Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
The standard advisor communication during a market shock has a recognizable shape: “stay the course,” “diversification protects you,” and the all-purpose “these things pass.” I understand the instinct. The calm tone rests on an assumption that clients must be steadied before they can absorb anything useful, and for some clients, in some moments, that instinct is right.
On the other hand, I was taught during my career to do the opposite. Lead with the bad, then give the good. The first time I heard it, I was sure it was bad advice. I had spent my early years on Wall Street minimizing the bad, a practice reflecting an industry built on blame assignment. Young associates dependent on annual bonuses do not want to be the object of blame from those above when things go wrong, and things go wrong under time pressure.
More than four decades later, I’m convinced that framing bad news first is a practice to be embraced rather than feared. More importantly, the research in cognitive psychology and behavioral finance increasingly supports it.
The Psychology of Information Order
How we order a mixed bag of information sets in motion stress responses that can either escalate or deflate tension. Consider a simple example. If the people who know you have learned you deliver good news to soften bad, over time they respond with less joy to the good because they have been conditioned to wait for the other shoe to drop. The conversation becomes centered on relief rather than optimism, and that is not where we want our client conversations to live.
While many of us can relate to the above, hard research gives us four distinct mechanisms for why information order matters so much.
Loss Aversion
Kahneman and Tversky’s 1979 prospect theory, replicated across 40 years of experimental economics, established that losses register with roughly twice the psychological weight of equivalent gains.
A surprise 10% drawdown after a year of advisor reassurance feels closer to a 20% drawdown, because the loss is compounded by the revealed failure of the reassurance. Front-loading the possibility of loss absorbs the psychological cost before any drawdown occurs.
Information Avoidance
Golman, Hagmann, and Loewenstein’s 2017 review in the Journal of Economic Literature documents that humans systematically avoid uncomfortable information, even when it would materially improve their decisions. Karlsson, Loewenstein, and Seppi (2009) extended this to finance as the ostrich effect: Individual investors check their portfolios less frequently during bad markets.
Concealment is not protection. It defers the moment of engagement until the situation has deteriorated and the response window has shrunk.
Asymmetry Between Anticipatory and Realized Anxiety
The anticipation of an unnamed threat generates more anxiety than the anticipation of a specific, named one. Clients who sense trouble without specifics imagine scenarios reliably worse than reality.
Hebb first documented this finding in his 1946 work on fear, and Borkovec later extended it through research on generalized anxiety. Naming the bad news is a relief function. It replaces generalized dread with specific concern, which is both more manageable and more actionable.
Inoculation Theory
William McGuire’s 1961 persuasion research showed that people exposed to a weakened form of a threatening argument develop increased resistance to the stronger form when it arrives later. Compton and Pfau have extended this work across public-health and political contexts with consistent results: Pre-exposure to a small dose of challenge builds durable resistance.
Leading with calibrated bad news inoculates clients against panic. When a drawdown arrives, they have already rehearsed the response in a milder form.
These four mechanisms all point in the same direction. Concealing bad news increases total client suffering, decreases decision quality, and defers, rather than eliminates, the eventual emotional cost.
What Leading With Bad News Actually Accomplishes
Before we put the research into practice, we must confront our own discomfort at ripping the bandage off before applying pain relief. I still feel that pinch after decades of leading with the bad, and I know from experience that once the barrier is pierced, the rest flows with less anxiety and greater focus on how I have framed the context and the action plan. My collective experience reflects what the research predicts, with five specific benefits.
Credibility Through Information Integrity
A client who consistently receives the difficult news first learns the advisor is not filtering information for their comfort, which changes the baseline expectation of every future communication.
Reassurance from an advisor who has demonstrated a willingness to deliver bad news carries different weight than reassurance from one who has not.
Trust compounds across every subsequent interaction, and every future reassurance reprices upward because the client knows it was not manufactured.
Reduction of Advisor Stress
James Pennebaker’s 1989 research in Advances in Experimental Social Psychology shows that concealment extracts measurable cognitive and physical costs from the person holding back information.
Advisors absorbing those costs lose focus for the substantive work. Leading with bad news eliminates the load and moves the conversation to substance, which is where the advisor adds value. The psychological relief is not for the client alone. It produces a better advisor.
Disarming Client Imagination
Clients who suspect trouble without specifics fill in the blanks, and the blanks they fill in are reliably worse than reality.
A client told their portfolio has exposure that could produce a 6% to 9% drawdown under certain scenarios is working with bounded information. A client told only that markets are volatile but their diversification should protect them is working with unbounded worry.
The first client sleeps better than the second, even though the first has been told something that sounds worse.
Trust Asymmetry Over Time
Paul Slovic’s research on risk and trust shows that negative events have a disproportionate impact on trust judgments compared to equivalent positive events, and trust once broken is difficult to rebuild.
Concealing bad news trades small amounts of near-term comfort for a low-probability but high-consequence trust destruction event later, typically when the concealed information surfaces through market outcomes rather than through the advisor.
The expected value of that trade is negative under any realistic assumption about eventual discovery.
