Clients & Advisors Learn Lessons from Recession

I did an interview over the weekend for a Columbia graduate student seeking both professional and participant commentary about the state of the 401k industry. He wasn’t expecting to hear a whole lot of positive considering the recessionary environment, but he genuinely wanted to know how attitudes and advice regarding 401k investing had changed. He even asked: “had I learned (as an advisor) any lessons from the recent and precipitous market declines?” The answer to that question is a resounding yes and I’d like to share what has changed in my practice and comment on the realities which have surfaced in the planning profession in general as a product of the recession.


One process which has certainly evolved since the onset of the recession is our due diligence when it comes to assessing the risk of various investment products. Periods of intense volatility remind financial advisors of how quickly years of financial gain can be erased. The S&P 500 declined roughly 50% in the 10-month period beginning in May of 2008 and ending in early March, 2009. It took nearly five years for the S&P 500 to climb to those highs from the 2003 lows. In light of this enhanced volatility, many advisors are rethinking what they are getting their clients into when they buy shares of certain stocks, bonds and funds. For example, many advisors rely on rating agencies when it comes to picking bonds for clients. At this point we know that the rating agency business is riddled with questionable behavior, in part due to their compensation structure in which the agencies get paid by the companies which they rate. Rating agencies are also relied upon to convey the financial solvency of insurance companies. Financials advisors review these ratings because they help determine the claims and benefit paying ability of the insurers. If these ratings are inaccurate they can result in bond defaults for clients, lost insurance premiums and overall higher levels of anxiety for everyone.
Along those lines, I’ve spoken with several advisors who feel discouraged by the uncertain nature of the information they rely upon when it comes to making client recommendations. If a prospectus illustrates risk in a way which is understated or inaccurate, there really isn’t much an advisor can do about that. There’s a certain element of trust and responsibility inherent in the financial advisory business because of how many third parties are involved. When counterparties and product providers misrepresent risk, it reflects badly on everybody but ultimately hurts clients the most. One potential method of reducing the risk posed by third parties is managing more assets in-house. The primary disadvantage of doing so is that you become the only person to blame if your performance is lacking. On the flip side, you don’t have to worry about somebody irresponsibly mismanaging your client’s accounts. Lately, at least for me, I prefer to build accounts myself rather than rely on too many outside managers who, quite frankly, I can’t keep a tab on.
As for industry-wide changes, the financial planning profession has been shifting more into ‘planning mode’ from ‘grow your investments’ mode. More specifically, the concept of goal planning around the growth of an investment portfolio has been slowly disappearing. The new highest priority is safety of principal. Investors want to know that their money isn’t going to disappear if they place it with a certain bank or insurance company. Investors are less concerned about rate of return and more concerned about their ability to retain control over their money and have access to it in the future. This pattern is evident in the trillions of dollars either sidelined right now or flowing into government securities which pay little or no interest.
As for this shift towards planning, it seems investors are now looking more closely into whether or not they will be able to reach certain financial goals such as retirement, funding education for children and supporting aging parents. They want to know what, if anything they can do to offset the effects of declining 401k balances and more future uncertainty about the rate of return on investment portfolios. Is working five more years the answer? How will the housing crisis deter plans to sell your home? Is now the time to actually create a monthly budget and stick to it? These are the sorts of concerns clients have been inquiring about with more seriousness than ever before.
We’ve also been focused on creating emergency funds. Most financial planning textbooks recommend keeping 3 months of living expenses on hand in a safe and liquid account. This is really starting to happen now, mostly as a natural reaction to watching other account values fall. It’s also a product of higher savings rates. As home values have fallen, people react by attempting to save a greater percentage of their incomes. Because the stock market is so jittery, banks have become the beneficiaries of greater savings rates.
Recessions can have an interesting effect on people. As a financial advisor it’s my job to make sure my clients don’t react irrationally and impulsively. Helping investors to focus on not just the next six months, but the next ten years can radically change attitudes and behaviors about saving and investing. Perhaps the most helpful thing an advisor can do is keep their clients focused on the planning aspect, even as the markets improve. Building wealth is a daily grind, and the more goal oriented you become, the easier it should be to reach and exceed your expectations.
As always, feel free to e-mail me with any questions.
Russell Bailyn

Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

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