With the recent market turmoil driven by the coronavirus pandemic, people around the world are understandably worried not only about the safety of their loved ones but also about the status of their life savings.  In turn, financial advisors are working hard to help their clients think about (sometimes substantive) mid-course corrections to their plans but, at the same time, avoid panicked emotional reactions that could have even more detrimental effect down the road, and instead try to remain rational about their portfolio decisions. Yet the irony is that, in some circumstances, the process of becoming more emotional may actually play a crucial role in helping us address our irrational beliefs, and therefore the path to more rational decision-making may actually demand that we get more emotional first!

Research has found that emotions can play an important role in influencing decision-making by helping us form predictive models of the world that we are navigating. Our “emotional brains” can associate certain emotions with past memories and experiences that become encoded in our long-term memory (a process referred to as memory “consolidation”). Often this works well (e.g., don’t be mean to my friend, because then they won’t be my friend, and then I’ll be sad), but sometimes our emotional learnings can be triggered even when it is inappropriate for a given context, and this can lead to harmful rather than helpful behavior (e.g., don’t be assertive, because assertive people are rude, and people won’t like me if I’m rude).

In their book, Unlocking the Emotional Brain (UtEB), psychotherapists Bruce Ecker, Robin Ticic, and Laurel Hulley present a model of how emotional learning helps us navigate the world, and, importantly, how we can go about updating our emotional learning when it is leading us astray. According to the authors, we must engage in a process of memory “reconsolidation” in order to modify our emotional beliefs. The key to successful memory reconsolidation is to hold an emotional learning that is harming our decision-making in our consciousness—which involves getting into an emotionally activated state that really brings this emotional experience to the forefront of our mind—while holding some other experiential memory that contradicts the harmful emotional learning in our consciousness simultaneously. While our minds will generally be highly resistant to rationalizing away an emotional learning, the juxtaposition of two experiential memories in our consciousness simultaneously allows us to “unlock” a memory (i.e., deconsolidate a memory) and then change and “re-lock” that memory (i.e., reconsolidate) with some improved predictive model of the world (e.g., assertiveness isn’t always rude; perhaps we should be more assertive in the workplace than we are at a dinner party).

This idea has a lot of overlap with concepts such as Brad Klontz’s “money scripts” (i.e., beliefs about money which are so strong that we just act them out unconsciously). For instance, suppose John believes all rich people are evil (a money script) because some rich landlord wronged his family as a child. While there may be some logical basis for John’s belief in a very narrow context (e.g., perhaps his landlord truly did commit an evil act against his family), he’s currently overgeneralizing and that can be harmful. A key insight of UtEB is that we can’t just point this fact out to John and expect that the emotional learning will go away. Rather, we need to help him both unlock and modify this emotional learning by holding two contradictory experiential memories in his consciousness at the same time. The authors argue that, intentionally or not, many forms of therapy actually facilitate this type of juxtaposition which enables us to change our beliefs.

Similarly, in the current environment of turbulent markets, it may be important to acknowledge that we cannot simply rationalize clients away from their emotional beliefs. If a client is engaging in emotionally-driven investing, that investing may be rooted in some past emotional learning. Logic alone is not necessarily going to be enough to convince clients to stay the course. Rather, advisors may need to be able to help clients reconsolidate their emotional memories, which may require getting more emotional first before clients can update their predictive models of the world to incorporate the wisdom of not jumping ship.  This insight may also be useful when we encounter passive non-compliance (e.g., a client who agrees to take action during a meeting, yet fails to ever do so), as passive non-compliance might stem from a client’s ongoing (but perhaps unspoken) struggle with and emotional belief.

Ultimately, the key point is that sometimes more emotion, not less, is first needed to help clients make better financial decisions. Advisors can assist in this process by engaging clients in conversations and exercises which may help both identify the root cause of some problematic behavior (e.g., an emotional learning underlying a money script) as well as lived experiences which contradict this emotional learning and therefore can be used to facilitate a process of updating our predictive models of the world to better align with reality. Advisors who learn to do this well can reap the rewards of truly helping their clients improve their financial decision-making!

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With a market decline of nearly 30% in just a few weeks as the coronavirus pandemic expands and amidst eye-popping daily market volatility, most financial advisors today are simply trying to help clients to remain calm, stay the course, and not engage in panic-selling. As while it’s relatively ‘easy’ to keep clients focused on the long-term and to stick to their established plans when their retirement accounts are marching steadily higher, it’s a different story when a major disruption occurs. Yet, in practice, following the advice to “do nothing” in the face of historic volatility is challenging, as it’s human nature to want to do something – whether to fight or flee – in the face of a dangerous threat.

However, just because advisors may be guiding clients to “do nothing” when it comes to selling out of their portfolio, it doesn’t mean that nothing can be done. Instead, recent market volatility does present a number of other financial and tax planning opportunities, from the more ‘obvious’ topics, like rebalancing and tax-loss harvesting, to other potentially necessary adjustments, and even opportunities, that might not be readily apparent mid-crisis.

As a starting point, advisors should re-run clients’ retirement projections, which could mean communicating some not-so-pleasant news (such as having to adjust the plans they’ve made for their retirements and/or even their current lifestyle). But knowing whether their path has changed (or in some cases, not!), and by how much the plan will need to be adjusted (often far less than what clients fear) will go a long way towards mitigating their current stress levels.

Advisors can also help clients effectively adjust their budgets as needed. While many have likely already changed some of their spending habits (if only because they are constrained by social distancing from many of their usual activities), some will need to make longer-term adjustments. And while severe (but shorter-term) spending restrictions might seem like the immediate 'best' option to follow, oftentimes smaller (but permanent) cuts can be far easier to adapt to (and can actually be more effective in the long run!).

From another budgeting perspective, making contingency plans for next-in-line sources of cash, should a client deplete their emergency fund, is an important step. While such an event may not seem very likely at the moment, game planning for such an event can at least provide peace of mind, especially since some of those options (such as using a home as a source of funds) take time to secure.

Other potential planning opportunities include reducing loan payments to lenders making special accommodations for those affected by COVID-19, using the once-in-a-lifetime option to transfer funds out of an IRA and into an HSA, fixing “asset-location” problems that have (up to this point) been impractical from a tax perspective, and reviewing (and maybe revising) healthcare proxies, living wills, and advance directives to account for current travel restrictions and the healthcare implications, should a client contract COVID-19.

Ultimately, the key point is that financial advisors are uniquely positioned to help clients – almost all of whom are under an unusually high amount of stress at the moment – by making mid-course adjustments to their plans, staying focused on the bigger picture, creating contingency plans, and generally providing them with some peace of mind in these highly uncertain times. And more generally, doing something – with respect to the financial plan – can help clients feel like they are more in control (even as advisors guide clients not to panic-sell from their portfolios). As with everything, this too shall pass, but the important thing is for clients to take steps to control those things that are in their power to control.

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