Investors, advisers heeding wake-up call

Judging by the results of InvestmentNews' 2010 Industry Attitudes survey, the financial crisis and market crash seem to have changed the behavior of financial advisers and clients for the better. It seems that both groups have relearned the importance of due diligence and considering the risks of pros-pective investments within the context of future needs, as well as possible returns. As Michael Stolper, chief executive of Veritable LP, said: “It would appear that for high-net-worth clients, objective advice continues to be in demand. But clients are much more demanding. They have questions about the safety and soundness of investment vehicles. They want to know who's counting the money and who's holding the money.” Clearly, investors once again are re-evaluating their risk tolerances and deciding that they really can't accept as much risk, as much volatility, as they thought they could. Stocks might promise higher returns than bonds in the long run, but they also bring with them more sleepless nights. And the long run over which stocks produce the greater returns may be longer than many investors can wait. Interestingly, the attitudes of individual investors seem to echo those of institutional investors, such as corporate pension funds. According to a survey by the Center for Retirement Research at Boston College, corporate defined-benefit pension plans have slashed their stock exposure to an average of 45.3%, from almost 70% in mid-decade. Public-employee pension plans also have reduced their equity allocations to 63.5%, from just over 70% in 2006. Pension funds, like individual investors, seem to have decided that the extra return promised by stock investing isn't always worth the volatility that often accompanies it. As a result, they have increased their exposure to bonds, commodities and other alternative investments that they expect to have low correlations with stocks. In addition, companies seem to have accepted that because they can't accept the volatility associated with high equity allocations, they will have to make larger contributions to their pension plans. Once again, investors have discovered that their risk tolerance isn't as great as they thought it was, a lesson supposedly learned during the bear market that followed the collapse of the Internet bubble in 2001. Perhaps because the lesson has been hammered home twice in less than a decade, it will stick this time. In addition, investors may have learned that the stock market can't be relied upon to do the hard work in providing financial security. That comes only from developing a plan to build and husband resources for the future, and the plan must include saving as well as investment.

REALITY CHECK

Financial planners and investment advisers can reinforce the lessons of the financial crisis to make sure that they don't fade the next time a strong bull market appears. One way they can do this is by encouraging their clients to reconsider their financial and investment plans, and their risk tolerances. Are they still realistic, given the likely economic scenarios for the next five and 10 years? What's more, financial planners and investment advisers also should examine the economic and investment assumptions on which they base their guidance to clients. Only by going back to basics and checking that their advice is based on evidence and sound logic will they be able to help clients revise their plans in ways that make sense in this environment and that will help them meet their goals.