Thought Leadership in Action

Last year’s swift bear market revealed that “clients working with RIAs tend to sell less and buy more” when markets tumble, according to a new academic paper.

Greg Bartalos, RIAIntel, March 4, 2021

Articles, white papers, and research reports regularly counsel advisors about how they should communicate with clients and manage their portfolios during sharp downturns. In the past decade, however, those recommendations largely remained theoretical as stocks rose ever higher in the longest bull market in history.

Last March, things got real.

The Covid-19 pandemic torpedoed investor confidence as the Standard & Poor’s 500 index plunged 34% between Feb. 19 and March 23 — the fastest bear market ever. This provided “a unique opportunity to examine any proactive or reactive measures” that RIAs implemented and whether those added value for clients, according to a recent academic paper. 

“Our research indicates that RIAs provided great value to their clients during the Covid-19 market crash, consistent with prior literature in this area of investment performance on subsequent client wealth,” wrote Yuanshan Cheng (Winthrop University), Tao Guo (William Paterson University), Janine Sam (Shepherd University), and Philip Gibson (Winthrop University).

Investors tend to “shift wealth from risky to safe assets in volatile and declining markets,” the authors note.  Advisors, however, managed client behavior effectively, ensuring that they didn’t panic when stocks swooned in 2020.

“Our findings show that clients working with RIAs tend to sell less and buy more during a market downturn,” compared to accounts with a higher percentage of client-discretionary options, they wrote.

Advisory businesses with a larger portion of high-net-worth clients were “significantly” less likely to underweight positions during last year’s bear market, according to the study.

Moreover, investor sentiment entering the bear market influenced actions, too. “Investors who were most optimistic in February had the largest decline in expectations and sold the most equity,” noted the authors, citing a study based on a Vanguard survey.

And unlike those investors who lost faith as stocks crumbled, RIAs consistently projected optimism during the market's darkest days, sticking to their traditional mandate of keeping emotions from influencing investing decisions.

“We found that RIAs communicated frequently with their clients during this period, reporting positive financial news even during extremely volatile trading days.” They did so “even during extremely negative return days.”

Some RIAs used Twitter to quickly reach clients, the report says, with advisors tweeting more on days experiencing extreme downturns. In those instances, advisors sought out “positive news in order to comfort clients.”

The study, which examined RIA communication with clients and the impact of market volatility on their investment portfolios, is the first, according to its authors, that addresses the topic “using manually downloaded data that combines 13F filing with ADV forms together with RIA tweets.”