Stay the Course

I know, I know. You brokers never chase the hot dot. You create detailed financial plans and stick to them. You wouldn't dream of letting short-term market direction fads dictate your clients' long-term strategies. Seems every advisor I talk to has insulated his clients from the current bear woes, or at least dampened their pain. But we all know that's not really the case. When I was crawling around

I know, I know. You brokers never chase the hot dot. You create detailed financial plans and stick to them. You wouldn't dream of letting short-term market direction — fads — dictate your clients' long-term strategies. Seems every advisor I talk to has insulated his clients from the current bear woes, or at least dampened their pain.

But we all know that's not really the case. When I was crawling around on my belly, wholesaling a separate account to brokers and independent RIAs during the height of the bubble, I got hundreds of questions about how to get a jump on the next hot IPO and about our holdings in the moment's tech darling, but I was rarely asked how we would preserve capital.

I don't blame the brokers — entirely. Many times, they were simply responding to their customers: They were obsessing about all those wacky Nasdaq issues because their customers were demanding a piece of that hot action. Salespeople are taught to please the customer and, in those heady days, when there was a full-on buying panic, the broker who tells his client he won't put him into Amalgamated Antimatter.com! risked losing that customer.

I remember a presentation I made about my firm's growth portfolios at a dinner at a polo club in Birmingham, Mich., in January 2000. I handed out neatly bound books describing our returns and stock-picking strategies and I lectured the assembled financial advisors and their clients about our firm. Afterward, there was a lively discussion, during which I fielded a number of questions from the dozen or so high-net-worth clients who were invited (“Do you guys still like Intel?” or “Will Microsoft be broken up?”).

Then the value manager's wholesaler rose to speak.

“Well, I didn't bring anything to pass out or anything,” he said. “But I would like to remind you that the value style and the growth style trade off. And if you were to look at a graph of this relationship, you'd see that it is way out of whack and it's been that way for some time. You would see that value is not dead, that it will come back, and probably soon, given that it has been out of favor for so long.” He went on to extol the virtues of a diversified portfolio. One must rebalance at least once a year, he said, and not bet everything on a particular style, much less a particular manager or a particular stock.

The audience fiddled with their desserts, some began to whisper to their neighbors, a few began to collect their things to leave. When he asked for questions, there were none.

He then sat down, defeated.

That's how bad it was for value during the late 1990s. The man had such a hard time selling anybody on the merits of value investing that he had basically given up trying to sell his theory. No one seemed to want to hear that the New Era would ever end, that you should invest in his out-of-favor manager or someone like him. By comparison, it was easy for guys like me, flacking for growth managers. The assets came fast and furious, phone calls were returned and the assets (and your paycheck) rose.

To their credit, the financial advisors at least invited the value guy to dinner. (On the other hand, they kind of had to: I had promised to pay only half the tab. And they couldn't very well bring in two similar, competing managers.)

Sometimes, even I would question whether brokers weren't caught up in the buying frenzy themselves. Often, they would put the blame on the clients. “It's getting so tough to manage clients' expectations,” they would mutter, by way of explanation. But clearly the bogey was QQQ (a tracking stock for the Nasdaq 100 stocks, basically a tech proxy).

Today, brokers are feeling the welts as the whipping boys of the boom. “Why did you let me own so much tech?” clients ask. And, true to form, brokers are just as likely to fall prey to their clients' fears. Many of you are finding that your clients want out of stocks — even at these depressed levels, believing that they will continue to bleed like this forever. You mustn't let fear control them.

The best brokers, then, are the ones who can make clients understand that it's not just the return, it's the risk you take to get there. The problem really is that your clients tend to be relative investors during bull markets (beat the index or else!) but are absolute investors during bear markets (don't lose me money!). You can't be both.

Writer's BIO:
Aldo Blackthorn
is the pen name of a New York-based writer.

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