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For advisors, and their clients, the conflict between head (rational judgment) and heart (emotional reaction) is always present, but it’s probably never been more apparent than in the current environment. On the one hand advisors are watching client account balances diminish (not to mention firm revenues as the level of assets under management drops) and know their clients expect them to make sense of it all and do the right thing, whatever that is. At the same time, they also know that one of their most important jobs is to help their clients cope with the crisis and keep those clients from doing something imprudent as a result of panic. And advisors certainly can’t give in to the panic themselves.

“This is the ultimate stress test,” says Beaver, Pennsylvania-based advisor P.J. DiNuzzo. “The emotional quotient of what we’re going through is arguably for most advisors at an all time high.”

Our annual look at how advisors try to match their clients’ principles with their portfolios has been transformed this year into how clients’ distressed portfolios have challenged not just their own principles, but those that advisors hold dear as well. (We still couldn’t resist reporting on some new developments in the green and socially responsible investing worlds, as the sidebars at the end of this article attest.)

“I don’t think there’s panic among advisors, but uncertainty,” observes Lynn Mayabb, senior managing advisor with BKD Wealth Advisors in Kansas City, Missouri. “Are we in an environment where the past is not an indicator of what could happen in the future? We all know we have market declines. We’ve had them since 1926. But I think in the back of their minds advisors do say, ‘What if it is different?’ What if the global economy and the U.S. economy is truly in a shift and history is not going to be as much of an indicator about what we should do? It’s not really panic, it’s just a little bit more uncertainty as to what types of indicators we should be looking to, because maybe some of the past ones are no longer relevant.”

Advisors know that past performance is no guarantee of future results, but most are hoping that in the long run, history will continue to repeat itself. “I’ll have to admit to you that throughout the last year it has been extremely difficult,” reveals Ricky Grunden of Grunden Financial Advisory in Denton, Texas. After the market dropped in 2001, he realized that moving people in and out of the market just didn’t work and that by doing so he wasn’t adding value, just risk. Instead Grunden refocused his practice on proper asset allocation and staying invested, on making a plan and sticking to it. “When times are good it’s important to remember that I didn’t bring the good times to them,” he says. “That’s what the market offered them by the way we were invested, because we owned all the pieces. And when they go bad, which they surely will, it wasn’t me that made it go down.”

Since the current crisis erupted, Grunden has been spending much of his time reassuring his clients. “It’s not only reassuring clients about the future of our country and the future of capitalism, but reassuring them that we did the hard work in the good times and we allocated the funds for specific goals,” he says.

DiNuzzo’s reaction is similar. “What we’ve found is that if all the work we did over the years on clients’ plans was accurate, then those plans are holding up real well,” he says. “If you have a plan the plan is still intact.”

Keeping Clients on Track

“One of the things that we’re doing with clients is to remind them what their goals are and to keep the focus [there] as opposed to the immediate situation,” says Mayabb. “For those we’ve only done investment management for and are just starting to do the planning for, it’s having those conversations to pin them down and identify their goals so they can realize that what is happening today–while not comfortable for them to deal with–is only one piece. It’s only part of what their wealth plan is. It’s all in relation to their long-term goals, to their risk tolerance, to what their cash needs are. It’s getting them to articulate what all of those goals are and then seeing how this current environment affects those goals.”

It seems obvious, but is probably worth stating anyway, that advisors who have carefully constructed their clients’ portfolios with exposure across a broad array of asset classes, who have helped those clients set goals and developed plans with realistic time horizons to help them implement those goals, and most of all, who have taken the time to educate their clients about investing and how financial markets work are holding up rather well in this environment.

“I think what differentiates my clients’ perspective from others is that they have a tremendous amount of faith in what we’re doing,” says Nicholas Yrizarry, an advisor who runs an eponymous private wealth firm in Reston, Virginia. “We strategically design portfolios that aren’t getting hit as hard as the market. So the first thing the client realizes is that they’re not as exposed, so they’re not hit as hard. Secondly, they know we have a system, a process in place to take advantage of the opportunities that exist in this marketplace.”

To be in a position to do so, Yrizarry began selling off energy and emerging market stocks, pieces of REITs, and other highly appreciated assets six months ago. “Whatever was up during the time we could sell, we sold off, while everyone else was doing the opposite–selling off what was profitable to the extent that it was inordinately exposed in the marketplace and buying more shares of things that were frankly going down the toilet,” he says. “We’re very, very carefully hand-managing the reallocation and rebalancing of our portfolios to exploit the fact the market is down now–buying more shares and buying systematically so that we’re dollar cost averaging within portfolios that would otherwise be static and getting hurt.”

Yrizarry has plenty of reasons to cite for why he sees the current market as an opportunity and he addressed many of them in an October teleconference with his clients. “I explained that the media would have you believe that the economy is melting down, the economy is having a problem,” he recalls. “To the contrary, the economy is in pretty good shape. GDP is still positive for the year. The unemployment rate of 6.1% is not like it was during the Great Depression, which was 25%. The inflation rate to date was nothing like the Great Depression, which was in a deflationary spiral. So we have these reinforcing facts that help us understand that the economy is not going down the toilet and the market is not either. It’s just a reflection of fear that’s built into the marketplace, which gives us an opportunity to buy into it while it’s low.”

