Look in the mirror, advisers and investors

While CNBC pundits were debating whether we were in a correction or a bear market, the crash took place – and the second-guessing began.

Rich investors’ faith in the investment industry has eroded. Individuals who had hired investment advisers during the mid-’80s experienced losses by yearend.

Wall Street analysts were accused of being captives of their investment banking clients and not warning investors about the pain ahead.

The Nasdaq Composite Index and the Standard & Poor’s 500 stock index hit all-time highs in March, lulling advisers and their clients into a contented, if not giddy, euphoria.

As the year progressed, the pundits surrendered and began to talk about “historic precedents” and “peaks and troughs.”

But when the year ended, many investment advisers were reporting not only negative returns to their clients but also, in many cases, a tax liability, thanks to capital gains.

“How,” investors asked, “can I owe taxes on capital gains when my portfolio is worth less this year than last?”

Baffled and irritated, clients quizzed their advisers, “Why didn’t you protect me? Didn’t you heed your own industry’s warnings about the frothy market?”

Feelings of betrayal and disappointment place the entire industry in a vulnerable position. If investors lose confidence in their investment advisers (as in the case of mutual funds, considering December’s dramatic pullback), what then?

Before being lulled to sleep by the glorious returns of yesterday’s bull market, both advisers and clients could have better prepared for the crisis of confidence in the industry today.

To know who will emerge smarter and stronger in 2001, both advisers and investors might examine their own behavior.

What might advisers have done differently?

Advisers are human. When a prospective client announces that they are going to hire one, an adviser often “doesn’t go past the sale.”

Many advisers cease asking questions, happily take in the assets and do what they are paid to do – manage the money.

Reports are issued quarterly or monthly, face-to-face meetings are held quarterly or annually, and unless the client complains, the advisers assume that the client is satisfied. And they were – until recently.

What might private clients have done differently? After all, the blame can’t be squarely and solely placed on their money managers.

Today, the investment world is awash with “if onlys.”

I would like to suggest a dozen more for advisers, and another dozen for private investors: