Peter M. Maris got to work on Friday, Aug. 5, and prepared for a long day. A principal and certified financial planner at Resource Financial Group, a registered investment advisor in Wilmette, Ill., Maris saw the Dow Jones Industrial Average plummet more than 500 points the day before. Analysts attributed the nosedive to a broad range of causes: speculation that Standard & Poor's would downgrade the United States' triple-A credit rating (which came to pass later that Friday); Congressional brinkmanship over a higher federal debt ceiling; concerns over European sovereign debt; stubbornly high unemployment and fears that a slowing economy would slip into a second recession. Recalling the turmoil of the financial crash just three years earlier, Maris figured his clients would have a lot on their minds.
He sat down at his desk and pulled up his clients' telephone numbers. Starting with households on the East Coast and working his way west, Maris says, he made about 125 calls and did little else. “I got up for bathroom breaks, literally. Ate lunch at the desk,” he says. The message he left on peoples' answering machines was basically the same: He wanted to see if they were okay and to offer a chance to review the basic tenets of their financial plan in the wake of the market swoons. On Monday, when the Dow dropped another 630 points, he resumed his calling.
What happened next was unexpected. “Probably a dozen called back to say, ‘It's okay, thanks for calling.’ I got some e-mails that said the same thing,” Maris says. About a half-dozen clients took him up on his offer to consult over their options; just two clients were panicked and decided to liquidate positions.
“I'm pleasantly surprised,” he says. “I found surprisingly few people worried. I think 2008 is still fresh in everybody's minds, and they know this is part of the norm. Either I'm doing a good job educating people, or they're more accepting than they ever were.”
Maris' experience was similar to that of a half-dozen other brokers and advisors who talked with Registered Rep. about the worst market downturn since the 2008 crash. All had made efforts to stay in touch with clients as the market gyrated up and down, and most reported investors who seemed less rattled by the events of the past week. The outreach varied from advisor to advisor; some had sent a raft of e-mails sharing their thoughts about the turmoil with their clients, others like Maris made calls and offered to re-examine portfolios. Patricia Jennerjohn, managing partner at Focused Finances LLC, an RIA in Oakland, Calif., gave her clients a chance to redo their investment policy statement. No one changed his risk profile. “Very few actually want to do something,” she says. “They just want to hear my voice.”
This is not to say small investors are buying the dips. Investors have been yanking money out of equity mutual funds since 2006. “The truth is that these have largely been a one-way trade for five years,” says Morningstar in a recent report. “During that time, investors have withdrawn a net $200 billion.” The report says, “Even when there have been inflows, demand has typically been weak.” (Retail investors have been buying bond funds and commodity ETFs, however.)
But the fact is, retail investors have left some $4 trillion in stock funds — and most of them aren't going anywhere. According to a survey by Decision Research of Eugene, Ore., two-thirds of investors spent more time watching financial news during the early August swoon, but only 6 percent called their financial advisors for advice.
Reaching Out
Merrill Lynch broker Christina Boyd says advisors need to take their clients' concerns seriously. “You want to validate their concerns, but on the other hand, we're not in a situation like 2008 when it felt like we were in the perfect storm,” she says. Boyd, whose Wayzata, Minn., practice manages more than $2 billion, says she and her team of 14 worked the phones to contact their 150 clients. Boyd left on vacation on Aug. 5 but says she spent half her time off talking and meeting with clients. She says she was often asked, “Christina, should I be worried?” Her response: Don't lose sleep. Market corrections are not unexpected. You're in the right investments. “They say, ‘Thank you. I was hoping you would tell me that.’”
To be sure, not every advisor is having the same experience. David Patchen, a regional director for sales management at Raymond James Financial Services, works with 40 advisors in 12 states in the central part of the country. The first advisor who called him on Aug. 8 said he was hearing as much angst as he had heard three years earlier. “He wasn't pleased with how badly his clients seemed to be taking it on Monday,” Patchen says. But that advisor's experience appeared to be an outlier, Patchen adds; the other advisors he spoke with said they had plans for dealing with their clients' concerns and were hearing less fear and panic. “The vast majority are saying, ‘Thanks for the call, let me know if I need to be worried.’
