Although we recently began the fourth year of the bear market, there was no mention of the bear’s birthday in personal finance magazines, no specials marking the occasion on Cable TV financial talk shows, and none of the advisor Web sites mentioned the inauspicious anniversary. The dismal day slipped past us unnoticed on March 24 because we were all justifiably preoccupied with the war in Iraq, which began on March 19.
With America’s victory now in hand, and polls showing that a majority of Americans now feel like we are winning the war against terrorism, there is good reason to hope better times will soon be upon us. But with the shadow of September 11 still shading how history will record the era in which we live, the beginning of the fourth year of the bear market seems a fitting time to take stock and assess the damage wreaked on independent advisors by that market.
With the help of the Internet, I surveyed the 35,000 subscribers to Investment Advisor’s e-mail newsletters, along with my own database of about 700 advisor e-mail addresses. Nearly 1,100 financial advisors responded from April 10 through April 15. By better than a 5 to 1 margin, advisors said they believe the economy and stock market will strengthen over the next 12 months; about a third believe the bear market has spurred them to focus on financial planning and not just investing; a majority said their revenues are lower than they were three years ago; and about 95% said their average portfolio is worth less today than it was three years ago.
For the record, the bear market is widely thought to have started on March 24, 2000, when the Russell 3000, a broad index representing 98% of the stock market’s total capitalization, traded at 3247. As of April 15, 2003, the index was at 1918.35, a 39.2% loss equal to about $5.4 trillion, according to the Frank Russell Company. From its peak on March 24, 2000 to its trough of 1727 on of March 11, 2003, the Russell 3000 declined 44.9%.
Amid this stunning reversal, advisors are questioning the most basic assumptions about investing. For instance, we all know that when stock prices go down, you should maintain your allocation to stocks. Rebalancing would thus have an advisor buying more stocks at low prices and force a dollar-cost-averaging discipline. Yet in our survey, more than 40% of the advisors responding said that over the last 12 months they had reduced allocations to stocks in client portfolios that they manage. Less than half said they maintained the same allocations to equities over the previous 12 months. Just 6% of them said they increased their stock allocations over the prior 12 months.
I guess you can toss aside the notion that advisors adhere strictly to asset allocation as preached by Modern Portfolio Theory, which would have you allocating more to stocks in a bear market based on stocks’ long-term historical behavior. Emotion gets to you, and you generally are not adopting the institutional and academically accepted methods of managing money as much as your marketing materials would seem to claim.
Stanching the Wound
Perhaps this lightening up on equities helps explain why a good number of advisors said they have sustained losses over the previous three years that are significantly lower than the 39.2% drop in the Russell 3000. When asked, “Which of the following statements best describes the value of assets you managed for clients since the bear market began,” only 2.8% said their client portfolios had suffered a loss greater than 40%. About 1% said their portfolios declined between 30% and 40%.
Even if you keep in mind that advisors are managing portfolios composed of stocks, bonds, and other asset classes, the results would seem to indicate that many advisors surveyed have served their clients quite well during the bear market.
Nearly a third of the advisors said their client portfolio dropped in value between 20% and 30% since the bear market began. Even if you assume that these advisors answering the poll had some bonds in all of their portfolios, that’s about in line with the market’s performance during the bear market. A portfolio with 80% in the Russell 3000 index and 20% in five year U.S. Treasuries would be down about 24%–although that’s before fees.
What’s impressive, however, is that about 35% of the advisors say their portfolios are down between 10% and 20%; another 15% said they were down less than 10%. About one-half of 1% of those polled said they actually eked out a gain over the bear market period. Thus, the survey results indicate that many independent advisors have managed client portfolios with much better results than the market has yielded over the bear market period and have earned their fees.
Meanwhile, the effect of the bear on advisory firm revenues has been dramatic. About 13% of the advisors surveyed said their revenues over the past three years have plunged more than 30%, with another 12% saying their revenues have sunk between 20% and 30%. Sixteen percent report revenues down 10% to 20%, compared to what they were before the bear attack. Another 12.5% say revenues have fallen by 10% or less. Interestingly, nearly 45% of the 1,100 advisors said their revenues have risen since the bear market began, with 13% reporting that revenues are 30% higher or more.
With more than half the advisors saying they are bringing in less revenue than they did three years ago, it’s not surprising that about half of those surveyed also said they have cut spending in the previous 12 months on marketing, salaries, or technology. Twelve percent said they reduced salaries–by far largest area of cutbacks, while about 7% are spending less on marketing and 5% are spending less on tech. About 53% said they made no spending cuts in these areas in the previous 12 months.
Meanwhile, while 37% said they are not spending more on marketing, technology or salaries, the rest said they have increased spending in these areas, with marketing and technology being the two biggest areas of increased expenditures.
One surprising result in the survey is that only about 10% of the advisors participating in the poll said the bear market has spurred them to focus their practice on life planning. This new niche attempts to find out what clients really want to accomplish with their money and aims to make their lives more meaningful, and it has been covered a great deal in the trade press. Only 110 of the 1,074 advisors responding to the survey said they are focusing on life planning because of the bear market. But nearly a third said the bear market has spurred them to focus their practice on financial planning and not just investing, while the remaining 56% of advisors said the bear market had brought about no change in their practices.
A Reflection of Optimism?
Respondents submitted answers to the survey in the days right after the 40-foot statue of Saddam Hussein was toppled in Baghdad’s Firdos Square, and the same week Defense Secretary Donald Rumsfeld announced that the major combat in Iraq was completed and seven American POWs had been rescued. My guess is that all this good news must have made the advisors taking the survey giddy, because about 87% of them said they thought the economy and stock market would strengthen over the next 12 months. Just 13% said they believed the economy and stock market would get worse.
Some would say that overwhelmingly bullish sentiment is a reverse indicator and that the market would not bottom out until most advisors predict the market will worsen over the next year. I don’t think that’s true. I believe a huge swing in sentiment occurred the week we surveyed advisors, and that’s why so many became more bullish. That’s why they reported that they had allocated less to equities in the previous 12 months.
The proof will come in three months, when we will conduct another survey to determine advisor sentiment. I’m betting that in the next survey we will see far less than 87% of advisors predicting stocks will strengthen over the coming 12 months.
In fact, with your cooperation, I am hoping to turn a survey like this one, which had 15 questions and took an average of just three minutes to complete, into a semiannual or quarterly event. I will, of course, share the most significant findings with you. Your response to this first survey truly was wonderful, and the data can help you better understand what your colleagues are doing.