Bear market tests skills of financial advisers

On the heels of the stock market's worst June performance since 1930 and the official start of a bear market, financial advisers are calming clients' nerves and preparing them for more bad news.
JUL 14, 2008
By  Bloomberg
On the heels of the stock market's worst June performance since 1930 and the official start of a bear market, financial advisers are calming clients' nerves and preparing them for more bad news. "We're setting the expectation with our clients that the market can fall further," said Tim Courtney, chief investment officer of Burns Advisory Group Inc. in Oklahoma City. "The market can very well fall by another 10% to 15%." Since its high of 14,164.53 Oct. 9, stock prices, as measured by the Dow Jones Industrial Average, already have fallen 20% — the definition of a bear market. The Standard & Poor's 500 stock index also is in bear territory, marking the first deep market dip since March 2001. Despite the decline, advisers are taking the negative news in stride. "The market is the same as it always is," said R. Saxon Birdsong, director of planning and investments for Baltimore-Washington Financial Advisors Inc., a Columbia, Md., firm with $200 million under management.
"Clients that are new to equity markets are having severe indigestion," he said. Mr. Birdsong said that many of his clients who have been investing since the market downturn in 2002 are "less anxious." "Anytime that you have such a dramatic loss in a single month, it will tend to unnerve clients," he said. "It is important in that regard, but [performance during a single month] is not an important metric," Mr. Birdsong said. "The fact that it was the worst June was irrelevant." Ivory Johnson, director of financial planning at Scarborough Capital Management Inc. in Annapolis, Md., has warned his clients that they should expect the markets to swing downward by at least another 10%. "When investors express concern as their monthly statements come in, I will explain that they are not investing month-to-month, and the key is to have returns that are adjusted for risk when the market goes back up," he said. Scarborough manages $1 billion in assets. The weaker market has given advisers an opportunity to test their mettle and earn their fees or commissions.

MITIGATING THE SLUMP

Mr. Courtney, for example, sets aside an income reserve in client portfolios that is designed to last several years and is used so that clients don't have to sell stocks when prices are depressed. "Even though stocks can fall further, clients know that there is enough in cash and bonds, and that gives them the confidence that they can capture the performance when the market recovers," he said. Mr. Johnson said that he has taken the opportunity to talk to clients about alternative-asset classes such as gold and commodities. "My take is that alternative assets will hedge against the weakening dollar and are not correlated with the broader financial markets," he said. "I think it is going to be an interesting next couple of years, and that is when you are going to find who is providing value for their client," Mr. Johnson said. Since the beginning of the year, Sovereign Wealth Management Inc. in Memphis, Tenn., has carried more cash than normal in its clients' portfolios, while cutting back exposure to real estate, said Michael Deutsch, the firm's chief operating officer. Aside from those changes, the company continues to hold on to long-term Treasury bonds and exchange traded funds while continuing its diversified hedge fund strategies through a subsidiary, said Mr. Deutsch, whose firm manages $450 million in assets. E-mail Aaron Siegel at [email protected].

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