Leading With Bad News Requires Calibration
Gerd Gigerenzer’s 1995 work with Hoffrage on frequency formats shows that clients comprehend and act on probabilistic information when it is presented concretely, and disengage when it is delivered as vague verbal reassurance.
Bad news delivered with probabilities, alternative scenarios, and specific actions being taken produces a fundamentally different client experience than bad news delivered as doom.
Bad news without a response plan is alarm. Bad news paired with the advisor’s specific response is advice. The difference determines whether the client stays focused on the problem or fixates on the messenger.
The discipline is not to frighten. It is to let clients see the actual landscape with its actual boundaries, because people give you more room when they know where the boundaries are.
From Practice
Consider a recent event in my own practice. In late March, a portfolio position we purchased in a specialty healthcare name dropped roughly 46% over the first three trading days on the back of a short-seller report alleging aggressive accounting and patient-safety issues. Our own analytic work concluded the attack was largely unfounded on the merits, but the timing was exquisite and the price action was what it was. We replaced it with a similarly sized alternative in the same sleeve, and the portfolio continues to perform within the range we tell clients to expect, though the drawdown has hampered results relative to what would otherwise have been possible.
Our client communication about that sequence is where the argument of this article lives. We published a special announcement to all clients the next day by leading with context. The affected portfolio had been running roughly 1% ahead of our other strategies when the sell-off hit, and a 46% drop on a single position in a 22-equity portfolio rebalanced quarterly is essentially one of our worst-case scenarios. We listed our due diligence in selecting the stock, acknowledged the short-seller’s exquisite timing, and replaced the hobbled position. Nothing was buried, nothing was softened, and nothing was deferred to the next conversation.
The client response was consistent with what the research predicts: no observable panic and no apparent trust impairment, because most people know these sorts of things can happen from our prior communications.
Now consider the counterfactual. Had we communicated in the industry-default style, softening the drawdown and emphasizing diversification, we would still be playing defense. Every client conversation would be about the advisor’s credibility rather than the portfolio’s positioning. By leading with the bad news and naming it cleanly, we moved immediately back to offense, where conversations with clients are more focused on what comes next.
Whether selling the position was the correct investment decision is largely irrelevant to whether our communication pattern buys us the trust to have that conversation without spending credibility we cannot replace. In a world where we cannot get it right all the time, how we deal with getting it wrong matters to our longevity and credibility.
The Compound Effect
The practical objection I hear is that “some clients prefer reassurance.” This is true, and it is less relevant than it sounds. Clients who genuinely cannot tolerate calibrated bad news are a smaller population than the industry appears to suggest, and they tend to self-select out of long advisor relationships anyway because the stress is just too much. Calibrating a practice to clients who cannot handle reality only heads toward larger headaches down the road.
The clients who remain through multiple market cycles are the ones who value information integrity. The retention math and referral math compound in ways that dwarf any short-term discomfort from difficult conversations.
The advisor who has been delivering calibrated bad news for 20 years has a client base that remembers being warned about 2008, 2020, 2022, and whatever comes next, and remembers navigating each of those with an advisor who treated them as capable adults. That memory is the most durable competitive advantage available in wealth management, and it is not accessible to practices that have been optimizing for near-term comfort.
Leading with bad news can feel wrong and even confrontational at some level, but the psychology research supports it, the behavioral finance supports it, the career math supports it, and the clients who stay through multiple cycles apply the final confirmation stamp.
More articles by Mark Tennenbaum:
Mark Tennenbaum is CEO of Life UnLocked Partners, a registered investment advisor. He holds an MBA from UCLA Anderson and a psychology degree from Pitzer College, where his studies included brain evolution and behavior. He has 40 years of experience in securities valuation, M&A, and structured products.
Disclosures
This publication is provided by Life UnLocked Partners LLC (“LUL”), a registered investment advisor. The content is for educational and informational purposes only and does not constitute investment advice, a recommendation, or a solicitation to buy or sell any security. Nothing in this publication should be interpreted as a recommendation to purchase, sell, or hold any particular investment or security, or to employ any particular investment strategy.
The analytical framework, tools, and methodologies discussed herein are presented for educational purposes. They are not designed or intended to be used as stock-picking devices, trading signals, or the basis for any investment decision. Past performance, whether of the framework, any fund, or any strategy referenced, is not indicative of future results.
All investments involve risk, including the possible loss of principal. The information presented is based on data and analysis believed to be reliable, but LUL makes no representation or warranty as to its accuracy, completeness, or timeliness. Market conditions, economic factors, and individual circumstances vary, and outcomes may differ materially from any examples or historical patterns discussed.
LUL is registered as an investment advisor with the California Department of Financial Protection and Innovation (DFPI). Registration does not imply a particular level of skill or training, nor does it constitute an endorsement by any regulatory authority. For more information about Life UnLocked Partners LLC, including our advisory services, fees, and business practices, please refer to our Form ADV, available through the SEC’s Investment Adviser Public Disclosure website at adviserinfo.sec.gov. This publication does not create an advisory relationship between LUL and any reader. Readers should consult their own financial advisor, tax professional, or legal counsel before making any investment decisions.
A message from Advisor Perspectives and VettaFi: Discover something new! Click here to register for our upcoming webcasts.
More Mutual Funds Topics >
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.