If there is one lesson that financial advisers and their clients have learned since the financial world cratered in mid-September 2008, it is that black swans can be as numerous and messy as Canada geese.
Black swans? Until 2007, when mathematician and author Nassim Nicholas Taleb suggested that rare, powerful events occur much more frequently than we think possible, few had ever heard of a black swan.
Then came September 2008 — “The black swan” writ large — and we experienced the unimaginable.
In the space of a week, bond powerhouse Lehman Brothers Holdings Inc. declared bankruptcy; Wall Street avatar Merrill Lynch & Co. Inc. sold itself to
Bank of America Corp. to forestall collapse; the world's biggest insurance company, American International Group Inc., became an $85 billion ward of the U.S. government; and the granddaddy of money market mutual funds, The Reserve Primary Fund from Reserve Management Co. Inc., sent mom-and-pop investors scurrying to find a save haven for their cash.
As fears of an economic collapse worsened, the government intervened on a massive scale in the form of bailouts and deficit spending. Such actions would have been thought inconceivable just months earlier — as would a Ponzi scheme run by a former chairman of The Nasdaq Stock Market Inc. that turned out to be the largest investor fraud in history.
But as the seasons passed, the flock of black swans flew over and a “new normal” set in.
Fears of another Great Depression abated. As the Federal Reserve's beige book indicated last Wednesday, a recovery — albeit a listless one — seems to be taking place.
Even though the national unemployment rate stood at 9.7% in August, the highest in 26 years, the hemorrhaging of jobs has slowed. The number of new jobless claims reported last Thursday was lower than analysts had been expecting.
The stock market, as is customary, had been anticipating the economic turnaround. Although the public mood displayed little of the ebullience typically accompanying a stock market rally, the S&P 500 this year has enjoyed its greatest rally since the mid-1930s.
Investors and advisers remain wary.
On the economic front, the unwinding of the residential real estate market continues to plague banks, municipalities and, of course, the millions of homeowners threatened with foreclosure. Adding to the anxiety are the toxic mortgage-backed securities that triggered the financial crisis, which remain the Love Canal of the banking system.
Although the essential optimism of advisers and most Americans endures, and most think that better days are ahead, the events of the past year have shaken several core investment beliefs and led to the questioning of many once-inviolate givens.
For example, is the stock market really efficient?
And if stocks are for the long run, what do you do if 20 or 30 years of saving and investing is decimated on the eve of retirement?
When should buy-and-hold become buy-and-sell?
What about asset allocation and diversification? Weren't those techniques supposed to ensure that losses in one asset class or geographic region would be offset by gains in another?
And what about the integrity of credit ratings agencies or the risk-assessing ability of insurance companies?
As advisers grapple with those and other questions, and reassess their guiding principles, there are other lessons to be learned from the events of the past year.
First is the overriding importance of adviser-client communication.
Having to counsel and console anxious clients (and, in many cases, their own employees) over the past 12 months has been emotionally draining and time-consuming. But for advisers who invested the time and energy to call, e-mail, write and meet with clients — an effort demanding a far greater commitment to communication than many advisers had ever made — the rewards have been significant.
Second is a new appreciation for humility.
Although advisers still most offer clients knowledge, insight and wisdom, they have learned that positioning themselves as investment gurus or as advocates for a particular investment style can be fatal to their future. Ironically, investors who have been humbled by the events of the past year seem to prefer an adviser who is more coach and counselor than investment impresario, and tend to look more favorably on advisers who don't position themselves as stock pickers.
Finally, advisers have learned the importance of creativity.
More than ever, they have come to see the value of standing apart from the crowd with more-innovative customer service, novel investment perspectives, tax-saving ideas or any one of a variety of clever and insightful suggestions that clients find meaningful.
Adversity can be a great teacher. And while the difficulties of the past year probably provided too many educational opportunities for advisers, it may have set the stage for wiser counsel and stronger client relationships in the future.
