How to Coach Your Clients Through a Recession

Three Strategies for Three Different Scenarios

Advisors are no strangers to recession. But it’ll come as no surprise that in recent months, the topic has become a client hot button. With analysts debating whether a recession is likely, or even if we’re in one already, the investment professionals I speak to are understandably concerned. Most of us in the industry think of the long run; we believe, based on precedent, that markets are resilient. The short term, however, is a different story, and Advisors are looking for ways to deliver a positive message and keep their clients calm, and on course, despite the volatility.

The two most common questions I hear relate to outlook. First, clients are interested in historical performance—how long it takes markets to bounce back from a recession. And second, Advisors want to know what our Multi-Asset Solutions Team (MAST), which specializes in comprehensive market analysis, is projecting so they can utilize this in ongoing conversations. Even when armed with data and expert commentary, however, opinions may differ—will it be a “soft landing” or a long and painful downturn? Providing a well-reasoned, emotionally neutral opinion is table stakes for a successful investment professional. But navigating the many possible outcomes—and recommending the right solutions based on differing risk tolerances—can prove challenging.

Here, I examine three hypothetical scenarios with three different clients—bearish, bullish, and middle-of-the-road—and provide some key talking points for each.

Client Conversation #1 – Bearish Outlook

If we do experience a “hard landing”—or if a client believes we will—an Advisor can approach the conversation as a two-step process.

First, reiterate the importance of staying invested—even through a recession. While the current economic environment is unfamiliar to many investors, it isn’t unprecedented. When markets become volatile, most investors are prone to overreact and sell at the wrong time, accepting substantial losses. Over the long term, however, markets are resilient and investors who stay invested will recover their losses and grow their wealth. Remember: it’s not about timing the market, but time in the market.

Step two is recommending strategies that work for the client’s bearish outlook. If they believe that tough times are around the corner, you can tell them that there are certain investment factors that are built for just this type of scenario—and evidence from past downturns to prove it. Two defensive directions to consider are low volatility and higher dividend solutions. A “get paid while you wait” approach addresses key client concerns, with dividends providing income while low-vol investments provide a smoother ride through market turbulence.

Client Conversation #2 – Middle-of-the-Road Outlook

If you or your clients are expecting a less ‘dire’ recession, you’re not alone. This is the result that seems most likely, given markets’ tendency to bounce back sooner than one might think. And since research has shown that trying to time the market is extremely difficult—a fact worth mentioning to your clients in all scenarios—investment solutions that include the “best of both worlds” in an effort to optimize risk-adjusted return will likely appeal to the broadest number of investors.

One strategy to consider is a ‘barbell’ approach. By combining some defensive positioning, like a dividend or low-vol solution, with a growth component like Quality, an investor has an opportunity to capture market upside while also hedging against the possibility of a recession.

Client Conversation #3 – Bullish Outlook

With recent comments by U.S. Fed Chairman Jerome Powell indicating that high interest rates will likely persist into 2023, is there still a case to be made for a bullish disposition? In the mid-to-long run, absolutely. Many investors have a lengthy time horizon—they’re thinking not in terms of years, but in terms of decades. For those clients, the best approach may be to stick with Growth. But it’s crucial they understand that it could be a bumpy ride in the near term.

For bullish investors or those with time to spare, a strategy worth considering is a combination of growth Quality, such as the BMO Global Quality ETF Fund, and a vehicle like the BMO Equity Growth ETF Portfolio to capture neutral beta. More volatile strategies may also make sense as long as you’re able to demonstrate that the risk is justified by the potential return. Tech-heavy options like the BMO Nasdaq 100 Equity ETF Fund (packaged with a currency overlay to reduce risk exposure) or renewable energy solutions such as BMO Clean Energy ETF Fund may be the right fit for clients seeking aggressive strategies.

Three Key Solutions for Today’s Environment

Sometimes, a client may ask—what happens if you’re wrong? What if the markets zig when you thought they would zag? Most Advisors I know would love to be asked this question, because not only does it indicate an engaged and interested client, it also offers an opportunity to demonstrate exactly what a worst-case scenario would look like. By taking clients through the historical data—the worst recessions, for instance, and how long it took markets to bounce back from them—you can really hammer home the benefits of staying invested. Presenting challenges ahead of time gives an Advisor a better chance of convincing a client to stick with the plan.

By the time recessions are officially declared, often a lot of the pain has already been felt, because expectations get baked into the market. That potentially makes it a good time to start putting money back to work. Taking all of the possible scenarios into account, a question I often get from Advisors is—what’s the best solution for my clients? There’s been a belief in some quarters that you’ve got to choose a particular investment and never waver. I think that perspective is changing, as rotating to the sectors, factors, and geographic allocations that typically do well in this kind of environment just makes sense.

We don’t know for sure whether we’re at the end of the market cycle or the beginning of a recession. But by combining strategies for those two possibilities, you can help clients prepare for a range of likely outcomes. The solutions we’ve been recommending most often are Quality, Low Vol, and Enhanced Dividend. As always, staying on your client’s radar and encouraging them to stay invested in key.

BMO solutions that you may consider for this type of three-pronged approach include:

BMO Global Quality ETF Fund
BMO Low Volatility Canadian Equity ETF Fund
BMO Low Volatility U.S. Equity ETF Fund
BMO Covered Call U.S. High Dividend ETF Fund
BMO Covered Call Canada High Dividend ETF Fund

Please contact your BMO Global Asset Management wholesaler for any support and guidance.

¹ As compared to an investment that generates an equivalent amount of interest income.