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February 9, 2010 |
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| November 09, 2009 |
By: Wayne Tompkins |
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“
How do I know you’re not like Bernie?”
For Cathy Pareto and other financial advisers across South Florida, the Bernard Madoff scandal was just one part of an ongoing financial and economic crisis that over the past year has tested wealth managers’ relationships with clients as well as their skills in navigating waters that, if not uncharted, have not been sailed for years.
 Wayne Tompkins video report: The financial crisis has tested not only wealth manager's investment skills but also their relationships with clients including the question hanging over everything: "How do I know you are not like Bernie Madoff?
“Of course it’s made our life a little more difficult,” Pareto said. “But now I actually put that as part of my initial introduction: ‘Let me tell you why I’m not like [Madoff]. This is what sets us apart.’ That brings the client a tremendous sense of safety and comfort in a world where we can’t seem to trust people.”
Seven financial advisers from across South Florida discussed the challenges of both the past year and the next at the Daily Business Review’s seventh annual Wealth Management Roundtable, and gave their take on how clients should approach the next several months.
“One of the things that set a certain set of advisers apart in the downturn is the way that they communicated with their clients during that very tumultuous period,” Pareto said. “I’ve found a lot of clients were coming to me whose advisers were pretty absent in terms of what was happening and wouldn’t even answer phone calls a lot of the time.”
She said the wealth managers who set themselves apart during the crisis were “available, knowledgeable and able to explain things in a cohesive, down-to-earth way that they may have to make some changes to their planning. We can’t just arbitrarily play catch-up while the market returns.”
Joe Nader of Zenith Capital Partners said the financial crisis has created “a clear separation” in the quality of advisers.
“It’s really about the knowledge the adviser can bring to that kind of client,” Nader said. “In normal times, what’s called upon from a client-based adviser in a medium- to larger-sized firm was considerably less than what was called upon last year. We really had to bring out folks that had a better global understanding of what was going on.”
For many clients the past several months have offered them a chance to reflect, said Matt Lapides of Gibraltar Private Bank & Trust.
Taking inventory of goals
“What a perfect time to reassess and look at your inventory, reassess goals, reassess desires, motivations, aspirations, and determine if that’s really possible at that point or not,” Lapides said. “Often times it’s being more than a financial adviser and really more of a personal counselor to help people make very difficult decisions, because the future might look a little different than what they had originally expected.”
For wealth managers, one of the most critical components was having a plan in place from an investment perspective in advance of whatever came down the road, Evensky & Katz’s Matthew McGrath said.
“Most critically, in my opinion, was sticking to the plan during the tough times,” McGrath said. “It didn’t save people, it didn’t prevent them from suffering losses when things turned south, but by having an idea in advance of how to deal with different situations. ... Our job was most importantly getting folks when it was scariest to actually ride through, hang on, stick with the plan in place.”
Viewing things from an estate planner’s perspective, David Pratt of Proskauer Rose said, “It’s a little similar and a little different. We have been actively telling our clients that they need to revisit their estate plans and portfolios that have been significantly affected by the real estate and the financial markets.”
Pratt said he’s been on a campaign for the last year, talking about estate planning during turbulent times. “With estate planning especially, the goal is to transfer assets when the values are low so that the appreciation occurs outside of the individual’s wealth network.”
Just as important, he said, is for the client to have “a tremendous amount of collaboration amongst the professionals: the financial adviser, the CPA, the attorney, the insurance professional. The client feels very at ease knowing that they’ve got their team rather than just a bunch of parts working separately.”
Nader said that risk management strategies should be revisited because of the correlation in difficult times of all asset classes.
“We tend to brush that off every time there’s a period of expansion and we’re harshly reminded of it when there are periods like the last 18 months or so,” Nader said. “But the simple use of diversification and the financial consequences of a portfolio are probably not enough for my clients. I think the introduction of some more sophisticated plans. … They’re revisited again in times like this.”
Keeping clients on board
The financial crisis deepened the bond between some financial advisers and their clients, but for others, the relationship deteriorated.
“I would say that those folks that were close to their clients certainly had terrific retention models,” Lapides said. “Those folks that just had more names and possibly no depth of relationship were not successful.”
From the trust standpoint, “when you think about the litany of disaster that’s happened over the past year and a half, I think the importance of having a client understand the way you conduct business is certainly paramount.”
McGrath said he witnessed a raised awareness among clients of things “they probably should have known before.
“Questions that maybe they took as just a given in as far as who has custody of their funds, what rights and powers do they have to do something with those funds, whether it’s to make changes in investments or to pay fees or whether it’s to send money somewhere else,” he said.
Communication was so critical “because people got very scared about some of the basic things about ‘Is the custodian of my money really there?’ ” he said. “Those are the kinds of questions that people didn’t contemplate over the last 10 to 20 years.”