“I'm speaking for the best advisors, the advisors that are keeping in touch. Let's be clear about that,” Patchen says. And he warns that advisors could face a much less tolerant clientele if the economy worsens later this year. “We could have a very different response if a month or two from now we continue to move in a downward direction,” he says. “And those advisors who are not communicating with clients are going to be the next group that falls out of the industry and loses those clients. That never changes. This will be another cleansing period if there's another extended downturn.
“The biggest concern clients represent in every survey is not hearing from their advisor. That's more important than performance, that's more important than all of the other attributes measured.”
Some advisors attribute the tamer response from clients this time around to their own efforts. After the crash in 2008, they moved investors with lower risk tolerance into more conservative portfolios that weren't shaken as badly this time around. Jonathan Kelley, a financial planner at Hinds Financial Group in Lakewood, Colo., said his firm moved several dozen clients into variable annuities with living benefits or into very defensive third-party asset managers. “As a result, they're out of the market. So they're not calling us,” Kelley says. He figures fewer than 10 percent of his clients contacted him in August, about half the number when the markets tanked in the fall of 2008. But outreach also made a difference, he adds. His office sent four e-mail blasts over eight days during late July and early August, offering the firm's take on the national credit downgrade and the market volatility that followed. “I think if we had not done that, we would have gotten more calls.”
Raymond James provided its advisors with frequent, compliance-approved e-mail updates on the market situation, coupled with conference calls with company analysts that could be made available to clients through the web. Patchen says the company moved faster and more comprehensively on this, prodded by advisor reaction from the 2008 crisis. “I don't think we were alone on this,” he says. “One of the things advisors would say to us three years ago was, ‘You were getting us stuff we could e-mail to clients and give them some rhyme or reason about what's happening, but it's taking two or three days’ … I think broker/dealers as a whole learned from three years ago.”
Also, investors were warned. Mendel Melzer is chief investment officer and president at Newport Group Securities in Heathrow, Fla., whose affiliate manages 401(k) plans for sponors. He said that Standard & Poor's telegraphed its intent to downgrade the U.S. rating if Congress didn't produce at least a $4 trillion reduction in the deficit. Newport warned investors to expect rough sledding, Melzer says, although he adds that the scale of the market reaction surprised him.
Carolyn Philpot, an advisor with Beall Barclay, a wealth manager and accounting firm in Fort Smith, Ark., took the unusual step of sending handwritten letters to her clients along with the firm's second-quarter report. “I don't customarily send out letters,” she says. “But I wanted them to know somebody didn't just put those quarterly statements into the envelope and didn't think about it. I wanted them to know that I really checked them.” In the letter she warned her clients about continued volatility, but told them that for their financial objectives, they were positioned correctly. If conditions worsened, she said, the accounts could be rebalanced.
The rocky market gave some advisors a chance to evaluate some new investing strategies. “The alternative space has been providing some pretty good shelter as promised. You have to pick your spots, but certainly a lot of them are performing as promised,” says David Ruths Jr., a financial advisor at IPI Wealth Management in Decatur, Ill. He added Merk Hard Currency Fund to increase more alternative exposure to a client's portfolio, which is up 5.8 percent year to date. Ruths also is using traded and non-traded real estate investment trusts.
Aradhana Gupta Kejriwal, a portfolio manager at GV Financial Advisors, an RIA with $800 million in assets under management, said the firm has boosted its cash position and has been looking for alternative money managers. GV Financial held a conference call for investors last month where it talked about some good economic news it believed was being overlooked in the tumult, such as record levels of cash on corporate balance sheets and strong first-half earnings, she says. “Corporations have shown they can still make a lot of money even though the economy is not sprinting,” she says. “At some point, when the fury of the market subsides, the fundamentals of the market come back into focus.”
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