Podcast Center
Video Center
Webcasts
Resource Center
Events
November 03, 2002 at 07:00 PM
The last two years have been tremendously humbling for investors. A challenging market, combined with insufficient planning or exceedingly high expectations have disrupted more than a few retirement dreams. However, as a result, many investors are seeking advice. This presents intermediaries with an opportunity to enhance and deepen relationships with clients by applying the lessons learned from a difficult period.
While there are many lessons learned over the last two years, here are a few of the most important:
1. Set plans with realistic market and risk expectations.
History tells us that the equity markets generally provide a 10% to 11% average annual return. The robust growth of the markets in the late 90s led many investors to design financial plans with unrealistic growth expectations–in many cases looking for 20% annual growth or more. Its not prudent to fight history. Work with your clients to help them understand realistic expectations. I would recommend forecasting 8% to 10% annual rates of return, though in todays market, even those numbers seem high.
It follows then the need to establish new risk tolerance expectations. The bull run of the 90s fostered overconfidence for many investors who in turn embraced very ambitious risk tolerance levels. But the past two years have tested all of our risk tolerance levels. Did the correction trigger an emotional reaction in your clients? If it did, their risk tolerance was not accurate. Help them understand risk–and how much they are willing to take–and factor that into their plans.
2. Take the entire financial picture into consideration when creating your asset allocation.
Some individuals working with intermediaries are selective about the financial information they are willing to divulge. By withholding information about other assets they may have, investors are doing themselves a substantial disservice. Educate your clients about the importance of a total financial review when building a plan.
3. Dont set it and forget it.
Its one thing to set a plan, but its another thing entirely to monitor it. Too many investors forget that planning requires two parts–setting the goals and then monitoring plan performance as both the markets and possibly their goals change. Agree on review points throughout the year with your clients. Goals, family situations and careers are all constantly in flux, and its important to schedule time to help your clients stay on track, rebalance their portfolio or adjust for altered risk tolerances.
4. Use discipline when investing 401(k) assets and limit investments in client company stock.
Again, its critical to know where all of your clients assets are when designing a plan. Take a close look at their 401(k) asset allocation and watch out for overlapping investments (funds inside their portfolio vs. those they own outside), and help them to understand why discipline and asset allocation are more important than owning their own company stock.
A tough lesson learned over the last two years focuses on the amount of company stock people own in their 401(k) plans. Too much exposure to an investors companys stock could have a disastrous impact on his/her portfolio. The question is–if a client is already dependent on the company for a paycheck, health benefits and more, why increase that dependence? Whats more, a client may already own the company stock in his/her mutual funds, in a defined benefit (pension) plan, or even in the funds within his/her 401(k) plan.
