There really are only two reasons people seek out a financial adviser: for help in making money through investing, or for help in meeting a major financial goal such as retirement or a child’s college education.
Most times, that second reason also is largely about making money through investing.
As a result of several events — the slump of 2008, the
recession, Bernie Madoff, the painful correlation of supposedly uncorrelated assets, thousand-point market declines due to overstimulated algorithms, uncertainty in Europe and a sense that Washington is non compos mentis — the primary reason for using an adviser is about to change.
Instead of a focus on making money, I believe we are witnessing a shift to a focus on preservation. This is a result of a decidedly more pessimistic outlook on the part of the public.
Consider how the investing public looks at the stock market. For years, we’ve optimistically viewed equities as the road to riches. But the belief that the stock market is a magic money machine is cyclical, and dependent more on mood than on hard numbers. After the crash of 1929, it took more than a quarter-century for the mass-affluent Joe to regain confidence in equities — even though market performance itself was actually quite good from the late 1930s onward.
Except for a cooling-off period in the ’70s and a break that followed the bursting of the tech bubble, our love affair with stocks lasted until 2008.
The most recent decline, which erased a decade’s gains, initially led to jokes about 401(k) plans turning into 201(k) plans. But the jokes are over. More and more people are starting to believe that the good old days — and their good old stock market values — are not coming back anytime soon.
After all, why should the stock market turn up? Earnings per share increase not through growth but as a result of stock buybacks and operational cuts. That translates into jobless recoveries, in which even the employed feel financially insecure.
The rest of the economy also is pretty depressing. Housing is a mess. Small companies find it tough to borrow money because banks would rather make risk-free loans to Uncle Sam.
And let’s not forget the states, which are in terrible financial shape, or the federal government, which appears to be in less hot water only because it can print money.
All of this is making individual investors nervous, and you don’t have to take my word for that. Recent research conducted by Professor Eric Johnson of Columbia University in collaboration with AARP and the American Council of Life Insurers found that retirees are five times more sensitive to loss than younger investors. This “hyper loss aversion,” as Mr. Johnson terms it, was far greater than he predicted. And I bet that pre-retirees aged 55 to 65 also are more risk averse than is generally believed.
Whether they articulate it or not, the nagging fear of most people over 50 is whether they will have enough money to see them through their post-working years. Those who don’t worry are the relatively few who will receive a defined-benefit pension, have a couple million dollars in assets or are delusional. And while many hope and pray that the stock market will work its magic on money they earn in the future, I believe that most want to make sure that what they have now is safe and isn’t going to shrink further.
This less expansive mindset presents a huge challenge for advisers, as well as an opportunity. If, as I believe, the preservation of capital is far more important to clients these days than growth of capital, then a business proposition (whether stated by you or assumed by the client) that centers on making money through investing is out of sync with the times. Instead, a focus on preserving wealth, assuring income and minimizing taxes is far more compelling.
Do some market research to test my hypothesis. Try the following elevator speeches the next time someone asks what you do:
Version No. 1: “I help people like you make their hopes and dreams for a rewarding future come true.”
Version No. 2: “I help people concerned about their future make sure their wealth and income will be sufficient.”
Go with whatever works, but I think it will be the second.