Morgan Stanley Smith Barney’s Adam Carlin said many lose sight of the fact that the past 18 months have not been unique in the annals of the adviser/client relationship.
“We like to look at this as something so unique and something so absolutely terrible,” he said. “It’s the most recent thing we’ve been through and it was surreal in many ways. I just hope that people continue to be as diligent with respect to understanding the money. Because I think that in market extremes, people will ask questions they would not in other periods.”
His concern is that as things improve, these questions will become less important.
“We’ve been through failures in the past. People asked these things in the past. We go back to the failures of Drexel. And back then people were asking questions,” he said.
Trust and confidence
Mark Scheer of the Gunster law firm’s Miami office said his clients have the same focus, “but ours are looking to us a little differently. Their concerns over the last 18 months are not so much over being managed or self directed, it’s more over
confidence in their advisers.”
Scheer said clients are asking for help to either regain confidence or help them find new relationships.
Lapides said he has watched the client base come full circle from the late ’90s, when some began to think they could make better decisions than their financial adviser.
“They were convinced that they could buy a private island all on their own by trading on their stock brokerage account,” Lapides said. “Then we saw a cycle where people got very enthusiastic about certain investments. We’ve seen the same enthusiasm with hedge funds and Madoff. It becomes more of an ego game, regretfully, then really about long-term financial prosperity.”
Carlin said emotion also is a powerful force in all of this, noting that while only a small number of people got caught up in the Madoff and Stanford debacles, “the thing that people were worried about is ‘Oh my God, am I going to get caught in this?’ ”
Carlin said problems with rating agencies has hurt far more people.
“Everything is really built on the ratings off all types of assets,” he said. “Take a look at how many people in the past owned what they thought were Aaa insured — at what’s happened to the insurance companies’ balance sheets as a result of the rating agencies not really doing their job.”
McGrath added that the failure of existing regulation also contributed to a breach of trust.
“There was a system in place to prevent Madoff from happening. It was there, and it failed.”
Preservation, recovery or both?
Nader pointed to a combination of forces “that has to do with both clients not knowing what they have in their portfolio and advisers not knowing what they have in those portfolios. When you marry those two together, you not only don’t get the kind of transparency that you should.”
So where do clients go from here?
Pratt points out that the high-net-worth individual who has already achieved that plateau is more concerned about preservation than growth. Others are in a hurry to recapture the money they’ve lost.
“It’s pretty tempting for investors to try and make up for lost ground now with the market seems to be showing some stability,” Pareto said.
That means piling into high growth areas like emerging markets, international small caps and metals. “You can’t lose sight of the importance of maintaining a globally diversified portfolio, regardless of where the next hot stock or the next hot asset class is,” she said. “You have to maintain for risk-management purposes a cross section of various assets around the world. It’s really about how all of these pieces balance each other out in a portfolio.”
Scheer said his firm’s clients are leaning toward the wealth preservation side.
“Clients are going back to being more conservative and wanting to invest in what they know and understand,” he said. “Over the last decade or so, there’s been more reliance on advisers and investment advisers buying into products or investments that they really didn’t understand. They might shake their head and say yes they did, but they really didn’t.”
To what extent does the market rally and the move of gross domestic product into positive territory signal better times ahead across the broader economy?
“It’s provided a sense of relief for many people that at least it doesn’t go down forever,” Lapides said. “But it leaves them confused right now. What does Dow 10,000 mean? Should they be scared? Should they sell out? Does this mean that the worst is behind us?”
Pareto said she remains cautious because “we still have so many fundamental problems in our economy and the markets, including oversight of the markets and the industry. So I try to temper that euphoria.”
Carlin said that massive intervention has left the economy on life support, in spite of what the rebound in the financial markets might suggest.
“My concern is where will the real economic growth come from in this huge amount of stimulus that’s out there?” he asked. “It’s temporary. I think if you continue to educate your clients in that way, they don’t get caught up as much in what they’re hearing and what they’re reading from all the talking heads.”
Looking ahead, expecting long-term 12 percent or 15 percent stock market returns is probably unrealistic, McGrath said.
“That may not be the environment we’re looking at. If we get high single-digit stock market returns over a long period of time, that’s a different environment and folks have to really focus on what they net out of that after taxes, after expenses.”
Lapides said that while no one knows what might come around the corner economically, the recovery of the past six to seven months has helped to justify those planners and advisers who counseled their clients to stick to their plan.
“I know of cases where planners have thank-you notes from their clients saying, ‘I came to you last year scared to death. Thanks for helping me get through this,’ ” Lapides said. “Clearly we don’t know. We could have a W-shaped recession. We could have a double dip. But this at least lets folks believe ‘OK, it can’t go down further.’ And that helps.”
Wayne Tompkins can be reached at (305) 347-6645.
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