The stress testing scenarios in Risk Intelligence are back-tested and updated weekly with the latest market data points. As the macro situation evolves, you always have new data to share with your clients.
If a client has expressed deep concern about a given scenario, run their holdings through stress testing at regular intervals or whenever a big piece of topical news comes out. Then, proactively reach out to share the stress test results, make recommendations for adjustments, or simply offer some calming words or advice.
Keeping the lines of communication open shows that you have listened to and absorbed your clients’ concerns and are taking them seriously.
3. Enhance Your Expert Guidance
When the economic data reinforces the investing advice you’ve been providing all along, you deepen client trust.
While forward-looking stress testing is ideal for managing expectations and guiding adjustments to your plan, historical data can help educate and demonstrate vital investing principles.
Say, for example, your client is worried about the possibility of a recession. You can use the Past Crashes scenario to show how their portfolio would have fared in historical times of turbulence.
While no two macroeconomic events will be identical, looking at historical data can help highlight patterns. For example, historically, the investors who have remained invested throughout times of volatility have fared better than those who tried to time the market.
Running your client’s portfolio through the Past Crashes scenario can help them visualize how their holdings would have performed following the Great Recession or dot-com bubble, which reinforces what you’ve said about the importance of remaining invested through volatility.
4. Highlight Market Opportunities
Every cloud has a silver lining, and financial pros know there are often opportunities to be found, even in down markets.
Taking a holistic view of your market risk management and analysis can help you uncover hidden levers in the data — that is, surprising ways in which one corner of the economy impacts seemingly-unrelated spaces. If you can spot those unexpected connections, you may be able to take proactive steps to adjust for them.
Market dislocations often present possibilities, but they can be hard to spot if you’re not assessing risk comprehensively.
5. Integrate Risk Tolerance and Market Risk Analysis
Market risks will impact each investor differently. Each person has their own risk tolerance, investing time horizon, and holdings.
Selecting a market risk management and analysis tool that incorporates a client’s 3D Risk Profile with stress testing can help you quantify alignment between your proposed investment plan, hypothetical stress testing outcomes, and a client’s risk profile.
When market volatility causes misalignment between a client’s risk tolerance and their current holdings, you can proactively suggest adjustments to bring that risk back in line. The Model Management feature within Orion Risk Intelligence makes it easy to rebalance portfolios to align with risk scores.
And if the alignment is already there, having a visual representation of it can help your client see why they should stay the course with their investment plan.
6. Watch Your Own Market Risk
No one is immune to market volatility. Market risk analysis and stress testing can help you understand how the portfolios you manage may impact your firm’s revenue.
With Orion Risk Intelligence, you can drill down into your risk, assessing your standing at the firm, advisor, or individual client level. Armed with this risk-focused data, you can take steps to manage your risk more effectively for each of your clients and the firm as a whole.
Market volatility can cause unease and turbulence, but with the right tools and mindset, it also presents opportunities. Financial advisors who utilize market risk analysis and management tools can strengthen client relationships, provide more thoughtful recommendations, and insulate their firms from risk.
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