Advisors frequently say their clients have been "frozen" by their equity losses. These clients have not rebalanced and, often, the advisors have not pushed them to do so. Asset allocation is often based simply on where the client finds themselves as a result of the market rather than on carefully analyzed strategies. Compounding this, these clients are now putting new money into fixed investments only. Their asset allocation to equities ratio has not only been drawn down by losses, but also by new fixed investments.
It is, of course, easy to understand this failure to rebalance. Uncertainty has never seemed higher. There are credible analysts predicting a steep drop in the Dow - some predict a number as low as 4,000. Many believe the recovery will bring the Dow to 16,000 or higher. It's hard to make decisions in a time of such wide ranging possibilities.
The role of boomer advisors is clear. This is a time for a detailed discussion of risk and asset allocation with your clients. While defining an optimal asset allocation strategy may be harder than before, the importance of effective asset allocation has not diminished. My own research indicates that many advisors have lost confidence in their former views about asset allocation.
This is not necessarily a negative. I have long believed, and have written, that common views on asset allocation for those close to, and in, retirement are often sub-optimal. I believe that asset allocation for the retired and near retired should include more guaranteed lifetime income products, including immediate annuities. I believe that the static asset allocations that many advisors subscribe to - in which asset allocations remain constant during varying market conditions and client circumstances - are less than optimal for those drawing income. But my point now is not to argue about what asset allocation should be, only that advisors need a strong view about asset allocation now and to work with their clients to get their investment portfolios allocated properly. I think many advisors will conclude that guaranteed lifetime income in the form of annuities is prudent and more useful than ever, but the key point is to have a plan to present to clients.
It's also clear that investor views about asset allocation have changed. Investors risk tolerance is higher in a rising market than a falling market. If a client's risk tolerance has been revised by recent events, all the more reason to talk to him, analyze the situation and develop a new strategy that is more appropriate. Clients are impressed by a pro-active advisor. Re-visiting the investment strategy is one way to demonstrate that.
Client discussion should revolve around the willingness they have to accept the near term risk of further declines. Typically, markets recover before the economy; those who reduce their risk levels for fear of further decline risk missing a good deal of market growth. But rebalancing during a recession risks further loss. It's good to know which of your clients can take it and which cannot.
One way to proceed is to review scenarios for the equity market, including short and long recoveries and high and low market bottoms. It's especially useful if you can provide some sense of the likelihood of each scenario.
I shudder when I hear portfolios aren't being re-balanced. This is the time for financial advisors to be in control, and to not only reassure clients but to maximize their contribution to their clients. Proper rebalancing isn't easy, but it beats asset allocation by accident.
Mathew Greenwald is president of Washington, D.C.-based Mathew Greenwald and Associates.
