These are the times that test the mettle of financial planners and investment advisers.
They are also the times when planners and advisers prove their worth to clients and earn a good part of their keep.
Certainly, a substantial part of a financial planner’s income is earned from devising long-term plans for clients. But long-term plans are of little use if clients are tempted to deviate from them whenever the stock or bond markets swoon.
The financial planner or investment adviser must prevent clients from panicking and selling stocks.
Of course, planners and advisers must first examine what’s happening in the market to determine whether some fundamental change is under way that throws into question the basic assumptions underlying the long-term plans of the clients.
Planners and advisers are not immune to the natural reaction to flee when danger, in this case financial danger, appears. But they are paid to keep their heads while other people are losing theirs.
Having determined whether some fundamental long-term assumptions have been overtaken by developments in the economic outlook, they must then re-examine each client’s plan.
They can then make a convincing case to clients to stick with the agreed-upon strategy or, if necessary, to make appropriate changes.
In most cases, the best strategy is to hold steady to the long-term plan, making at most small changes at the margin.
Times like these also give planners and advisers the opportunity to let their clients know they are looking out for their interests and to show them the value of their training and experience.
They also show the value of true diversification — diversification across asset classes, not just across different classes of stocks, for as stock prices tumbled, so too did interest rates, and bond prices rose.
Finally, they give planners and clients another opportunity to examine the clients’ true risk tolerance, an important part of any financial and investment plan.
Though the risk tolerance of most clients was tested as recently as 2001-02, when many found that it was lower than they thought, many no doubt forgot the lessons as the market climbed between late 2002 and early this month.
That’s because, as Jason Zweig noted in his book “Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich” (Simon & Schuster, 2007), which was reviewed on this page last week, the brain remembers the thrill of expecting a jackpot (i.e., a winning investment) when the market is rising, better and much longer than the pain of investments that never paid off.
Thus, the current volatility and uncertainty in the market provides another opportunity for planners and advisers to cement their relationships with their clients, to educate them about the realities of investing, and to review and sharpen the clients’ plans after the latest stress test, if necessary.
