Among the roles financial advisers play – manager, teacher, therapist – perhaps the most important is as a steadying force. But after the market tanked three years ago, many advisers reacted no better than their clients, bailing out of stocks just as they began their steady climb back up.
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Nearly one-third of advisers moved clients out of the stock market and into conservative investments in 2009 and the early part of 2010, according to research from GDC Research and Practical Perspectives. That includes bonds, cash and variable annuities, with bonds and cah as the most popular exit strategies: Some 40% of households increased the exposure to bonds and cash during that time, with those 50 to 64 most likely to flee stocks.
Whether the advisers were responding to pressure from nervous clients or reacting to their own anxiety, one thing remains clear, "advisers are no more immune to emotions than their clients," says Laura Lutton, editorial director of the Fund Research Group at Morningstar. And even those who wanted to stay the course risked angering clients. Terry Donahe, an adviser with Cascade Wealth Management in Lake Oswego, Ore., says he lost several clients during the financial crisis because he refused to dump stocks. "They insisted on getting out of the market," he says. "I said I understand, but I cannot do that as your adviser, and they left."
So many advisers acquiesced rather than convince clients to stay invested in equities. "I think partly they gave into their clients' fears," says Kate Warne, investment strategist at Edward Jones in St. Louis, who she says encouraged advisers to stay the course. Worse, the market upheaval "blind-sided a lot of advisers," says Kelly P. Campbell, a financial planner with Campbell Wealth Management in Alexandria, Va., with $300 million in assets. "Clients were upset by their losses and advisers didn't have a plan."
Other advisers say they weren't feeling the heat at all – they recommended that clients dump stocks because they honestly believed more damage was coming. Brian Fricke, an adviser near Orlando, Fla., says the downturn changed his focus from building wealth to preserving his client assets. By March 2009, he had reduced his clients' equity exposure to less than 30%, and eventually 0%, as he moved to 100% cash. He fully acknowledges that his clients have subsequently missed out on big gains. The Dow has climbed 86% since March 9, 2009, the beginning of a two-year bull market. Even so, he says, "we wanted to keep losses to a minimum."
Is your adviser still gun-shy when it comes to stocks and riskier assets? While it's difficult to pinpoint what is "too conservative," when an adviser makes radical changes to a portfolio following a major event that's a cause for concern, says Lutton. Instead, look for consistent advice over time, says Warne. She says a good adviser should constantly discuss the mix of equities and fixed income. If they are reacting to hot trends, they are likely to talk about a different investment each time -- instead of the overall portfolio.
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