Editor's Note: On October 4, leading industry observer Nick Murray gave us his thoughts on the implications for the economy and the stock market from the terrorist attacks. Murray, whose latest book, The New Financial Advisor, was just published, also spoke about client psychology and how advisors can succeed in these turbulent times.

Simonoff: Since September 11 and the week of September 17, we've seen a return to at least some normal level of economic activity and a rebound in the stock market. But there seems to be some serious damage to the nation's psyche, which probably is normal, but which clearly is related to the omnipresent and hidden nature of terrorism. Some people like Sir John Templeton would argue it's different this time. Is it?

Murray: It's new as Pearl Harbor was new, as the Cuban Missile Crisis was new. Vietnam was new, the Cambodian incursion was new, the killings at Kent State were new, the confluence of OPEC and Watergate were new, stagflation was new, the October '87 stock market event was semi-new, and Long Term Capital Management was new. There's a difference between new and different. My argument is that a contextless disaster is itself a context.

Simonoff: Many people who aren't worried about the economy or the stock market are worried that the world is entering a dangerous period. There seem to be a lot of people in the world who hate this country, and some are willing to sacrifice their lives to harm it, and turning that around isn't going to be that easy.

Murray: I'm not sure you ever turn that around, and I'm not sure it's going to take a lot to neutralize it. I don't think that is the operative variable.

Simonoff: What is?

Murray: Fiscal and monetary stimulus on a scale that I don't believe I've ever seen in my life.

Simonoff: I don't think the Fed has ever cut rates this hard this fast.

Murray: Up until September 17, this round of cuts was second to 1982. It no longer is. This is the deepest, fastest interest rate cut in American history, and on top of it you have a fiscal stimulus which, to pick a number off a bus, looks like $100 billion, plus or minus $50 billion.

Simonoff: Politicians in Washington sense that there is a crisis in confidence in the economy more than the stock market.

Murray: No, in the stock market, too. The stock market, in the first week that it was open, adequately and fully discounted a moment in American history where there was more or less an instantaneous, total collapse of confidence. You can say that confidence had been depleting over the previous 18 months, and you would be right, but I still don't remember anything that so instantaneously took away confidence. I've seen confidence a lot lower, but it took longer periods of time to decline. That's what the stock market told you the first week it was open. It was so great that the monetary and fiscal authorities could do nothing but respond to it.

Simonoff: There were reports that week that department store sales were off 30%. People were just paralyzed.

Murray: Fifty percent in New York.

Simonoff: In New York, at first people had this angry strong defiant reaction. Then you started to hear all these stories about six-year-olds saying, "I don't have a mommy or a daddy anymore." It started to hit home.

Murray: Yes.

Simonoff: Is there a danger that we overreact to this?

Murray: Which way?

Simonoff: Too much in terms of fiscal and monetary stimulus.

Murray: The short answer is no. You stimulate as much as you need to stimulate, and in the long run that's probably too much. Then you have to reel it back in. This is the point where you cut the patient's chest open, you grab his heart and you bang on it. Which is something you'd never want to do unless you thought the patient was just about to die. In the first couple of weeks after September 11, the patient gave evidence of, at least psychologically, wanting to die on you.

Simonoff: In 1973-74, you were working on Wall Street. Even after this tragedy, we have a much stronger economy.

Murray: I would argue we have an infinitely stronger economy and an infinitely stronger body politic. And they are not the same thing. You don't have OPEC, and you don't have Watergate. All crises pass. It's just a question of how bad they get before they do. The world doesn't end.

Simonoff: Is the post-September 11 bear market a new bear market or a continuation of the old bear market?

Murray: Great question. I tend to see it as a second bear market. I'm not sure history will bear me out, but I just find it easier to look at this as two consecutive bear markets.

Simonoff: Because the causes are so different?

Murray: Absolutely.

Simonoff: The first bear market, pre-September 11, was a healthy, badly needed bursting of the bubble?

Murray: Very much so. Up until September 11, it was barely able to put the economy into recession, and in my judgment, in early September, it was almost over.

Simonoff: The second bear market is now only three weeks old. Do you have any read as to whether it will be long or short?

Murray: My guess is that it's over. On October 4, with the S&P where it was on September 10, the second bear market looks like it's over. You could get a lot of money on the other side of that bet.

Simonoff: How long will it take the nation's investment and economic psyche to recover?

Murray: It's a grieving process, but you can't grieve forever. And I think what you're watching now in the first week of October is, very clearly, that people are ceasing to grieve.

Simonoff: There are still scars.

Murray: Very much so. We'll never be the same. Apparently, people are getting on airplanes, and what I'm hearing is that the airlines are quietly beginning to call employees back. That's spotty, anecdotal evidence but I believe it.

