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MAKING CENTS OUT OF THE NEWS
Blog #16
(April 29th, 2010)
SUE YOUR INVESTMENT ADVISOR? WHY?
By Tom McAllister, CFP®
As the economy emerges from the Great Recession, we continue to unearth details about how it happened. How could the global economy have come so close to total ruin? Several authors have taken great pains to spell out in their books how the “perfect storm” unfolded.
Within the microcosm of the financial services world that is financial planning, there are questions about these events with which many advisors are only now beginning to come to grips. Admitting they had a surprisingly high number of clients who panicked during the dark time between October 2008 and March 2009, some of my colleagues are feeling a measurable sense of relief now that stock prices have made such a substantial recovery. One financial advisor I know who sometimes testifies as an expert witness for investment-related arbitrations and lawsuits recently mentioned having more requests to appear than he can handle.
I am pleased to say that, at McAllister Financial, all but one of our clients stayed the course. (The single investor who sold out had only a very modest share of his worth at stake, and decided he did not want to be concerned with it.)
Looking back upon those dark days, even experts admitted the possibility of the Dow Jones Industrial Average falling from 7,000 to 4,000 or even going as low as 3,000, as alarmists who claimed to have predicted the debacle were warning at the time. (From today’s vantage point, of course, we can look back at those times as a once-in-a-lifetime buying opportunity.)
What happened when those clients panicked? Some converted all their assets to cash – and have yet to return to stock investing. Others went from 60% equities to 30% equities - and failed to capture most of the rebound. The most depressing client stories are of those who had agreed to allocate 80% of assets to equities, expressing a high tolerance for risk, and then later capitulated, selling totally out of stocks. Now some of these, egged on by the plaintiffs’ bar, are suing. (I only hope their advisors had well-documented investment policy statements signed jointly by the advisor and the client, as is standard practice at McAllister Financial.)
As a veteran FINRA arbitrator, another question arises in my mind. Aside from the preposterous supposition that any advisor could have - or would have - sold all equities, junk bonds and asset-backed securities in October 2007 and then known to reenter those markets at precisely the opportune moment in early March 2009, how would any prudent investor or advisor have handled his or her own portfolio? Some of the finest minds in the investment business are asking themselves exactly that question. Even with the benefit of hindsight, the conclusion is remarkably simple: Not much.
Since the crisis, the goal of most investors has been to recoup their losses. Advisors who stayed the course, and perhaps even participated in the bargain basement prices available in early 2009 via rebalancing, now report that client portfolios are back to within a few percentage points of their all-time highs.
That’s the good news. Unfortunately, it’s small consolation to advisors facing lawsuits or arbitrations from clients who improperly assessed their own pain threshold. Many of these litigating clients, inadvertently or not, deceived not only themselves, but their advisors.
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