RIAs struggle to keep clients grounded amid stock market euphoria

With equities at record levels, financial advisers are confronted with realities of greed and fear

Dec 14, 2017 @ 4:44 pm

By Jeff Benjamin

The stock market run, which has been charging largely unabated for nearly nine years and entered a second stage of out-performance after last year's presidential election, is creating new headaches for some financial advisers.

Whether it is convincing clients to stay in the market at these record levels or deterring them from getting carried away on a wave of performance-chasing, advisers say they are earning their fees in these market-rich times.

"Many of the baby boomer and retired investors we are meeting with appear to be in a happy state of euphoria while suffering from recency bias, where they are evaluating their money moves for 2018 based on the past year's spectacular market results with low volatility," said Jon Ulin, managing principal at Ulin & Co. Wealth Management.

The S&P 500 Index, which has gained more than 290% since the financial-crisis bottom in March 2009, has charged ahead more than 18% so far this year.

"It appears that the pain of the losses suffered through the past market crash are only a fuzzy memory, as greed is overtaking logic," Mr. Ulin said. "Investors are almost like Cinderella at the ball, oblivious of when the clock is going to strike midnight."

Thomas Balcom, founder of 1650 Wealth Management, said he is starting to see some of the typical market-peak indicators that tend to make his job more challenging.

"We may be near a market top, since clients are now questioning why their portfolio isn't keeping up with the S&P," he said. "Fear has been replaced with greed, and that usually signals that the market top may be near."

Mr. Balcom said most of his clients are "comfortable with their allocation and are seeking to take some risk off the table," but he has some clients who want to increase their equity exposure to catch more of the broad market's run.

Jane Nowak, a financial planner at Wealth and Pension Services Group, said most of the bullishness she sees comes from less-experienced investors who don't recall or didn't fully experience the market downturns of 2008 and 2002.

"I have been seeing a crazy appetite for risk," she said. "We don't want investors to be buying high or to be disillusioned, which is why I try to tell people that it's important to have a plan."

Ms. Nowak isn't advising against investing the market, but she does suggest gradually dollar-cost-averaging money across a diversified portfolio.

"For the more conservative investor, this is clearly a good time to take some profits, which can bring a portfolio back into balance," she said.

Robert DeHollander, managing principal at DeHollander & Janse Financial Group, said he manages client emotions and expectations by segmenting their portfolios into three buckets, with one for longer-term, riskier investments.

"We know that investors tend to make the biggest mistakes at the tops and bottoms of markets, because they're usually chasing returns and they're not rebalancing," he said. "It's important not to get greedy."

In terms of the current stock market level, Mr. DeHollander isn't necessarily convinced it won't keep climbing, but he does recognize the need to keep the mind focused on the bigger financial picture.

"Record levels for the stock market just means that it's higher than it's been before, but we focus on how expensive the markets are relative to other asset classes, and on a risk-adjusted basis, stocks still look reasonable," he said.

Not unlike the election of President Donald J. Trump that caught a lot of prognosticators by surprise last fall, the stock market continues to shrug off various economic and geopolitical risk factors.

"The extended bull market has certainly changed clients' expectation and investment outlook," said Rose Swanger, president of Advise Finance.

"A lot of people have morphed into risk takers from timid investors just a year ago," she said. "Regardless of their time horizon or lack of financial and investment knowledge, many investors have rolled up their sleeves and given the order to buy ... and buy more when the market dips."

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