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Portfolio > Portfolio Construction

Advisors May Be Crazy, Like a Fox

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Back in the 1990s, the editors of Worth magazine (including myself) invited celebrated financial journalist Joe Nocera (then an editor at Fortune magazine, where he eventually rose to editorial director, and now a columnist at The New York Times, and author of “All the Devils Are Here” about the 2007 mortgage meltdown) to talk to us about the investing habits of our Baby Boom generation.

His message was radical at the time (and probably still is): Contrary to the prevailing notion that the “Me” Generation was simply a bunch of irresponsible spendthrifts, Nocera argued that the Baby Boomers’ approach to finance was a perfectly rational response to the financial markets we grew up with. In the same way that our parents (who were young during the bank failures of the Great Depression in the 1930s) had a fundamental distrust of financial institutions, we Boomers’ formative years were defined by the double-digit inflation rates of the 1970s. Consequently, we learned to distrust “money,” and that “buying now” was smarter than waiting until prices were even higher.

I often think of Joe’s theory about us Boomers when I hear discussions about how the 2008-’09 meltdown (when the S&P Dow dropped from 10,831 to 6,547) has affected financial advisors—and wonder whether that experience will have an equally profound effect on them. Over the past year, two studies have come out that shed some light on how advisor attitudes have changed, yet I wonder whether the authors in either case have given enough weight to how much catastrophic financial events can shape investment attitudes.

First, Bob Veres surveyed 1,090 advisors toward the end of 2011 about changes in the way they manage client portfolios, post 2009. He found that some 83% were anticipating making “tactical adjustments” to their client portfolios. In contrast, back in 2005, an FPA study found that only 24% of the financial planners surveyed made “material changes” in their clients’ portfolios… …based on expectations regarding changes in the market.”

Both of the above studies were cited in “Financial Trauma: Why the Abandonment of Buy-and-Hold in Favor of Tactical Asset Management May be a Symptom of Posttraumatic Stress,” by Bradley T. Klontz, Psy.D., CFP and Sonya L. Britt, Ph.D., CFP of Kansas State University, which was published in the Journal of Financial Therapy last year (2012 Vol. 3, Issue 2). As the title of their paper suggests, Klontz and Britt not surprisingly found significant evidence of posttraumatic stress disorder in a group of 56 financial planners who were surveyed in early 2009.

But perhaps more surprising, they concluded that the changes in advisor investment strategies (from Veres and the FPA) were the result of this stress: “In the months following the 2008 crisis, 93% of the planners surveyed reported medium to high levels of posttraumatic stress symptoms… …How did the financial crisis impact financial planners’ thoughts and feelings about their financial planning services? It is hypothesized that in the midst of the financial crisis, financial planners were calling into question their basic assumptions about how best to serve their clients.”

Let me admit right up front that I greatly admire Sonya Britt’s work at K-State. For instance, her studies of the effects of advisor stress on client behavior (as reported in the September 2012 Investment Advisor cover story “Stress Fracture”) are ground breaking. But even for me, this seems like a stretch. I’m sure many advisors did experience some PTSD in the wake of 2009. Undoubtedly, more than a few advisors questioned the value they were providing to their clients. But is it really more reasonable to assume their doubt resulted from a psychological issue, rather than that the 50% hit to client portfolios (when virtually all assets classes departed from their historical correlations and fell in unison) was a good reason to rethink their portfolio management strategy? 

Was it irrational for survivors of the Great Depression to question the safety of banks? Or the Boomers of the ‘70s to question the safety of money? I suspect that changes in the way advisors manage client portfolios today is more a matter of adding a much-needed level of risk management to their static buy-and-hold portfolios than it is a symptom of a collective mental breakdown. 


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