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Seven Strategies to Help You and Your Clients Weather the Storm

Tough times present opportunity to strengthen ties with clients. 

Veena A. Kutler and Annette F. Simon, 10/23/2008

This monthly series of articles describes the many steps and occasional missteps we have taken in building our financial advisory business, Garnet Group LLC. Currently, Garnet has eight staff members, more than 90 clients, more than $300 million in client net worth under advisement, and offices in Bethesda, Md., and Boston. Veena Kutler, CFA, and Annette Simon, CFP, are the managing principals in the Garnet office in Bethesda.

As we write this column, the S&P 500 is down more than 40% for the year; the few up days in the market are quickly followed by big drops. A good day is when it closes flat. Over the past six weeks, all market sectors are down except Treasuries. Banks, hedge funds, and quasi-governmental agencies are blowing up right and left.

What does your instinct tell you to do when the financial system is crashing? If your first thought is to crawl into bed with the covers pulled up over your head, you are not alone. It's a human nature to take cover and lick your wounds during a retreat. But the reality is that your best course during a time like this is to reach out to your clients.

Our Approach
Veena left the institutional money-management world and started her business working with individuals in late 2000, just as the market began its long decline through mid-2003. Annette had been at it a few years longer opening the doors of her solo practice late in 1997. We merged in early 2002 and together went through almost two years of bringing in new clients and investing their assets only to see month after month of negative returns. Recently, we have gone through a similar period of uncertainty and daily crisis in the markets; the basic structures and systems we developed in those difficult first years are carrying us and our clients through the storm.

Here are seven strategies we use to provide a consistent experience for our clients and to help us weather challenging periods:

1. Financial Planning
We have always believed that ongoing financial planning is absolutely critical to the long-term financial security of our clients. Early on, we figured out that preparing a lengthy plan in a binder was neither useful to our clients nor a productive way to spend our own time. A written plan is out of date almost as soon as it is printed. This is particularly clear in times like these when asset values are moving so dramatically every day.

An essential building block of our service to clients is an annual update to their financial plan. Prior to our annual review meeting with each client, we send out an update form showing them the data in our planning model. We ask them to correct any numbers that are out of date and to add any new information that is missing. We also invite them to share with us about qualitative changes in their lives--new jobs, children, grandchildren, and plans for the future. Using this new information, we re-run projections and Monte Carlo analyses and review past achievements as well as recommendations and planning steps that still need to be tackled.

We believe this ongoing attention to planning strengthens our ties to our clients and helps us better understand them and their goals.

2. Diversified Asset Allocation
Our core philosophy is that broad diversification by asset class and by issuer is the best way to reduce risk and achieve long-term results. Because we know our clients well and understand their goals and priorities, we are able to guide them in choosing an appropriate allocation that will allow them to achieve their long-term objectives and to stay the course when times are tough. 

For several years, we relied solely on our qualitative assessment of our clients' risk tolerance in setting asset allocations. A few years ago, we began using Finametrica, which is integrated into our planning software, MoneyGuidePro, to measure risk tolerance more objectively. We've been happy with Finametrica. Most clients are willing to complete the 10- to 15-minute questionnaire and are interested in seeing their results. In almost every case, the test has confirmed our own less-scientific evaluation of client risk tolerance, which gives us added peace of mind that we are investing appropriately for each client.

We have never thought to ask a client, "How would you feel if your portfolio lost 30% in two weeks." We don't know if any risk tolerance questionnaire could really prepare us for what is happening in the markets now. But in general, our clients are holding on bravely. A few have called to ask about reducing equity exposure or redirecting new contributions to cash for a while. This may just be the start, but we're encouraged that as a group our clients seem to be taking the downturn rationally.

3. Low-Cost Mutual Funds and ETFs
We don't invest in individual securities for our client portfolios; we stick to open-end mutual funds and exchange-traded funds. Many of our colleagues who use individual bonds within their client portfolios are surprised to learn that we do not--especially those who know that Veena managed $2 billion in bond funds for T. Rowe Price for several years. We think that they add too much risk and illiquidity to non-institutional portfolios relative to the small yield pickup they provide over fixed-income mutual funds. A recent conversation with a colleague who holds bonds that no longer trade in the current credit freeze (municipal issues and bonds issued by formerly strong issuers like Wachovia and AIG) confirmed our conviction that using bond funds is the best policy for a small shop like ours.

Although by some definitions it disqualifies us from being wealth managers, we have also steered clear of hedge funds and other derivatives in our client portfolios. On several occasions, we have evaluated complex alternatives and have never found that the potential upside adequately compensated our clients for sacrifices such as higher costs, lack of transparency, and liquidity. With almost daily reports of hedge funds failing and derivatives becoming impossible to value, we have no regrets on this front.

4. Rebalancing
Rebalancing back to target weights within the asset classes in the portfolio produces smoother returns over time by buying high and selling low, the opposite of the emotion-driven momentum strategy that leads investors to buying high and selling low.PAGEBREAK

Because we have preached and practiced rebalancing for years, it has hardly surprised our clients that we're viewing the current "correction" as a great opportunity to harvest losses and restructure portfolios. Rebalancing is our best tool for providing measurable value to our clients in these terrible times.
5. Annual Reviews
While we communicate via e-mail and phone with most of our clients throughout the year, at a minimum we reach out to them to schedule formal annual review meetings. As discussed earlier, we update financial-planning assumptions and recommendations before the annual meeting and prepare investment reports as well. In the meeting, we catch up with clients on their lives, go over the reports we have prepared and answer any questions they have for us. Over the years, we've grown attached to our clients; many of our annual review meetings feel like pleasant get-togethers with old friends.

6. Quarterly Newsletters, Market Updates, and Other Client Communications
Between meetings, we keep in touch with clients via a quarterly newsletter sent out using Constant Contact. Recently, and in other more challenging times, we have sent letters to clients sharing our thoughts on what is happening, how it affects them, and what they should do (or not do) in reaction to the market. We've also made a special effort to call certain clients who we know are generally more skittish and who respond better to phone calls than to e-mail communications.

Most of our communications have been warmly received. Even though they know we are not market timers, our clients want to be reassured that we are paying attention and reacting appropriately to what's happening in the world.

7. Getting Personal
We get to know our clients and have been invited to some of their homes for parties and other events. We recently stopped by a longtime client's art show held in her home. Imagine our surprise when she informed us that she had a picture that she had set aside specifically for us. She led us to a large painting sitting on an easel. In the background of a picture was a towering monolith; in the foreground sat a man holding his head in his hands. His body language suggested despair and anguish. Our client told us that the title of the painting was "SubPrime" and that she had thought of us when she painted it! We actually bought one of her paintings, but chose a more uplifting piece.

Next month, we will discuss the implications of the current economic crisis and the election results on client portfolios and changes it may lead to in the planning process.

Veena A. Kutler, MBA, CFA, and Annette F. Simon, MBA, CFP, are founders and principals of Garnet Group, LLC -- www.garnetgroup.com, a fee-only wealth management firm with offices in Bethesda, MD and Boston MA. Both are NAPFA Registered Financial Advisors with more than 30 years of financial planning and portfolio management experience between them. Garnet serves the needs of high net worth individuals and families in the Boston and Washington, D.C. areas

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