by Cynthia Harrington

What a difference a year makes.

After three consecutive years of down, down, down, the equity markets have rebounded. Investors now add up the double-digit percentage gains in portfolios. And the advisors’ role of managing expectations has shifted quickly from assuaging fears to moderating greed.

The message to clients from both ends of the spectrum seems to be the same.

Top advisors tell clients to stay diversified and stay the course. “After these past few years, clients see the evidence that we are line smoothers,” said Glenn Frank, CPA, PFS, CFP, MBA, of Tanager Financial Services, in Waltham, Mass. “We’re able to explain risk to them now because they have experienced it.”

Advisors are still surprised at how quickly investors’ attitudes have shifted with the market. “I still would have thought that more would have looked at this differently,” said Kacy Gott, CPA, CFP, of Kochis, Fitz, Tracy, Fitzhugh & Gott Inc., in San Francisco. “No one’s euphoric and they’re not spending their market recovery, but I might have thought that after what they’d been through they would be more conservative at this point. Very few are moving to a more conservative position.”

Investors, it seems, have short memories.


Michael Lane, director of advisory services for the Advisor Services Division of TIAA-CREF, in Louisville, Ky., likened this phase of the equity market to the 30-year flood in his hometown. The most recent one, in 1995, swept away millions of dollars of expensive homes built on the picturesque riverbanks. “They’d forgotten,” said Lane. “They’d gotten all cozy down there, some even went without flood insurance.”

For the following few years, caution reigned.

Then one home popped up, then another. Nine years later, the area is fully developed again. Lane makes the parallel to the market. He said that some investors got wiped out by the three bad years and others just got water in their basement. “Now that the waters have receded, some are putting their toes back in. But some are jumping in fully, trying to make up for what they lost.”

Time to rein them in?
Responding to clients’ needs is a cornerstone of a good advisor. But the vagaries of the market sometimes demand that advisors coach clients against what they think they need. “Some advisors are facilitating their client’s aggressiveness, and some are not just reacting but are taking advantage of it and pushing clients to buy in,” said Lane. “But the good ones are making sure that people don’t get greedy again.”

The planning process is the foundation of managing investor emotions. At San Francisco-based Kochis Fitz, clients see projections of what different returns mean to their future lifestyle and spending. “This is where the financial planning part really comes into play,” Gott said. “Even with lower expected returns, most clients still have excess resources.”

Kochis Fitz lowered expected returns on all asset classes after a six-month review of academic literature. Every asset class got nicked 50 basis points for expected inflation and the expected risk-free rate is now 3 percent, down from 4 percent. The future of fixed income registered the biggest decline. Kochis Fitz even lowered expectations for returns on alternative investments. “So much money is flowing into the absolute return strategies that it’s hard for even the best managers to find trading opportunities,” said Gott.

Gott and colleagues run the projections for a client’s portfolio during the regular review meetings, which started this April. “After the last few years, they realize the market is like a roller coaster ride, [and are] not going to get nervous if it drops another 20 percent to 25 percent,” Gott said.

Gott made the point that new or prospective clients do not share the same level of calm. “We tell new clients that we project a return of 8 percent in equities and they say they could produce that return in their sleep,” said Gott. “This is partly because these are new-money investors, gained from stock options or other corporate wealth.”

Investors’ understanding of risk improved partly because of the volatility, and partly because advisors found better ways to illustrate the concept. “Standard deviation gets lost pretty quickly as a way to illustrate risk,” said Tanager’s Frank. “What people really feel is how much money they have lost or gained.”

Tanager incorporates this explanation of risk into their planning process. They show how investors truly performed against a benchmark of a combined stock and bond portfolio. They show the worst one-year period, worst four quarters, and the worst peak-to-valley move in the previous five-year period. “This helps clients see not just what they have done, but also the value of our advice and counsel,” Frank said.

The discipline to stick to a plan can be the most valuable service that an advisor offers, according to Lane. Providing the discipline keeps investors from making mistakes by becoming greedy. “The more the message of discipline versus performance gets out, the more advisors see that sticking to a plan is the way to do the best for the client,” said Lane.

His experience is that most advisors affiliated with the TIAA-CREF advisory services unit align with this way of thinking. They see that providing investment discipline supports a long-term view of building a practice. “The biggest mistake that new advisors make is thinking their value comes from picking funds or stocks,” said Lane.

Advisors are finding it easier to move clients into nontraditional asset classes. Despite the lowered expectations, Kochis Fitz finds that more clients are open to allocating capital to alternative investments. In addition to stretching more and more into alternative investments and hard assets, Tanager is bumping the allocation to international. They think non-domestic equities are 30 percent undervalued compared to U.S. stocks. “We’re moving to more defensive positions,” Frank said. “Valuations of domestic stocks compared to the EAFE without Japan suggest an upside move to catch up.”

Said Frank, “Weird assets are becoming the norm. It’s not so much that we’re seeking alpha as it is an extension of the diversification prescribed by modern portfolio theory.”

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