In overwrought markets, advisors must get clients on track with fundamentals and empathy

Were part of a culture, says Phil Pearlman, executive editor at the financial communications platform StockTwits, that has been through the wringer for the past 14 or 15 years. With all thats happened, were dealing with very high levels of emotional volatility that are also predictive of post-traumatic stress, so if were looking at the market as human, as the sum of collective sentiments, then we are at a point where were extremely sensitive to any kind of stimulus.

Thats why now more than ever, financial advisors need to have nerves of steel if theyre going to reason with overwrought investors and help them circumvent excesses of behavior such as that demonstrated in reaction to the recent news about the state of Cyprus banks.

Its an approach that Pearlmanwho holds a doctorate in clinical psychology and who has in the past managed a long-short equity hedge fund focused on behavioral strategiessays calls for advisors to gather their wits about them and stay the course in order to stick with the fundamentals and get their clients back on track as soon as possible.

As an advisor, you have to have had a plan laid out with your client, you have to have a strategy in place and at times like these, youve got to sit them down and get them to understand the rationale of that plan, its goals and why it was set up in the first place, he says.

Doing that not only requires levelheadedness on the part of an advisor, it also calls for empathy, Pearlman says. If clients are to buy back into the rationale of their financial plan at times of extreme stress when their rationality is thrown off balance, then advisors need to have formed a good relationship with them, one that is based on trust, understanding and responsibility that has been cultivated through time.

A financial advisor has to know and feel who his or her client is, how they think, how they feel, how theyre going to react; being able to do that depends on the relationship that the advisor has been able to develop with a client, Pearlman says. So both of these, the importance of the fundamentals as well as the empathy element of the relationship, should be preparatory, and neither of them should be reactive. Advisors who find they have been able to emphasize the rationale through empathy beforehand will find theyre on good grounds in acute crisis periods.

Given the state of the current collective markets, even those advisors who are extremely well-prepared and have made an effort to understand their clients psyches and behavioral patterns are bound to be frazzled by different events as they occur, and dealing with their clients in the right way means they need to get themselves together first, Pearlman says. Its important, he believes, for advisors to take a step back from any proceedings, collect their thoughts and approach their clients in an even keel manner, because in times of stress, the face an advisor puts on is critical, he says.

For all intents and purposes, the markets are going to remain tense and highly strung for some time to come. After a string of crises including Y2K, the bursting of the tech bubble, 9/11, Anthrax and the 2008 financial crisis, to name a few, it is clear that people are exhibiting the features of what Pearlman calls a trait, which, as opposed to a state, is something that is prolonged and sustained over a long period of time.

I could be a generally happy person, and one day I get up and something went wrong and I feel down, and that is my state at the time, but there is a difference between having a bad day and feeling depressed, he says. A trait is more of a personality characteristic. The nature of reactivity and how prolonged its been has features of being a trait that is much more stable of time. We are going to need a significant period of stability of healthy markets in order for us to shift trait, so I think we as advisors should know that people are going to be reactive for a time and be prepared to deal with that.

StockTwits streams consist of ideas, links, charts and other important financial data that are summarized within 140 character messages. The company was founded in 2008 and its platform is also integrated with the major social platforms, including Twitter, Facebook and LinkedIn, thereby making it easy to incorporate financial communications into investors broader social interactions whenever they choose to do so.