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July 31, 2010 at 08:00 PM
Advisors have been given a unique opportunity to bring real value to their clients after having been maligned for many years. Seen for two decades as financial charlatans and unnecessary in many instances, financial advisors are now being viewed with a much higher level of esteem and respect. Why? Simply put–because we hold the keys to security and safety offered by no other profession. As financial intermediaries, we are the ones who can unlock the mystery of the myriad of financial products that are complicated to understand.
This unique position is the result of the financial tsunami that hit the world during the last decade. Who would have thought that an entire decade of growth would be wiped out? Yet, because of the tech bubble and the housing bubble and the next bubble de jour, the markets are reeling with uncertainty. Many of our clients are scared and their certainty of security has been shaken. Many have seen their portfolios cut by 25 percent or more and real estate holdings become virtually worthless overnight.
Balancing capital and income
As advisors, we have the answers they didn’t want to hear before today. When everything turned to gold, security and certainty were unwelcome because the ROI was too little compared to the vast fortunes they hoped to make. But now, those returns are the norm and losing capital is a far greater sin than earning low returns.
Most studies have shown that to preserve capital, withdrawals from the portfolio should be no more than 4 percent. This leaves perhaps 2 to 3 percent for inflation protection. But what if the markets rock ‘n’ roll again? Can they stand another hit of 25 percent or more? Sure, the markets will come back, but if there is a need for income, it means the capital has to recover both the losses and withdrawals to break even.
