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.

The money managers hired to oversee a pension fund have limits on the amount they can invest in one company. Mutual funds have limitations on single company investments, as well. The regulators must be telling us something by applying limits. But individual investors have no limits on the amount of company stock that they can own in their 401(k) plans. Absent regulatory action, you should advise your clients to limit their 401(k) investment in company stock to 5% to 10% of their 401(k) balance.

5. Take advantage of tax- deferred investments.

Products such as annuities and 529 plans have been granted special tax treatment from the U.S. government for a reasontax-deferred investments can increase important assets faster than taxable investments and in these cases, assets for retirement or college savings. The government offers special tax treatment to these products to encourage Americans to start planning early for retirement and college.

In a tax-deferred environment, any investment returns are not taxed until those assets are tapped either upon retirement or in the case of 529, not taxed at all, if used for educational purposes. Further, those gains can be reinvested, tax-deferred, so that the growth compounds. This is where asset growth can really accelerate, especially in a bull market.

The 529 plans offer one other additional benefit to investors. They are excellent estate planning tools since they allow you to take advantage of the annual gift tax exclusion by investing $55,000five years worth of tax exclusionall at once, removing substantial assets from your clients estate while preserving substantial control over those assets.

6. Use insurance to ensure that your assets get transferred not taxed.

Investors, particularly high-net-worth investors, face the challenge of asset transfer and in many cases are missing the most important toolestate planning. Clearly, investors with substantial wealth need to establish a will, and with that, they should consider using life insurance as an estate planning tool to reduce the tax exposure heirs will face when assets are ultimately transferred.

7. Plan for crisis.

Sadly, the events of 9/11 shed new light on financial crisis planning. Our lives have been forever changed, and this change needs to be reflected in our financial planning. An old adage observed by many savvy investors was to keep 6 to 12 months of expenses at hand, in cash or safe, short-term instruments. Given the state of global affairs, the slowdown of the U.S. economy and factors well beyond our control, it might be smart to resurrect this old adage with your clients. In addition, encourage your clients to review their life insurance coverage to be sure it still fits their long-term plan.

During difficult times, its critical that intermediaries demonstrate their value by asking thoughtful questions, listening, and then helping their clients make sound decisions about their financial planning. Any lessons learned, whether included here or not, present an easy conversation starter with a client. This in turn offers intermediaries the opportunity to demonstrate their value as advice givers and financial planning experts. These are the most constructive conversations and often the most appreciated.

John D. DesPrez III is chairman and president of Manulife USA.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 4, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.