It’s no secret that the United States economic outlook has been bleak. In the last three years, inflation rose from a modest 2.3% to an outrageous 7%, the Dow Jones entered a bear market, and rumors of an impending recession swept the nation. Market volatility, or the frequency and magnitude of price movements, has been a mainstay, causing many fiduciaries, attorneys, and family members to have difficult and often uncomfortable conversations with beneficiaries. 

Though these conversations may be difficult, they are important. Why? Because the lack of communication, or even ill-prepared communication, can cause fear to fester and potentially negatively impact investments. 

Although we’ve experienced market volatility over the past three years, the outlook is brighter. But that shouldn’t dissuade you from having recurring conversations about the market, investments, and concerns with beneficiaries. 

Below we touch on what market volatility is, what can cause market volatility, how to keep beneficiaries well informed, and how to prepare for difficult conversations. 

Understanding Market Volatility 

Market volatility refers to the fluctuation in price of a security or market index over a period of time. The stock market is filled with twists and turns, ups and downs – that’s what we call volatility. When there’s volatility, the price of stocks change rapidly and often unpredictably.

Volatility can happen for a number of reasons – political events, economic changes, or even consumer sentiment. And while the official measurement of stock market volatility has unaffectionately become known as the “fear index”, market volatility is not always a bad thing. In fact, market volatility often presents an opportunity to buy desirable stocks at lower prices and make solid returns when the market bounces back. 

Volatility exists in nearly every aspect of the stock market. Take for instance sectors. Some sectors are more susceptible to volatility than others. Energy, commodities, financial, and technology tend to experience higher volatility than other sectors, like consumer staples and utilities. Volatility can also happen during certain times of day and certain days of the week. 

Preparing for Your Conversation 

Market fluctuations can stir up emotional responses for beneficiaries who are concerned about the current and future state of the trust. Fear and uncertainty can arise, leading to impulsive decisions related to the trust’s investments. 

As fiduciary, navigating a turbulent market while safeguarding your client’s financial well-being in compliance with the Uniform Prudent Investor Act (UPIA) can be taxing. But, there are steps you can incorporate into your process that will leave clients and beneficiaries feeling less anxious during turbulent times. 

Understand Concern

Before jumping into conversation, try first getting insight into the beneficiary’s top concerns. Are they most worried about potential loss of wealth that will impact their financial security? Or are they concerned that the downturn will hinder progress on a specific financial goal, like education planning or buying a home? Whatever the reason, it’s key to first understand where the fear originates in order to have more tailored solutions. 

Goal Review

Next, review the goals of the trust and goals specific to the beneficiaries. The trust might have upcoming distribution amounts and schedules based on age or specific requirements (e.g. graduating from college). The beneficiary may have financial goals that are time-bound, like debt repayment or expanding a business, or goals that are more fluid, like legacy preservation and charitable contributions.

Reviewing the established goals and objectives before sitting down with the beneficiary can help you more easily navigate the conversation and make recommendations based on the goal’s timeline and volatility outlook. Consider whether you may need to reassess any financial priorities or adjust risk to protect the trust’s assets.  

Gather Information

People are visual learners, so it may not be enough to simply inform the beneficiary about market volatility, you may need to show them how it has impacted their investments. Before connecting with the beneficiary, be sure to pull all relevant data or statements that can build a better picture of how the turbulence has affected investments. By analyzing the data together via a visual presentation, the beneficiary has concrete insights into the volatility and where you plan to pivot. 

Focus on Long-Term Strategies 

Fear-based decisions can hurt long-term returns, so it’s important that the beneficiary does not feel you, as the trustee, are making emotionally-charged investment decisions. Instead of engaging in fear mongering, alleviate the beneficiary’s concerns by focusing on long-term investment strategies. 

Leveraging the expertise of a qualified investment advisor can be a fantastic inclusion into the conversation. The financial advisor can help wade through difficult financial conversations and assess how market volatility will impact the beneficiary in the short and long-term. They will also have key economic insights that may help ease client and beneficiary concerns. 

Handling Volatility 

Now that you’ve had the opportunity to connect with the beneficiary, move forward with the investment strategy that puts the client’s best interests above all else. Here are a few considerations to help navigate turbulent times. 

Regularly Communicate

One fear-easing conversation is simply not enough. Plan to set up recurring appointments with your client and the beneficiary with a standing agenda item to review current economic conditions. 

If you’re not comfortable speaking to the state of the economy, request the financial advisor be present for the appointment to address the current financial climate, provide an update on goals, and answer any other pressing financial questions. 

Duty to Diversify

A properly diversified portfolio can help reduce risk. A financial advisor is best suited to help construct a portfolio that is properly diversified across asset classes, sectors, equities, interest rates, and volatility. Based on the financial goals of the trust and beneficiary, the advisor will also organize a strategy with liquidity needs, tax savings, and UPIA compliance in mind. 

Partner with a Professional

The fiduciary’s goal is to provide stability, peace of mind, and prudent financial management for their clients. Partnering with an investment advisor experienced in the complexities of trusts and estate planning removes much of the investment related burnout many fiduciaries experience. 

The investment advisor will create an appropriate financial plan tailored to the specific needs, goals, and circumstances of your client and the beneficiaries, helping to reduce investment related litigation and compliance risk. 

An investment advisor can also help reassure your client and beneficiaries during market volatility, to help ease concerns and remain focused on long-term goals. 

Stay the Course

Market volatility can be a tricky concept to explain to those not familiar with the world of investments. During these turbulent times, it’s critical to remain proactive with your clients and their investments and continue keeping long-term goals in mind. Remember to engage frequently in open and honest conversations and lean on your financial advisor to provide economic context during appointments. 

Adapting to changing circumstances will help your clients achieve their long-term financial objectives. Prudent Investors can help. We work closely with fiduciaries to actively manage their clients’ investments in compliance with the UPIA, assist in asset administration, and evaluate existing portfolios for long-term success. If you’re concerned about navigating the current economic climate and want to partner with an investment advisor experienced in the complexities of trust and estate administration, we invite you to connect today


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