Cutting Through The Noise

By E. Hale Jones,
FA Editor-in-Chief

I met with a woman this afternoon whose equity holdings were down only 5% — and they represented only 20% of her entire portfolio. Everything else was doing fine. Yet when she entered my office, she was in a panic.

This was typical of the comments FA heard in talking with advisors throughout the tri-state region. Similar scenes are playing out all over as financial advisors seek to calm their clients – apprehensive at best, fearful at worst over the market downturn and the general state of the economy. Negative noise is everywhere: the media, the politics, office, barroom and country club chatter, even confl icting noise from financial advisors.

Should I stay in the market or get out?

That’s probably the most frequently-asked client question. The best answers, of course, come case-by-case. Some advisors say advising a client to get out now is essentially admitting that what you’ve been telling him or her all along has been wrong. Besides, a bailout now will kill all chances of recovering losses.

“The public – and to a very large extent we as advisors — are caught up in the mania,” said Ed Mazoyer, FA market analyst and a market specialist at Vanderbilt Securities, Melville (LI).

“Now, we’re in the “everybody sell” mania. There are some strong securities out there you can buy for 35-40% less than a year ago; these are bargains. Yet the public is selling because there’s a panic going on. Your house is down 30-35%. Are you going to sell your house? Of course not,” Mazoyer observed.

Longtime advisors say longevity trumps market timing. They note that there have been 32 bear markets (20% or more decline) since 1900 with an average decline of 34% — not counting the current slide. There have been 11 recessions since 1945 and the 10-year gains after each one has varied little – regardless of whether one invested on the first or last day of the recession.

When people say this is worse or this is different, experienced advisors point out that this downturn will be remembered for the subprime lending problems; but all bear markets have had similar core issues. The last bear market started when the technology bubble burst and was extended in the aftermath of 9/11.

Consumers working with financial advisors are likely to be more comfortable than others in economic storms. Roughly nine in ten consumers with a financial plan feel they have a clear financial direction – 50% higher than for self-directed investors, according to a study released by the Financial Planning Association (FPA) and Ameriprise Financial.

Chuck Jaffe of MarketWatch says this isn’t just because they can afford to pay for financial advice but because “the primary role of a financial planner is not just to manage investments and pick stocks and bonds, but to provide emotional discipline – the ability to foment a plan and see it through regardless of market conditions.”

But because they’re living in fear, investors are having difficulty “sticking with” financial plans. The see two alternatives, both bad: (1) remain invested and watch the market sink lower and not recover for years and (2) pull everything out and risk missing out on the recovery.

“It’s the risk of omission vs. the risk of commission,” says Washington State University professor John Nofsinger. “It’s failing to do something versus doing something that turns out wrong and a lot of people get frozen in between.”

MarketWatch’s Jaffe says the current economy has forced financial advisors to change the definition of short term.

“When the market is going gangbusters and investors don’t want to sacrifice returns, they tend to keep the short term short, a year or two,” writes Jaffe. That way, they can get more money into the market to take advantage of what seems like a sure thing.

“But right now. . . short term is defined as five years, meaning that any money you may need for at least the next five years needs to be in safe-haven investments or cash. Intermediate term – which had been defined as two to five years during the good times, now seems to be five to 10 years and long-term investments are looking forward by a decade or more.”

By far the majority of advisors believe the market will snap back long before then. Old timers cite history and contend that people will look back and see that they made money investing in a bear market but didn’t recognize it until the next bull market arrived.

Some advisors like to point out the current positives.

FA ‘s Mazoyer says there are more positives than negatives. He cites declining oil (and hence gasoline) prices, concerted action by the world banks and a stronger dollar.

“The U.S. led this economy down. . . and will lead it back,” he said.

FA

It’s Not What You Say. . . It’s What They Hear

Reassuring Clients in Volatile Markets
More than half of adults believe a major reason financial services professionals use jargon instead of simpler terms is to distract clients from the fees and/or commissions they’re paying. Nearly two-thirds say it’s to make a product seem more impressive. Roughly half say jargon is all about making consumers feel less confident and more dependent on advisors.

So say the results of a survey by AARP Financial, who says the research “generated fresh evidence of the debilitating lack of clarity and outright obscurity” of financial services communications.

William Nicklin, writing for www.horsesmouth.com pointed to 10 Rules of Effective Language from a book by Dr. Frank Luntz and applied them to today’s financial advisors.

Rule 1: Simplicity – Use small words. Clients are already confused; adding complexity with words that obscure the true meaning of what you’re saying only makes matters worse.

Rule 2: Brevity – Use short sentences. Clients can’t absorb a treatise when their heads are spinning. Short sentences will stick in their minds.

Rule 3: Credibility is as important as philosophy. Don’t try to contradict or gloss over the facts. Explain in concise terms what you believe to be the circumstances at the moment. . . and show how what you’ve said in the past is working out in the current environment – good or bad.

Rule 4: Consistency matters. It goes hand-in-hand with credibility. Stick with your basic underlying beliefs and don’t be pushed around by events. Your added value stems from your paying close attention. Stay on message.

Rule 5: Offer something new. Every situation offers new insight. Tie it to your past thoughts and advice. Give them a new take on an existing idea.

Rule 6: Sound and texture matter. Place more emphasis on parts of a conversation you want your clients to remember. Raise your voice and repeat two or three times the thought you want them to remember while watching a financial news show or reading the paper.

Rule 7: Speak Inspirationally. Offer a positive outcome. For example: If we look at the situation this way and conduct ourselves this way, we will do just fine.

Rule 8: Visualize. Take a similar situation from the past and project it onto a positive position. For example: The market got killed in the October, ’87, crash but ended UP for the year.

Rule 9: Ask a question. We have been through markets like this before? How did things work out for us?

Rule 10: Provide context and explain relevance. Tell your clients WHY their portfolios are structured the way they are.



Teach The Kids About the ‘Financial Geniuses’

“No way” should you shelter your children from the headlines generated by the current economic turmoil, says Jennifer Openshaw of MarketWatch.

“Some of this mess owes its origins to young, can’t-miss financial geniuses who grew up without seeing a downturn. So turn it into a learning experience,” Openshaw writes.

Tell the kids what’s going on and why. Financial life is about risk, not just reward. They’ll learn what you’re going through. Better yet, the lesson becomes part of their financial future.

FA