Give clients the confidence they need

The end of each year is a time of reflection and anticipation. From a financial perspective, this has been a year when people have had their confidence shaken to the core. Most are nervous about their employment situation, investments, credit standing and even the viability of institutions with which they do business.

In short, 2008 has been a year of financial uncertainty, and resolutions for 2009 will focus heavily on measures to restore lost confidence.

The axiom that the financial markets hate uncertainty is true: Investors are repelled when confusion reigns. But as signs of order reappear, investors will return.

It was no coincidence that the beleaguered stock market had one of its best recent rallies on the news that President-elect Barack Obama had decided upon some well-known and respected names to form the core of his economic team. The incoming administration appears to understand that actions that convey stability are what investors crave during times of crisis.

Investment advisers will do well to understand the similar effect that their actions have in terms of confidence-building.

The philosopher Jeremy Bentham said, “The power of the lawyer is in the uncertainty of the law.” Similarly, the power of the investment adviser is in the uncertainty of the economy and financial markets.

A skilled and ethical professional’s value is to replace chaos with success.

However, advisers can have their confidence shaken, too.

Recently, I have been asked by several seasoned advisers whether it is time to rethink key tenets of what, at least until now, have been deemed to be generally accepted investment principles. Modern portfolio theory, diversification and dollar cost averaging have done so little to protect investors from financial calamity this year that some are questioning the continued relevance of these concepts.

This is a potential trap for advisers for at least two compelling reasons.

First, under the laws that govern fiduciary conduct, there is an obligation to diversify portfolios and apply generally accepted investment principles, except in those rare circumstances when it is clearly prudent not to do so. This year, about the only way to have averted losses would have been to either sell all investment positions and park the money in cash or take short positions in just about every available asset class.

I don’t know of anyone who claims to have had such keen forecasting skills actually to have done this. Moreover, an adviser who places such big tactical bets will be wrong far more often than he or she is right.

Each correct call may win temporary respect and admiration from clients and colleagues. Each failure is an open invitation to a lawsuit.

Second, people typically turn to professionals to be reassured that order can be restored to their world and that the adviser can help accomplish that. They want to hear a specific plan in familiar terms, preferably using tried and true methods.

Think about this in terms of medical treatment.

When I go to my doctor, I know most of what he is going to say: exercise, eat right, get plenty of rest and return for regular checkups. If I am sick, I also expect to get a prescription to treat the cause or manage the symptoms.

What I don’t expect, and what I pray won’t happen, is to find myself in a conversation about experimental new treatments that may save my life in what appears to be a hopeless situation.

If ever I do get that dire message from my doctor, it better be accurate, because what is good for me over the long term no longer has much relevance, including my relationship with that doctor.

With these two caveats in mind, I recommend that every investment adviser make a New Year’s resolution to combat the debilitating effects of economic and market uncertainty by applying a reliable fiduciary standard of care in all client relationships.

When an investor asks you what to expect in 2009, frame the response in terms of what they can expect from you: professional competence in applying best practices in investment management, utmost good faith in disclosing material information, avoidance of conflicts of interest, and a commitment to placing the client’s best interests first.

This is what clients want, regulators demand and true professionals in our field should be prepared to deliver.

Blaine Aikin is president and chief executive of Fiduciary360 LP in Sewickley, Pa.

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