There's some sort of normalcy creeping back into the equation. I don't think the economy is the issue any more. I think the war is the issue. I don't know what the war looks like, which is the point. But it is more or less political uncertainty rather than economic uncertainty. Would the scale of the engagement in Afghanistan be likely to change the implications for the economy over a two- or three-year period of this massive fiscal and monetary stimulus? I'm almost sure it would not. So what you have to deal with is the psychological implications.

For that, I think you're in kind of the same boat you were in in December of 1990 when there was a war starting six weeks. There was no doubt about that, you just didn't know how many body bags there would be. If a lot of body bags don't come home, the 1990-91 experience would tell you that this market would go up 30% without leaving a skid mark. In Desert Storm, you had 30% in three months. When you found out that Saddam's SCUDs couldn't hit the Saudi oil fields, and you found out that from a casualty standpoint it was virtually a nonevent, there was a buying panic. It's hard to see why this should be different. I'm not predicting the length of the war or the size of the engagement. As we sit here on October 4, the fiscal and monetary stimulus being applied to the economy will get it going within six months.

Simonoff: Up until September 11, there were several money managers who were saying they thought the economy was about to bottom, corporate profits were three to six months away from a bottom, that things were likely to turn. But they qualified that by adding that you couldn't really get a new bull market going until investors came to the realization that 10% or 11% a year in stocks was a good deal. Unfortunately, investors were still conditioned by the bubble mentality of the late 1990s. The bubble had burst long before September 11, but the bubble mindset still lingered. Do you think the events of September 11 may finally have shattered that expectations mindset?

Murray: Without debating whether the bubble mentality was waiting to be revived, there is no doubt in my mind that this puts a stake through its heart. The age of unreasonable expectations is over for this cycle.

Simonoff: People are realizing there are bigger issues in the world than getting 20% or 30% a year in equities.

Murray: Or how many stars your mutual fund has. In that sense, as horrific as it is to contemplate, this is the best thing that happened to financial advisors in 10 years.

Simonoff: Why?

Murray: The restoration of reason. The restoration of some sense of reasonable expectations and a strong sense of the need for good advice. That's the diamond in the ashes here. I think that 18 months ago, the biggest, richest generation of Americans that ever lived, the baby boomers, had been conditioned by the culture to spit on the whole idea of advice. The apotheosis of the culture 18 months ago was the ad that said, "If your broker is so smart, why is he still working?" I would ask today's advisors: Would they rather be practicing then or now? I would certainly rather be practicing now.

Simonoff: What are some of the positives that you see in what you could call the post-bubble hangover?

Murray: What are the negatives is a better question. There's virtually nothing but positives. I mean let me count the ways. You had the bursting of the worst financial bubble of all time. Until September 11, it failed to produce a recession in the economy. One struggles for a less hyperbolic adjective and fails to find one. This is miraculous. This is a testimony to an economy that is so broad, so deep and so vital as to defy the imagination. You have the fastest deepest cut in interest rates ever. A faster, deeper interest rate cut than 1982. Which of course assisted in the birth of the greatest bull market of all time.

However deeply flawed it is, and it's terribly deeply flawed, you have a meaningfully stimulative fiscal policy in the tax cut. If the little men from Mars came down and said, "What's going on?" and you told them those three things which I would argue are the three most important aspects of the American economy, the little green men would assume that in the next breath you were going to tell them the Dow was 20,000, as it surely will be. Personally, I'm the most long-term bullish I've ever been in my life. I don't know what this proves, but the last time I felt anything like this was in the fall of 1990.

Simonoff: Until September 11, you basically regarded this as a garden-variety correction.

Murray: No. It is a bear market. Now having said that, I think you have a whole generation of advisors and a whole generation of investors who've never seen the average bear market because everything since 1982 has been either very short, very shallow or both. The exception being '87, which was very deep but almost momentary. If you blinked, you missed it. To appreciate that this is an ordinary bear market, you have to have a perspective that goes back at least 20 years. The other thing that people have gotten used to, especially since 1987, is this sort of instant snap back.

So it's the combination of a bear market that goes from peak to trough for a perfectly ordinary 13 months and then five months later is still basically close to the lows and again a whole generation of advisors and investors has no living memory of something like this. And that's why they read too much into it.

Simonoff: Do you think the problem really lies with people's expectations, their Pavlovian conditioning, and not with what a lot of people are calling the end to the secular bull market like the one in 1973-74?

Murray: Actually, I would argue that the end of that secular bull market came in waves between 1966 and 1974, which was the greatest time to invest of the post-war period. And one of the two best times to invest in the 20th century.

But back to your question because the "E word" got out and the "E word" is the key to all of this. And that is expectations.

It doesn't matter in the least what is happening. Again, what is happening is at best miraculous and at worst ordinary. And that doesn't matter. What matters is how people are reacting to it, which is a pure function of their expectations. What is the gap between what is actually happening and what people decided to expect was going to happen? When you know that gap, you know how much trouble people are in, both advisors and investors alike.

