On the eve of the worst financial crisis in 80 years back in 2006, what were the seers at our nation’s central bank doing? The picture that appears in a series of recently released transcripts of their meeting reveals a collection of clueless, smug, self-satisfied elitists engaged in an orgy of self-congratulation.
The governor of the Federal Reserve Bank of New York, Timothy Geithner, told outgoing chairman Alan Greenspan that the odds were that posterity would judge him to be even greater than commentators already had. Another Fed governor, Susan Bies, opined that if a housing downturn did materialize it could be a positive development, freeing up capital for other industries. If anyone at the central bank comprehended the connectivity between the housing industry, the financial markets and the general economy, they kept it to themselves.
Like Ben Bernanke, I confess to believing in 2007 that the crisis in the subprime mortgage market would be confined largely to that sector and maybe to certain regions of the country where there was an epidemic of overbuilding. We all know how that worked out.
For advisors, however, there is a larger lesson. Namely, it is very easy to succumb to group-think. The pull of these riptides can prove overwhelming.
At a time when many leading advisors find that their biggest challenge is managing growth, there is a danger that a disconnect between the professionals and their clients can develop. Six out of seven Americans work in service sector jobs, but not many are doing as well as the advisory business. Indeed, Main Street’s pain may be the advisory profession’s gain because, as any advisor will tell you, clients no longer need to be lectured about saving enough.
But there is another reason why advisors aren’t likely to get blindsided like central bankers did in 2007 and 2008. Specifically, they don’t live in the same type of ivory tower or bubble that Fed governors and college professors inhabit.
The nature of the advisory profession requires them to meet with a cross-section of Americans every day. Even if their clientele is substantially more affluent than the ordinary American, many clients are wrestling with the same challenges and insecurities as the general population.
At last year’s Schwab IMPACT conference, several advisors were candid enough to articulate some of the pain their clients are experiencing on repeated occasions. How much dissatisfaction is real and how much is environmental remains an open question.
At a conference in 2010, I heard a market researcher present results indicating that even folks with more than $20 million in assets worried about funding their children’s or grandchildren’s education. All they really needed to do was turn off the 24-hour news channels.
Finally, the pervasive gloom fortunately seems to be lifting a little, but maintaining perspective cuts both ways. Hopefully, advisors never become as disconnected as Fed governors.
Evan Simonoff, Editor-in-Chief
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