Monday Morning: Advisers’ clients edgy but sitting tight

More than a month after the attacks on the World Trade Center and Pentagon, financial advisers are still feeling the impact through their clients.

According to planners attending the Schwab Impact 2001 conference in Seattle last week, in most cases the clients have been frozen and have made no changes to their portfolios.

Many have called their advisers, ostensibly to ask how they are coping. Only later do they ask the advisers what they expect from the market, or they seek reassurance that their investment program is still on track. Few want to make changes.

Normal reaction

That is a normal reaction to traumatic events, according Terrence Odean, assistant professor of finance at the University of California at Berkeley, who researches how psychology affects investors’ decisions.

Mr. Odean told the advisers at the Schwab conference that one reason why people stopped discussing the situation and trading is that the Sept. 11 attacks caused them to doubt their prior beliefs.

Fear and doubt spread to their assessment of all other risks, he said. Often the most comfortable thing in times of uncertainty is doing nothing. In addition, when people are sad, they tend to be more analytical and less spontaneous. The best antidote, he added, is straightforward information from a trustworthy source.

Though Mr. Odean didn’t say it, the fact that so many clients called their advisers in the weeks after the attacks suggests that advisers have earned their clients’ trust.

Behavioral finance research suggests a number of other reasons why trading has dropped since the attacks.

One reason: People don’t like to sell stocks at a loss.

Another, the research shows, is that people buy stocks that catch their attention. Since fewer are rising, fewer catch investors’ attention, which means less buying. When the market is down, fewer investors think investing is easy, and therefore more drop out or seek help.

There’s also the house-money effect: When they are ahead, people reinvest their winnings. When there are no more winnings, they are reluctant to invest.

Finally, for many investors, investing had become a source of entertainment. Now it’s not so entertaining. Financial website traffic is down 40% from last year’s level. The death of investing as entertainment is good news.

And there is other good news for advisers in Mr. Odean’s comments: More investors will be seeking help once they begin to recover from the shock. And the fact that most clients weren’t eager to make changes – weren’t worrying excessively – means that most probably had the right portfolios for their situation.

In fact, according to Mr. Odean, excessive worry indicates a wrong portfolio.

Another piece of good news: People are remarkably resilient, according to Mr. Odean. He expects fear to subside fairly quickly if there are no further attacks in the near future.

Now some bad news.

When their investments are doing well, investors take the credit. When investments aren’t doing well, they tend to blame others. Some clients with poor results may now seek to blame their advisers. However, those likely will be a minority of clients.

In the meantime, as Mr. Odean suggested, financial planners and investment advisers must continue to position themselves as honest, competent and trustworthy. They must give clients straightforward and accurate information.

Mike Clowes is the editorial director of InvestmentNews.