The Financial Planner’s Guide to Seeing Past the Pandemic in an Era of Global Uncertainty

Lessons to Learn and Unlearn from the Great Recession

On top of all the same fears everyone else had as the novel coronavirus circled the globe, your phone was ringing off the hook and your inbox overflowed with other people’s fears as your clients saw the ticker go red with triple-digit drops.

The big swing back we’ve seen with the $2 trillion shot in the arm the economy received courtesy of the CARES Act might be buying you a little breathing room right now, but there isn’t a planner out there who doesn’t have ulcers trying to guess what’s coming next.

It’s a stressful time to be a financial planner.

For anyone who has been in the industry for more than a decade, it’s all eerily familiar… shades of the fall of 2008, as Lehman Brothers fell and the global financial system tiptoed on the edge of a cliff—then fell off.

That’s two once-in-a-lifetime financial crashes in one lifetime. And, for better or worse, that lifetime isn’t over yet.

If you thought the Great Recession reshaped financial planning, you haven’t seen anything yet.



The Benchmark of the Great Recession Could Be Scratched Off By the Time the Dust from the Pandemic Settles

The Great Recession is the inevitable lens through which both planners and most of their clients will view the COVID-19-induced recession to come. That experience offers some valuable, tested approaches for handling this event, but possibly also some bad habits that may not work as well this time around.

Financial planners came out of the Great Recession in fine shape when it came to retaining clients and having work, but it took a toll. Studies suggest that a whopping 93 percent of active financial planners at that time reported medium to high levels of post-traumatic stress symptoms.

Worse, according to that same paper, there’s reason to believe that the stress affected their judgement, and not in a good way. Many still rocked by the shell-shock of major losses became overly cautious, causing clients to miss out on the recovery.

Now that it’s happening all over again, will financial planners be thrown even further off track? Or will that previous experience help them adapt to current events faster and better than the last time?

Complicated Situations Are Clear Opportunities for Financial Planners

There will be no real financial recovery without a public health recovery; no industry exists in a vacuum where workers and customers value commerce more than their lives and the lives of their families.

If there is a bright spot right now, it’s that the tools currently available for fighting COVID-19 appear to be effective. The social distancing efforts worldwide, where implemented, are slowing the spread to the point where healthcare systems are no longer overwhelmed and can save more patients.

But it’s those exact disease mitigation efforts that are causing all that red to show up on Bloomberg terminals. Social distancing is a crude tool that wreaks economic havoc and is unsustainable in the long term. It’s unclear when vaccines, treatments, or other effective measures might replace it. This is the core tension that is facing planners right now—what degree of financial hardship must be inflicted to avoid a healthcare catastrophe?

Although the data won’t all be in for months or years, that tension all but assures a historic downturn in financial markets. Beyond that, the other areas where financial planners operate—education, business, retirement—are bound to see enormous disruptions as well.

Finding the path through that dichotomy will be exactly the place where the knowledge and experience of financial planners will come into play.

The Immediate Effects of COVID-19 in the Financial World

Although the Great Recession is our most natural point of comparison, the current situation is bound to be far more dire. According to the IMF, we’re seeing the worst downturn since the Great Depressionhappening right now, with a projected negative 3 percent growth rate for 2020. The United States alone will drop at twice that rate.

One of the ways the last catastrophe reshaped financial planning was by revealing that no sector was safe. That’s been borne out with COVID-19 as well; traditional safe havens haven’t been, and even well-balanced portfolios have plummeted.

Job losses have been absolutely unprecedented. Disruptions are even more widespread. Businesses that have been able to shift to remote work have done so, but the impacts on their efficiency and earnings from that hasty process aren’t clear. That could create further job loss, and more business failures in coming months.

Although the situation is not guaranteed to continue along those lines, most planners recognize that forecasts at the moment will be uncertain at best… as will recommendations based on them.

Markets have already bounced off the lows from the COVID crisis, but it’s likely we haven’t seen the last of the big drops, either. Algorithmic trading tends to exaggerate how investors react to headlines, and as we’re seeing, headlines and investor sentiment aren’t science, and certainly aren’t in line with what’s going on in the broader economy.

Current bailout efforts have proven difficult to implement and woefully inadequate. Government response has not been unified, and in some cases—such as PPE and testing procurement—appears to be actively at odds at different levels of governance.

For financial planners, this all represents a number of different challenges:

  • Lack of liquidity
  • Clients in personal crisis and financial difficulty
  • Lack of data and insight into the current situation
  • Understanding how markets are affected by government intervention versus fundamentals

And you are having to handle that in the middle of huge disruptions to your own business – if you work for a firm, you’ve gone remote, and if you’re an independent advisor responsible for your own employees, you’ve had to rapidly get them set up to work from home.

The Most Important Aspects of Financial Planning During COVID-19 Could Be Soft Skills and a Light Touch

A lot of your work as a planner related to the COVID-19 recession has already happened. Planning is all about doing essential work to anticipate the unexpected ahead of time – educating clients and determining their goals, building diversified portfolios in line with those goals, and managing their expectations.

Planners either did those things well or they didn’t, and the results are already becoming clear as the crisis plays out.

Traditional down-market actions like rebalancing and tax-loss harvesting are happening, but a lot of what most financial planners are actually doing right now is hand-holding.

Most planners are very familiar with being on the receiving end of displaced anger over events outside anyone’s control. Dealing with client emotion is part of the job.

You could say understanding the role of emotion in financial decisions is one positive that came from the Great Recession. Having seen exactly what happens when the lizard brain takes over, financial planners today are better equipped to talk clients off the ledge when the data doesn’t  actually make a case for jumping.

That’s something that has become even more complicated in today’s hyper-connected environment.

Though keeping clients informed can be counted among every planner’s primary tasks, these days, it may be more accurate to view it as keeping them from being misinformed. The proliferation of stratified and politicized information coming at us from a thousand sources can lead clients to conclusions that support a very different agenda than protecting their portfolio. Financial planners have to delicately unwind the webs of pseudo news to help clients focus on data-driven models that are more accurate than their Facebook feed.

Panic caused a lot of people to cash out near the bottom of the 2008-2009 slump, with or without the blessing of advisors. They largely missed the major bounce that happened from 2009 through 2019, bringing massive reductions in net worth. So keeping clients in the game and away from doom and gloom narratives may be the most important thing that planners are accomplishing right now.

Even Black Swans Come with a Lot of Gray Feathers

Keeping clients calm in the middle of the crisis is just the first step. Figuring out what to do next is a whole new ballgame. The closer you look at the trends and data, the more complex the financial planning job for a post-COVID world starts to look.

Although the crisis has hit quickly, it is likely to last for a long time, and go through sets of phases that we can only guess at today. It may be nothing at all like the recoveries that markets have seen in the past. If unraveling the complexities of sub-prime derivative markets seemed complicated, it was a cakewalk compared to the various factors that will be fueling moves in the financial markets over the next few years.

Uncertainties Can Be Crippling to Traditional Planning Processes

The early phase of any crisis puts financial planners in a bind: there’s tremendous pressure to take action, but far too little information to act on.

COVID-19 is delivering more uncertainty than most catastrophes. Some of the major unknowns include:

  • Disease Progression – While planners are focused on financial market data, it’s also important to factor in data on COVID-19 itself. And there is very little high-quality information about it to rely on yet. Much is unknown about how the disease spreads, progresses, or even the long-term physical effects on those infected. That uncertainty impacts everything else that is currently in play.
  • Vaccine or Treatment Development – The development of a vaccine that prevents the disease, or effective treatment to reduce the lethality, are major goals for pharmaceutical manufacturers and the healthcare industry right now. But the timeline for development, and whether or not they will become available at all, are still big unknowns.
  • Lockdown Duration and Recurrence – No one is exactly sure how long social distancing rules will have to remain in place, or how severe they have to be to do the job. In the real-time experiment happening, some states and countries are doing better than others, but almost all of them are playing it week-by-week. In the absence of treatments or other preventative measures, society may have to revert to the one effective approach we’ve found so far – more lockdowns. With future outbreaks, local or regional lockdowns could be reimposed at any time, leading to further business disruptions that could appear almost at random.

All of those factors simply address unknowns surrounding the disease itself. But COVID-19 might turn out to be the most predictable part of the crisis compared to the human factors.

A Lack of Clarity On How World Governments Will Intervene

If forecasting the progression of the disease is difficult, that’s nothing compared to guessing how global authorities will handle the epidemiological and economic response. Unprecedented factionalism in American politics makes the governmental response particularly difficult to forecast. The 2009 ARRA (American Recovery and Reinvestment Act) debates over the widespread industry bailouts, as contentious as those were, may look like a mouse squeaking compared to the uproar that is likely to erupt over COVID-19 recovery proposals.

With the country entering the crisis with both economic disparity and national debt already at record levels, everyone will have a bone to pick with anything and everything that gets proposed, leaving little ground for cooperation. Even if lessons were learned from what was handled well and poorly in the outcome of interventions to the Great Recession, the political lenses now may be too strong to take advantage of what the data shows.

In the same vein, ongoing attacks on multinational systems like the World Health Organization, may make a coordinated, global response difficult or impossible. This could both lengthen and deepen the crisis unnecessarily, and in ways that are hard to predict.

Planners Need to Avoid Fighting the Last War

As valuable as the experience of the Great Recession is right now, it’s important for planners to note the differences too and avoid simply trying to fight the last war. One of those is the distinction in the root causes of the events.

