Advisers feel pain of no gain

The crisis of confidence on Wall Street has become an indescribable, all-enveloping force.

This summer for the first time, many advisers report that they are receiving instructions to liquidate portfolios.

For now it’s just a trickle. But many advisers say they are losing clients, especially people on the verge of retirement who claim they simply cannot risk losing another dime.

“It’s not pain anymore,” says Carlo Panaccione, principal of Redwood Shores, Calif.-based Navigation Group, which has $125 million under management. “It’s exhaustion.”

The nascent trend compounds already heightened levels of malaise among advisers, who have watched clients suffer substantial losses because of the scandal-induced downturn in the stock market.

“I know there’s a different mood now, even among advisers,” says Dennis Miller, president of Miller/Russell & Associates in Phoenix, which has $500 million under management. “I think it’s even worse now than after the terrorist attack.”

Attacks, he explains, are “a definitive thing. A crisis of trust is like an unfaithful wife: It’s something you don’t get out of your mind very easily.”

Mr. Miller is less concerned about the Martha Stewart-like aberrations. He wonders more about the institutions that are supposedly guarding the henhouse. “Most disturbing are the accounting firms and the boards of directors,” he says. “Where were they? Where was the SEC? With that said, why would you invest and why not take out some money?”

Charles Hess, president of New York’s Inferential Focus, says advisers should be approaching their business differently. “Advisers,” he says, “are still living with what they were trained to do for 20 years” – that is, buy and hold equities.

“Up till now, there’s been the assumption that we’re dealing with a cyclical downturn, and as the mania has unraveled, it’s caused more and more confusion because we’re dealing with something different,” says Mr. Hess, whose company offers advice about macroeconomic trends to companies such as Boston’s Fidelity Investments and New York’s Goldman Sachs & Co..

“Advisers should take the analogy of the U.S. [approach to security] and apply it to clients and use more risk management,” he adds. “I’d still say they’re not doing that for a lot of investors.”

Donald S. Peters, managing principal of Central Plains Advisors Inc. in Wichita, Kan., agrees. “I wouldn’t buy anything in the world except government bonds,” he says.

Derek C. Jaskulski, strategic analyst with Portland (Maine) Global Advisors LLC, says he also has clients he’s hard-pressed to keep in stocks.

Some of them are “worried sick” – to the point that holding on may not be best for them, he explains.

“We tell people we’re closer to the bottom than to the top, and we’re not going to a 1929 scenario,” he says.

“But they’ve got to be at their level of risk tolerance, and you can’t get sick,” he says. “We’re readjusting. If it’s ruining your life, what’s the point?”

Indeed, advisers are reporting that though their basic game plan of tough love and full investment remains in place, they are making halftime adjustments.

Mr. Panaccione says he is meeting with every client and clearing out any remaining technology positions from client portfolios.

Patrick T. Hanratty, managing director of Capital Advisors Ltd. in Cleveland, says 5% of his clients have gone through the buffer of wealth that is the difference between retiring with breathing room and retiring on a bare-bones income.

Those clients are worried, but he says his system is working and he is adding clients as never before.

“We tell people they’ve got two portfolios,” he says. “One portfolio they’ll never see. It’s being passed on to their kids.”

He adds that he gets clients to focus attention on the second portfolio, which is loaded with government bonds and guarantees from insurance companies.

“If you don’t want to worry,” he concludes. “Die young.”

S. Timothy Kochis, president of Kochis Fitz Tracy Fitzhugh & Gott Inc. in San Francisco, says he has increased his hand-holding time but it hasn’t helped in every situation.

One client, he says, just insisted on converting 100% of their portfolio, valued in the millions of dollars, to cash. “All that conversation didn’t help in this case,” he says.

Even market-beating returns are not enough to attract clients, according to Thomas F. Basso, CEO of Trendstat Capital Management Inc. in Scottsdale, Ariz., which has $17 million under management

Mr. Basso uses hedging techniques that have resulted in a 2% gain this year and that resulted in a 25% gain in 2000. He lost 23% last year. He has lost 30% of his assets under management during the bear market because of clients’ liquidating their portfolios or dying.

“You’d think our business would be skyrocketing,” he says. “But people are getting disinterested and panicked. This reminds me of 1974, when people were swearing they’d never get back in the market.”

Mr. Basso says he is advocating his own brand of tough love for doubting clients.

“Clients don’t want to stick their necks out at all,” he says. “But it’s best to deal with risks head-on.” He looks back at Arizona’s savings-and-loan troubles: “As we learned in the S&L crisis, there’s risk in CDs or bonds.”

Mr. Miller also prefers sucking it up to seeking quick fixes. He believes the wheels are in motion at accounting firms across the nation to tighten standards.

“In America, we’re quick to recognize excessive behavior,” he says. “You go through a remedial period, and you have to agree that’s good.”

Real change

Mr. Hess is less sanguine about the prospects for self-remediation in today’s economy.

“They’re all, on the surface, changing the way to do things, but it’s going to take another round for these guys to really change,” he says.

Mr. Peters agrees that time is not on the investor’s side this time around, but he says taking drastic action is scarier.

“The real danger in the economy is that Washington will react to this and make things worse,” he says. “Time is the only thing that is going to heal this bubble.”

Mark Lutkowitz, an analyst with Communications Industry Researchers Inc. of Charlottesville, Va., says his observations of the disaster-riddled telecommunications industry tell him that advisers with faith will be rewarded.

“They should just take a pill and chill out for a while,” he says. “In our lifetimes, we’ll never experience this again.”