WSJ Wealth Advisor article by Daisy Maxey
Even the most successful financial advisers learned some big lessons as the financial crisis took hold in September 2008 and reached its low point in March 2009.
While the dark days of the downturn reinforced some of their long-held investment and client-service practices, it also forced many advisers to reevaluate the way they communicate with their clients, their asset-allocation practices and their faith in the U.S. financial system.
As the five-year anniversary of the collapse of Lehman Brothers nears, advisers discuss the most important lessons they took away from what many in the industry call a near-death experience for advisers and clients alike.
John Rafal, founder and vice chair of Essex Financial Services Inc. in Essex, Conn., which manages $2.14 billion:
It was easy for both clients and advisers to panic as the financial system began to stumble and wealth evaporated. But had the crisis occurred today, Mr. Rafal says he'd have more peace of mind and faith in the U.S. markets.
The day Lehman Brothers collapsed, Mr. Rafal was at a conference hosted by Barron's magazine in Boca Raton, Fla., where he was to give a speech. Upon returning to his hotel room, he saw that the stock market had plunged hundreds of points--and 48 voicemails from panicked investors awaited him. He immediately returned to his office, and more than a month later, he and his staff were still working to calm investors.
With 35 years in the business, experience told him not to panic, but the 2008 crash was as difficult as anything he'd been through. As he advised panicked investors not to abandon the stock market, he hoped he was giving the right advice.
"If we said we were confident that the markets would recover, that would be disingenuous; we were all terrified," he says. "Our role was to calm clients down, but we were panicky ourselves."
Spuds Powell, managing director, Kayne Anderson Rudnick Investment Management Inc., in Los Angeles, which manages $7.9 billion:
The downturn illustrated the importance of emphasizing investment risks and volatility in good times and in bad. Clients need to understand the potential for their portfolios to decline meaningfully for a period of time.
"If investors have those expectations before the scary times set in, I find they can cope with that much more successfully than when they don't have those cautious and realistic expectations," Mr. Powell says.
As the markets recovered in recent years and he delivered good news to clients about their investment performance, he also reminded them that rates will inevitably rise and bonds will then likely underperform. He also reminded them that there will likely be a month or a quarter when the stock market struggles.
In recent months as interest rates rose and bond prices tumbled, clients have handled it well, he says.
Also since 2008, in proposals for prospective clients, Mr. Powell has put greater emphasis on how the firm's recommended investment strategies have fared during bear markets.
Brian Holmes, president and chief executive, Signature Estate & Investment Advisors LLC in Los Angeles, which manages $3.2 billion:
The steep decline in financial-services stocks taught Mr. Holmes that determining a portfolio's sector exposure by looking at the exposure of a particular index can leave an investor overexposed. In 2006, his firm was underweight financial-services firms compared to the S&P 500 index, but that didn't sufficiently limit the impact of the sector's downturn. The crisis "tore apart" the entire sector, from insurers to brokerages to banks, Mr. Holmes says.
"I don't think it's good enough just to say we're overweight or underweight the index when the index itself gets somewhat polluted by stocks in that sector becoming overvalued," he says.
Financial stocks now account for about 16.6% of the S&P 500 index, for example, but they accounted for 23.3% in 2006.
His firm has since enhanced its systems that monitor client portfolios so that they pay attention to sectors as much as asset classes or individual securities.
Mr. Holmes also learned to encourage clients with higher risk tolerance to buy when there's blood in the street. Yes, he encouraged them to buy in the wake of the downturn, but today he says he might "push the issue a little more."
Paul Tramontano, co-chief executive officer, Constellation Wealth Advisors LLC in New York, which manages about $5 billion:
Thirty years ago, a smart investor told Mr. Tramontano that recessions end with the stocks of most major banks trading at single-digit prices. He thought that the investor was being "a little flip." But the 2008 crisis brought home the truth of those comments and the importance of not permitting a portfolio to become too concentrated in one industry.
In every downturn, some investors want to throw too much money at an industry that is being hard hit, be it technology stocks during the downturn of the early 2000s or financial stocks during the 2008 crisis.
Investors say, "The banks have been cut in half, they have to be a good buy; they've been cut in half again, they have to be a good buy," he says, but adds it's too hard to pick stocks when the market is falling like that.
Source: online.wsj.com
Posted by Steven Maimes, The Trust Advisor
