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By Stan Hinden | January 2010
In my book, "How to Retire Happy," and in my speeches and conversations with the people I meet, I generally give this advice: "Before you retire, consult a financial planner. It is worth the time, the effort and the money to ask an advisor to put you on the path to a comfortable retirement."
I still believe in that advice. In fact, because of the 2008-2009 market melt-down, it's more crucial than ever for prospective retirees to work with a financial planner. This is a time for more planning, not less.
If the events of 2008-2009 were traumatic for investors, imagine how stressful they were for the planners who were responsible for guiding their clients' investments and safe guarding their wealth.
I recently talked to four experienced financial planners to find out how they and their clients dealt with the market crash—and what they learned from the experience. I asked them how their clients' appetite for risk had changed and what adjustments they were making in their investment strategies and in their conversations with clients.
By and large, the planners said they were sticking with their basic asset allocation and diversification strategies. But their conversations with clients were breaking new ground.
Mary A. Malgoire, president of The Family Firm, Inc. in Bethesda, Maryland called the 2008-2009 financial crisis a learning experience for both clients and advisors.
"Clients learned their ultimate risk tolerance limits (and some could just not endure the pain, which is good to know). Clients also got an 'in the trenches' experience with what it means to be rational versus emotional with respect to financial matters. We are proud that many of our clients (but not all) were able to hang on and not succumb to the feelings that the world would collapse and their life would be in ruins."
"As advisors," Malgoire continued, "we learned how much our clients rely on us--and how to help them live with such enormous amounts of personal uncertainty. We had to resist the impulse to simply say 'Everything will be OK'. We knew we shouldn't and couldn't say that."
"Another important lesson was to focus our clients on how they would handle a worst-case situation. They wanted to know: What if my portfolio drops by another 50 percent from here? How will I live now that I'm retired? What would that mean for my life?"
"Finally, we ourselves had to be rational and communicate that getting out of the markets would leave them worse off than staying in."
Glenn G. Kautt, president of The Monitor Group, Inc. of McLean, Virginia, said the 2008-2009 crisis demanded that he and his staff act quickly to get on top of the situation.
"Facing a crisis," Kautt said, "could be bad or a great opportunity. How is that? Take emergency care providers. They live to respond to crises. Athletes face potential crises every time the game begins. What makes these individuals able to deal? They're prepared for challenges and expect they'll overcome."
One of the primary tasks for a leader, Kautt said, is to convey optimism. "No one," he said, "wants false hopes, but everyone in your firm is watching your every word. If you truly believe your organization has a bright future, even in the face of a problem, it's time to make lemonade out of lemons: you need to give everyone specific reasons why you can and will overcome the situation. Get engaged in making that future success a reality. Start with your key staff to combat the crisis."
Noting that a few of his firm's clients panicked and even some younger staff members were seriously concerned, Kautt said, "We stepped up our communications with clients, hosting a series of teleconferences, webinars, and so forth, starting in November of 2008, finally slowing the pace of communication in the summer of 2009 as the markets started to bounce back."
"As part of our enhanced communication," Kautt added, "we talked with every client personally. We re-analyzed every client's portfolio and re-ran their financial independence model as the markets reached their bottom. For most, the outcome of the analysis showed no significant change in the probability of their financial security, but for about five percent, the probability of running out of money increased significantly. For those clients, we met with them and crafted a plan which included changes in spending and, as appropriate, retirement plans—when they could stop working."
What did planners learn from the financial crisis? Michael E. Kitces, director of research at Pinnacle Advisory Group, Inc. in Columbia, Maryland, said he thought that some planners learned that they took too much for granted about market returns.
"I think a lot of planners have probably been humbled by looking back and saying, 'It's been a decade and there are a lot of people who haven't made any money in the market."
"That doesn't necessarily mean," Kitces said, "that stocks are no longer valid or stocks are dead or anything along those lines, but it does mean that we may have gotten a little too comfortable or maybe taken a little too much for granted about how things were going to go." That," Kitces added, "is not a pleasant lesson...but an important one to learn."
In addition, Kitces noted, the nation's economic problems—especially the high level of unemployment—have changed the nature of the conversations that planners are having with some of their clients—especially their struggling business clients.
These new conversations, Kitces said, may be less about whether the clients are getting a good return on their assets and more about the crucial question: Are they going to have a job? "If your clients are going to be unemployed, that has far more significant ramifications," Kitces said.
"A lot of us," Kitces noted, "really spend more time talking about what is happening with our clients' investment assets and not how the economy affects them. We probably don't always spend enough time talking about how it affects our clients' ability to earn money as workers.
And when the conversation changes, what will Kitces and his clients talk about?
Mostly, he said, it's about basic ideas that planners have always talked about: "Having emergency funds and about what you would do if you were unemployed for an extended period of time. That stuff matters," Kitces added. "A lot of people didn't take that seriously because things were sort of good for so many people for so long. We can't entirely take that for granted anymore."
Now, he added, there is a new emphasis on the ability of clients to work and earn money.
"How," Kitces asked, "are you going to protect the most important asset that you have--which is your ability to earn money? And secondarily, how are you going to maximize your...ability to earn money? Your money-earning ability can go through down-turns the same way your portfolio can go through down-turns."
Planner Jack R. May at Lara, Shull & May, LLC in Falls Church, Virginia said that his clients generally "are much more conservative than they were a couple of years ago." Indeed, he said, clients who also experienced the 2000-2002 melt-down, "may never enter the equities markets again." Still others, he noted, "have reevaluated their risk tolerance on the side of safety." In addition, most of the firm's clients required a new retirement plan analysis and some may have been concerned about the results if they revealed they would work longer and receive less income.
"As planners," May said, "we take our clients' risk tolerance very seriously." But the events of 2008-2009 "put a different light on safety and/or risk tolerance," he added. As a result, the firm conducted a thorough review of its investment management practices. May said they asked themselves, "Is strategic asset allocation still the best way to invest a portfolio or should we consider tactical allocation? And how many alternative investments—such as commodities, REITs and emerging markets--should we include in a portfolio?"
May explained the difference between "strategic asset allocation" and "tactical asset allocation." Strategic allocation, he said, is based on a formula, such as 20 percent large growth stocks, 20 percent large value stocks, etc., etc. A manager then sticks to the formula with small tweaks. Tactical allocation, he said, allows managers the flexibility to take much larger positions at times when they think they see specific asset classes that are undervalued.
Oddly enough, May said: "This has been a very good year for bringing on new clients, as there are so many questions and concerns out there, that many people want assistance in investing for the future."
As I said earlier, talking to a financial planner is always a good idea.
Copyright 2010, Stan Hinden. All rights reserved. Reprint permission required.
The author was compensated for writing this article by AARP Financial.
