Q: What did the crisis teach you about handling clients and risk levels?
A: Diversification and cash are the key things. We had a lot of alternatives at the time, which helped keep portfolios from going into free fall. And we had clients with cash on the sidelines. We were talking in December 2007 that the credit crisis had already started, so we checked that our clients had enough cash. When Bear Stearns hit, we looked again at cash levels, especially for those clients in distribution mode. We recommend two to three years' worth of cash be local and liquid. That's a local bank, money market or credit union, with ATM and checkbook access. That sounds like a lot, but we recommended it. What we needed to do was assure them that between short-term bonds and cash, we had sufficient liquidity to see them through. Most of the data we looked at from historically large downturns in the stock market showed it took five to seven years to get back.
So all this helped ease fears, but the market continued to slide, bottoming in March 2009. The simple fact is, you can talk until you're blue in the face, but if markets keep going down, clients are going to ask if it is ever going to stop. Some panicked. We had four clients just get out. They were the ones most hurt. In addition, we are putting more of an emphasis on financial planning, because that uncovers where risks are. So we do that planning upfront. We make sure clients understand it's not just cash flow planning; it's about job risk, health risks, property risks where they don't have umbrella policies but have kids on their auto insurance, or flood insurance after what we've seen from Hurricane Sandy. One good crisis can blow up a portfolio pretty fast. So good risk management is good wealth management.
Principal and wealth manager
— as told to Dan Jamieson