It might be the longest interview ever. Get a group of top advisors together in a room and ask them about client behavior, the economy, retirement income and politics, and be prepared for sparks.
Managed account provider Curian Capital did just that at its semiannual gathering of top advisors in Denver. While the group was able to get through only one of eight agenda topics at a previous gathering in Boston last October, forward progress was made on Tuesday as two more questions were addressed in the time allotted—but opinions and crosstalk were just as strong.
It began with a discussion of last Friday’s economic news and employment numbers, and how they—and their clients—were reacting.
“From an investment perspective, we’ve been cautious for some time,” Mark Singer (left), an advisor with Commonwealth Financial Network and author of The Changing Retirement Landscape, said. “Our allocation is a third in equities, a third in fixed income and a third in alternative investments. I get these calls from a reporter whenever a drop in the market of bad economic news comes out. She wants to know if my clients are panicking and she’s always surprised that they’re not.”
So was Singer comfortable with all that’s happening?
“No, but as comfortable as I can be,” he bluntly stated.
Jim Person with SII Investments said last Friday’s news was an opportunity for him. After receiving a call from a panicked client, he realized many of clients felt the same, but weren’t picking up the phone.
“No one likes to see a day like Friday,” Person (right) explained. “The Dow represents the market for most people; if they see it drop by 2% they think their portfolios dropped by 2%. I drafted and sent a e-mail noting the fact that due to our allocations we weren’t really affected from a performance standpoint.”
The result was twofold; a client called to thank him for the communication, noting she was too intimidated to call initially. The second was in relation to new money he just received. He e-mailed the client to show what would have happened to their portfolio had they still been in the previous investment.
“He said ‘Thanks, your advice is already paying me dividends,’” Person said. “My job is to manage client behavior. Down markets are better than up markets to help educate and influence clients. I have no control over the markets, but I was able to take a miserable day and turned it into one of the best PR days I’ve had.”
Rex Rexroad, also an advisor with Commonwealth Financial Network, said it’s all about setting expectations.
“It’s disingenuous to say ‘I know the direction of the market’ or ‘I know what’s coming,’” Rexroad noted. “About the only thing we can count on is that volatility will continue. We can set expectations by letting clients know we will use what we’ve learned from the past to get a picture of future possibilities.” Mike Helgesen of Securities Service Network then mentioned the current crisis in Europe, noting that the housing crisis was an asset bubble that will take 10 years from which to recover.
“It will be the same, at least, with Europe,” Helgesen said. “The problem was that their currency was amalgamated, but their economies were not; there was that disconnect between fiscal responsibility and currency. The result is a difficult period that will remain difficult for some time. The key is to not draw a line in the sand. I’m just not smart enough to know which way the market is going on a daily basis.”
Like Person, Rexroad saw it as opportunity, this time to revisit “the foundations of the financial plan and what the clients are trying to achieve.”
“Sure, it’s the retirement road map,” Singer added. “It’s the planning and goals. Don’t make it about short-term performance; it must have a bigger-picture focus.”
Rexroad then compared financial advisors to doctors, noting they can’t guarantee a cure, but can give it their best effort based on known variables. Person added that “no matter how much we educate clients, it will never be enough. That illustrates the real value of a properly allocated portfolio.”
Advisor Bruce Woods with Woods Investment and Insurance Services explained that he categorizes his clients’ reactions to poor economic news in one of four ways:
1) Opportunistic—“This is a client that I have to calm down because they immediately want to buy too much on the heels of bad news.”
2) Concerned—“This client will pick up the phone and want to know what’s going on. But it’s crucial at this point to walk them through it. If it becomes too overwhelming, they’ll shut down and become apathetic.
3) Apathetic—“This client won’t do anything; they’re frozen in place.”
4) Survival—“This client is fighting for their very financial lives.”
“It’s a perfect storm at the moment,” Woods added. “Demographically speaking, everyone is in the process of looking for retirement income simply because of their age. There is an enormous focus on the sources of that income, which I think id too deeply rooted in alternative investments. There is just too much of a focus on singular sources.” Woods also mentioned Europe, noting that most politicians are paying little more than “lip service” to unfunded entitlements.
“We’re now starting to hear rumbles that the Fed might somehow bail out Europe. At that point, we’ll simply be a loan broker for China.”
Helgesen then said it was a great time to redefine risk in more human terms that clients can better understand and relate to.
“It’s not about standard deviation; they’re not going to run into the road and risk being hit by standard deviation,” he said to laughter. “It’s better to talk more about timeframes.”
“Everybody will participate in the markets when things are good; what separates clients from one another is their tolerance for loss,” added Mark Schoenbeck, senior vice president and chief marketing officer with Curian.
Rexroad cited the famed portfolio manager Chris Davis of Davis Funds when noting that risk was the possibility of significant and permanent loss of purchasing power.
“The conversation has to begin with the financial strategies to help clients reach goals,” he said. “Then, and only then, can the conversation turn to the appropriate product. If you put the spotlight on daily activity and short-term performance, your clients will focus on daily activity and short-term performance. Get it down to their goals and their assets versus liabilities. In that way, you’ll help them take a longer-term view.”
“My father, John Woods, used a water pump analogy when explaining the markets,” Woods concluded. “Water will come if the handle is up or down; the key is to make sure the handle keeps moving.”