The 2008 crash resulted from fundamental instabilities in the economic system itself; wealth built on illusions. But COVID-19 is an exogenous hit on an economy that was firing on all cylinders in a relatively strong global market.

The job cuts have been sharper and faster with COVID-19, but the overall financial system is better capitalized and more effectively supported, short-circuiting concerns over bank failures and other systemic shocks. Although government-backed loans to afflicted businesses haven’t proven to be a panacea, banks have been quick to issue credit, which will help both businesses and consumers weather the downturn in ways that weren’t possible in the credit-tight environment of 2009/2010.

Many economists in 2008 were terrible at predicting knock-on effects from the sub-prime meltdown. Many of those same economists will be really bad at predicting the downstream effects of the current situation. Planners will have to avoid placing too much value on models generated out of the Great Recession, recognizing that the real lessons are in flexibility and adaptation rather than rote responses.

Financial Uncertainty Rises Quickly… but Takes a Long Time to Subside

Uncertainty is job security for financial planners. If the future were clear, financial planning would be easy, and no one would need you.

But who plans for the planners? What will the effects on the industry itself be in this unique set of circumstances?

If you just look at the lessons from the Great Recession, the long-term effects of the crash seem pretty positive for financial planners. Although assets under management were reduced, the importance of planning and allocation were seared into the brains of new clients, and financial planning rosters expanded significantly.

But will the very fact that it’s the second such event in a decade make it different this time around? If once-bitten clients were already twice shy, what happens to those who have been nipped twice?

There is reason for optimism for both you and your clients, though, fueled by some factors that are being broadly overlooked outside the planning community.

Labor Market Disruption Will Require Adjustment

The speed at which COVID-19 has caused shutdowns and layoffs has been unprecedented. Paradoxically, that may be a positive for economic stability in the long-term; businesses haven’t been able to drag things out and aren’t failing from exhausted cash reserves yet. The steep cuts may make rehiring a faster process.

After the Great Recession, the job market itself was reshaped dramatically, with recovery coming not in the so-called middle-skill jobs where the losses were concentrated, but in lower skill, lower paying positions.

A side-effect of that was widespread labor market withdrawal. Although the U.S. was at record levels of employment heading into COVID-19, that obscured the fact that the overall labor market participation rate was permanently depressed by the recession—down by a full point between 2007 and 2017 according to the Federal Reserve.

Will remote work cause a similar crowding out of some large classes of jobs? Will early retirements become en vogue for workers who can’t make the shift? Planners may be instrumental in helping clients navigate their way through more dramatic changes in the job market that spring from COVID-19.

Higher Education Will Be Big, But Also More Expensive

Financial planners are often asked to help families plan for the cost of sending kids to college, and this is an area that could get a lot of attention in the coming days. One traditional response to mass unemployment is a big pivot to education.

COVID-19 is hitting higher education hard right now. With lockdowns forcing many campuses to shift over to entirely online classes, many students are simply throwing in the towel – one survey we looked at found that more than 20% of current college students are considering transferring or taking at least one semester off due to the crisis.

Many American universities, particularly on the West Coast, have come to rely on overseas student enrollment to prop up balance sheets. In 2018-2019, according to CNBC, international students brought in some $41 billion.

This trend was already on a downward slope due to Trump era anti-immigration policies. More of those policies are likely to be on the way as a reaction to COVID-19, and in any event, global travel may be curtailed for years in any event.

That’s going to cut into the ability of colleges to offer financial aid to American students, and may see them cutting programs that are less popular with full-tuition students. That trend is going to make financial planning for either new or returning college students paramount.

Retirement Planning May Change for Generations

In addition to the possibility of a wave of early retirements that require planning in the wake of job market disruptions, planners will have an eye on the horizon for clients too young to consider that option – the millennials are on their way to your office in the years ahead, and may need to downshift their expectations yet again.

Much has already been made of the Great Recession’s effects on the abilities of millennials to gain a solid economic foothold to build on:

That’s fueled some resentment of the comparatively wealthy Baby Boomers and Gen Xers, and a real fear that not only will social safety nets have evaporated by the time the first wave of them hits retirement age in 2046, but that their feeble attempts at building their own savings will have been wiped out by two major financial crashes during their prime working years.

But as planners who work on estate and trust matters understand, that big wealth bubble built up by Boomers is going to go somewhere as they pass away. A study by Boston College estimates that nearly $60 trillion will be passed on by 2061.

That’s going to create a particular target market for financial planning: a mature generation that values wealth but has little direct experience in managing it.

For financial planners with steady nerves and sufficient blood pressure medication on tap, it may even be possible to enjoy the coming months and years. It’s the second time in a lifetime that you may see, and participate in, a wholesale reshaping of your entire industry.