Conduct a financial emergency drill

Conduct a financial emergency drill with your clients


Scott Critchfield, Director – External Practice Development

Great Practice Solutions

Like it or not, emergency drills are a part of life. Schools, office buildings, hospitals and other institutions conduct fire and tornado drills and emergency lockdowns to protect those inside. They do it when skies are clear and emotions are calm. However, emergency drills aren’t limited to physical places. There’s a case to be made for conducting a financial emergency drill with clients to protect their assets in times of market turbulence.

As a financial advisor, your job is to prepare clients to manage through emergencies like 9/11 or a market crash. That includes helping them manage risk and prepare for the unthinkable. Use this four-step approach to risk preparedness to guide your discussions.

  1. Set the stage

Be clear about what you want to discuss, and be mindful to use language that your clients will understand. When necessary, define terms that aren’t familiar to them, such as risk tolerance or cost basis. A sample intro to the discussion might look like this:

“Mr./Mrs. Client, we’ve learned from the history of the markets that we will see a significant drop in market indexes about every five years and that dip will usually last 12-18 months. That means a person retiring at age 65 could see upwards of five separate adjustments (or “market corrections”) while they are in retirement.

“We’ve been very fortunate to have experienced relatively uninterrupted growth for a long time. So I think you would agree that at some point, a downturn is possible. With that in mind, I’d like to do a practice drill to identify actions steps we would both take should a market drop occur. Would that be helpful?”

  1. Identify an action plan
    • Put the client in the moment. Revisit past events and associated portfolio/market performance
      • 2008 financial crisis
      • 9.11.2001 terrorist attacks
      • 2000 recession and dot-com bubble
      • 1987 Black Monday
    • Build a plan.
      • Identify a series of steps to take, including a communication timeline and account review process, in the event of a market correction or major economic crisis.
      • Revisit the client’s current financial plan and reassess risk tolerance across each account. Is the client still comfortable with his/her goals in light of this discussion?
        • If yes, hold fast to the plan and portfolio.
        • If no, determine where the risk(s) lies, discuss necessary adjustments and take action.
      • Look at current events/circumstances and discuss how long the client anticipates the current state to continue. Identify opportunities.
        • Short term: Is this an opportunity to improve portfolio positions?
        • Long term: Are there gains that should be locked in now? Is the client over exposed in any positions? Does that over exposure create risk that needs to be managed?
        • Agree to refrain from making uninformed, emotional decisions until there is more information on the direction/trend of the indexes. A one day drop does not require action.
    • Identify opportunities, such as improving the client’s position in a particular holding.
    • Identify positions where the client could harvest some gains now and have resources available to reposition into other areas at a lower cost basis.

The goal is to engage your client in a discussion now when there is no emotion or urgency involved in the decision.

  1. Confirm contact information and key persons

Make sure you have the client’s most recent contact information, including key people contacts. If something were to happen, you and your client want to be able to reach each other immediately and take the agreed upon actions.

  1. Leverage virtual tools

Your emergency drill is a perfect opportunity to promote tools. At Waddell & Reed we offer WealthLink – powered by eMoney – a digital solution for organizing and simplifying clients’ financial lives in one secure location. Specific to your practice drill, WealthLink allows you to model different scenarios to simulate ‘storms.’ It allows clients to see all accounts linked through WealthLink and quickly determine the overall impact a market correction could have on their plan and their investments.

Now is the best time to conduct financial emergency drills with your clients so you can make pre-planned, deliberate decisions while the weather is calm.

Plan for the unexpected with your clients.

Our Great Practice Solutions program offers risk preparedness and other practice development insight to help you optimize your business.

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