By Joni Youngwirth
A crisis is a terrible thing ... to waste, according to economist Paul Romer. Though some may question whether the current environment is truly a crisis, few would challenge that it certainly feels like one. It's a terrible thing to waste because, in a crisis, we are motivated to make positive and permanent change. Ask yourself: What lessons have I learned since Sept. 15, 2008?-the date Lehman fell. Here are a few common responses to that question.
Risk Assessment Redefined
Advisers and clients alike have found that their risk tolerance needs to be recalibrated. Not surprisingly, most clients have figured out they are not as tolerant as they thought they were. What is also readily apparent is that clients think in relative terms as the market goes up and in absolute terms as the market goes down. For example, in a bull market, clients say they gained 11 percent, but in a bear market, they say they lost $300,000.
Reassessment is challenging enough. But now, there are additional risks to assess. One is media risk, which is the risk that clients will overreact to what they hear in the media. Most assessment instruments are not calibrated to assess that kind of risk.
Advisers would do well to remember that they, personally, are not immune to risk either. Given the potential for liability suits, advisers should increase their focus on documenting conversations and decisions made with clients. And don't skimp when it comes to documenting interactions with family and friends, a frequent source of liability suits.
Advisers are also assessing their tolerance for the industry. Having to tell clients they will run out of money has taken a toll; some advisers will trade this career for one a little less volatile.
Advisers are not omnipotent. Clients know that, but sometimes advisers believe that clients think they're omnipotent. Some advisers have felt guilty because of the market's volatility, but humility is not the same as guilt. It is said that only when we are humble can we learn. And we're all in a great position for serious learning.
The public may not think much of the industry right now. According to the January 2009 Consumer Reports, people who used a financial planner were not necessarily better off than those who didn't. Whether or not the statement is valid is irrelevant. The sentiment is out there, and it will take a continual effort to reverse it.
Simplify, Simplify, Simplify
Advisers are asking themselves how to simplify their lives. For many, the answer entails reducing their number of clients, products and projects.
Advisers have learned that they cannot handle as many clients as they have in the past. During the recent market turbulence, clients have needed more of their advisers' time than ever before. Smaller clients, who required little time before the chaos, suddenly clamored for the adviser's time and attention. Advisers frequently organize clients into A, B and C categories or use a similar hierarchical approach, and, faced with a fixed 24 hours per day, there isn't enough time to go around. Some advisers are finding new homes for certain clients so they can right-size the client base they do serve, no matter what the market is doing.
Ditto for products. How many products do you need? How many products can you manage? As one adviser said, "I have decided to decrease the number of products I use for clients, while still being able to offer broad diversification and a balanced selection of asset classes. The basic goal is to simplify."
Similarly, the to-do list of projects in an independent adviser's practice can feel endless. Some advisers have decided to put a moratorium on projects. Given reduced revenue, there is logic in keeping a focus on the projects that can yield a return for the company.
Compassion fatigue results from dealing with too many emotions from too many clients for too long a period of time. We are fortunate to work in an industry where advisers genuinely care about their clients. But advisers have been working 24/7 for months-most have never communicated so much with their clients-and this is the time for extreme self-care. In many practices, the clients are now calling to check on how the adviser is doing!
Many articles on the topic of compassion fatigue remind advisers to care for their bodies, minds and souls. Eating healthy foods, exercising more and getting enough sleep are fundamental. Making sure to stimulate gray matter by reading something other than financial materials provides a mental break. Tending to the soul, whether through traditional religion or a walk in nature, depends on the individual. Some advisers say that the best way to nourish the spirit is to make sure to get in a hearty belly laugh each and every day.
Leadership Is Critical
As one adviser said, the only safe ship in a storm is leadership. Think of a leader who has been a role model for you. If that person had walked in your shoes for the last several months, how would he or she have displayed leadership?
Getting out of this mess will require leadership by each of us. Advisers have held dear principles such as buy and hold, diversification, dollar-cost averaging and modern portfolio theory; the courage of these convictions will be tested. But rather than throwing up our hands and claiming that nothing works, another perspective is that it is not now working as well as it has traditionally. Perhaps the most basic question is: How much faith do we have in the U.S. and world economy?
Short Term Versus Long Term
At the heart of this period of reassessment is the importance of strengthening client relationships. In one study done by SEI Investments Co., 80 percent of advisers said their clients value and follow their advice even in tough times, if there is a proper foundation in place. That means becoming your clients' trusted adviser, knowing their values and goals and creating a documented long-term plan with them.
Advisers must also reassess client selection and make sure only individuals who allow them to lay that foundation are chosen. Russell Alan Prince did a study several years ago examining nine high-net-worth personalities. He found that some personalities-such as family stewards, independents and phobics-are receptive to long-term planning, while others-such as gamblers and innovators-are averse to long-term planning.
The "prisoner's dilemma" is an intellectual puzzle that psychologists and economists pose to help understand human behavior. In one scenario, the game pits two suspects against each other. Police don't have enough evidence for a conviction, so they visit each person separately and offer the same deal. If both prisoners stay silent, both get a brief stay in prison; if both testify against each other, both go to prison for life; if one testifies against the other, one goes free and the other goes to prison for life. Data shows that when the game is played only once, and with a stranger, both players will generally turn on each other. But when it is played multiple times with someone familiar, players quickly learn to cooperate.
Similarly, clients who have only a short-term transactional relationship with their adviser are more likely to blame the adviser when losses occur. A more collaborative long-term financial planning/wealth management approach, however, seems not only better for the client, but also safer for the adviser.
Back to Basics
Advisers frequently say that they have learned to get back to basics. But when asked about what activities are basic, they give a variety of responses, such as increasing activity, making rain, focusing on documentation, budgeting more carefully to minimize unnecessary spending and enhancing client communication.
Everyone knows what getting back to basics means for him or her. The key is to focus on the question, articulate what your basics are and start doing them. The familiar saying fits: It worked so well, I quit doing it.
What Lessons Have You Learned?
There are a number of lessons to be learned here. What is key, however, is the question at the beginning of this article: What lessons have I learned since Sept. 15? Put your own response at the top of the list and use this blessed unrest to learn, change and improve. The goal is simple. Learn from this experience and transition current struggles into future strengths.
Joni Youngwirth is the managing principal of practice management at Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser, in Waltham, Mass. She also serves on the Practice Management Solutions editorial advisory board and the FPA Business Solutions 2010 task force. Contact her at firstname.lastname@example.org.