To take advantage of these opportunities, Yrizarry says he’s buying “high-quality companies that have good, solid earnings over time, that have a track record, that we feel are extremely depressed, we think, because of perception, not reality.” He says he’s been selling things that are overpriced and buying companies like GM, Ford and Apple. Yrizarry says he’s betting on sectors such as consumer durables, utilities, manufacturers, and banks and is staying away from gimmick stocks and the trendy, such as emerging markets.

DiNuzzo agrees that things might not really be as bad as many people think. He points out that although he doesn’t claim to have predicted the current situation, we have been headed in this direction for some time and notes that there were “experts” quoted in the media saying we were in a recession two years ago.

“You had this immense emotional and mental drag on the majority of the participants in the market,” he says. “When this finally came in, people were just cashing in, mentally, like it was the end of the world. What I maintain from most reasonable institutional projections that I’ve looked at [is that] our economy is going to be in the black, growing by the third quarter of 2009. If it is in the black by the third quarter of 2009, reasonable minds would have to surmise that this would be one of the most overblown drawdowns in the history of the market.”

The Advisor as Psychologist

One of the meetings Yrizarry had recently was with a client who is an economist with a major institution, but he wasn’t calling simply for financial advice, he was also calling for psychological counseling. “Folks don’t really understand the role that we, as investment advisors, play,” notes Yrizarry. “I’m not here to talk about numbers with this fellow. He knows the numbers, he’s a smart guy, he sees the systems I’ve built here. What he needs is encouragement. He needs inspiration. He needs to understand that to be an investor, to be successful, this is the time we need to tough it out. He left the meeting smiling and happy.”

When the advisor checked in two weeks later, the client reported being happier and that his family found him to be a more pleasant person to be around. “There’s value there that really can’t be measured in numbers,” Yrizarry notes. “I’m here as a rationale coach for my clients. This is the most important and valuable time in my career. It’s my responsibility to turn people around from the minute they walk in to the minute they leave. They leave with a smile and courage and strength to keep their chin up, to keep attitude up, which by the way reinforces their belief in the system, which is important.”

Grunden says he’s probably spent more time personally interacting with his clients, whether by phone and e-mail or in-person meetings, in the last few months than at any point in the last 15 years. Much of that time has been spent offering his clients reassurance. “It was not only reassuring them about the market and that our asset allocation was well thought out, well done, and well positioned, but also that we had done the hard work of getting all their pieces in place and reassuring them that the financial plan that we did was going to carry us through,” he says. “I tell them this isn’t just once in a lifetime. This is historic in nature and once in a hundred years or twice in a hundred years, like it was back in the ’20s.”

Starting last summer, Grunden and his associate Dave Ragan have attempted to call or send a personal e-mail to all of their 107 clients anytime there was a particularly down day in the market. “We couldn’t get to everybody, but for the most part we were proactive in getting out to people. So if there was panic, it was just a handful of people that were fairly new with us and we hadn’t been able to educate along the way about what we were doing,” he says.

It’s Not Our Money

Sometimes, despite the advisor’s best efforts to talk some sense into them, clients insist on cashing it in. “The one thing to remember is that it’s not our money. It is their money,” points out Mayabb. “Our job is to talk to them about their goals, but if it’s truly keeping them from sleeping at night, causing them a lot of stress, then it’s not the worst thing for them to go to cash. It’s just making them realize that they are locking in current losses, and making them realize what opportunities they could be giving up, but the bottom line is, it is their money.”

“There was irrationality, knee-jerk reactions and fear, which exploded into panic,” says DiNuzzo of the market collapse. “The underlying fundamentals I don’t think warranted a 50% drawdown in the market and a worldwide fire sale on every financial asset imaginable.”

He acknowledges a few of his clients have been infected with that irrationality. “There’s a large feeling of helplessness among investors, it’s like crazy world syndrome, and they need to make some sense out of it. For some clients taking some kind of action appeases them tremendously,” he says. In such a case he says he’ll make a modest adjustment to the asset allocation. “Clients are having an emotional meltdown and they just want to feel that you’re listening to them, that you care, and that you’re getting it,” DiNuzzo adds. “There’s nothing more important than your client being able to sleep at night.”

A number of advisors have discovered in their conversations with clients that most of them don’t want to do something different, they just want to know that what they’ve been doing all along is still the right thing. DiNuzzo thinks that after years of working with clients to develop a workable plan with long-range goals, to then suddenly shift gears and go in an entirely different direction would “scare the crap out of them” and certainly diminish the advisor’s credibility.

“It’s been difficult, yes, but there’s never been a temptation to jump ship,” says Yrizarry. “We’re not sinking and we don’t have any desire for our clients to believe we don’t have the discipline and the ability to stick it out. There’s no temptation, but it’s painful.

“We’ve only lost one client in this whole downturn. He bailed out of his account and went to a Fidelity emerging markets fund, but that’s it. We’ve had a really good retention rate,” Yrizarry continues. “We’re very careful and very proud of how we do things and we’re not foolish. Is it tough? Yes, like any discipline. Shakespeare wrote that there’s two types of pain in life–the pain of discipline and the pain of regret. We’ve always focused on the pain of discipline. But it’s been tough, though. I’m exhausted at the end of a day.”

He’s not the only one.


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