What you got caught in here is heaven's own original crisis of rising expectations. Now you can say that all financial bubbles are crises of rising expectations ,and that's perfectly true. This being the greatest financial bubble of all time, it is therefore not insignificantly the greatest crisis of rising expectations, I think. If not of all time, certainly of my career.

Simonoff: So that's really the heart of the problem?

Murray: From every perspective. Why will you go into an office of a financial company and see an advisor energized on the phone, excited about the opportunities, talking to people in a positive way, you know seizing the advantages that always crop up when the mob is terrified? And then go right to the next desk and see somebody who's basically comatose, who isn't moving, who isn't blinking, who isn't making eye contact with anybody or anything and who looks at the phone as if it were a grenade, out of which somebody had pulled the pin?

Why do these two people seem to be in possession of a different set of facts? I would argue that they are in possession of exactly the same set of facts. It's the impact on each of them of the fact that is at issue. And the impact of the facts in turn is a pure function of the difference between what happened and what each of them expected to happen and led his clients to expect or allowed his clients to expect to happen. Expectations are simply the key to everything.

Simonoff: What are the characteristics that differentiate those advisors who capitalize on what we call a post-bubble hangover from those who are simply comatose?

Murray: In a word, it's expectations. What did they tell their clients was going to happen? What did they allow their clients to tell themselves was going to happen? Did they get swept up in this madness or not? Did they give in to the bull market in general, the tech mania in specific and at its wretched excess, the dotcom lunacy? Did they give in to the progressive temptation to underdiversify? Or did they not? How well or how bad off an advisor is today may be a function of how well or how badly diversified his clients ended up at the top. Because, again, even if you were 30% in tech, which consciously or unconsciously you could have been if you owned even something as bland as an S&P index funds, this is a plain vanilla, garden-variety, every five years whether you need one or not post-World War II bear market, which, if you have any perspective at all, bothers you little if any and causes you to think not as a victim but as an opportunist. The point is that people weren't 30% in tech. They were 50% and 60% and 70% and 80% and 100%, and 180% in tech because they were in tech with borrowed money.

Technology did not kill anybody. Underdiversification killed a whole generation of speculators. And the advisors who didn't have the strength to stand up to them.

Eighteen months ago, I sat waiting for a plane and there were four refugees from the cast of Friends standing behind me conducting an intense conversation about the prospects for something called JDS Uniphase. And I mean if God had written on the wall, "Get Out," the message could not have been more clear. And today you walk through an airport and-or anywhere and it's all doom and gloom. It's all sardonic comments about investments and the market.

I saw this movie before. In fact, I've seen this movie you know how many times since 1967. I know how this movie ends.

The good guys won. The bad guys are all dead, and the good guys win.

Simonoff: People say that those advisors who are stock market-focused are the ones who are suffering, while those who are client-focused are prospering. Is that analysis reasonable from what you've observed in the past?

Murray: It's beyond reasonable. It's a truism. It's not news. If your portfolio is essentially a speculation on the trend of the market, then A: You were never an investor, you were a speculator, and B: You're dead. But not if your portfolio was and is a reflection of your long-term financial goals being pursued in a patient, long-term realistic way. Again, any approach to investing which does not assume a 30% hit every five years or so isn't reasonable. So if that's in the equation and if you had a long-term goal-oriented reasonable approach to investing, you're somewhere between stoic and deliriously happy at this point. You're stoic if you don't have any more money to put in. And you're in ecstasy if you do.

Simonoff: You've watched this business evolve for 34 years roughly. What are some of the most significant changes that you've witnessed?

Murray: I think it's remarkable how few really revolutionary changes I've seen. Unfixing commissions was the first. Unfixing commissions was one of maybe four revolutionary events I've seen in the business. The sudden and inexplicable shift of the investing public from individual stocks and bonds to mutual funds and later to other portfolio/package-type products around 1990 was the second. And the death of Glass-Steagall is the third.

And there was one more megashift. The fourth really revolutionary change was the migration of retail financial advice from a commission basis to a fee basis.

Simonoff: Some advisors and many investors started to favor individual stocks over funds in recent years.

Murray: You're saying in the late '90s people went back out to individual stocks. That was a cyclical phenomenon. Three things will take you out of mutual funds into individual stocks-three things working together. And when all those three things start running together, then you get epic, historic tops. And the three things are overconfidence, underdiversification and speculation. But I would say to you that those were cyclical rather than secular phenomena of the late '90s. At least I hope they were.

Simonoff: Do you think that that can explain the difference between those who are getting through this bear market relatively unscathed and those who are in severe pain?

Murray: Yes, but all that does is amplify my previous answer, which was that people who stayed diversified are mostly okay and people who didn't aren't.

Simonoff: You mentioned the migration from commission to fees. What were the implications of this change, and do you by and large think that it's positive for all the players involved?

Murray: Yes. It's a gigantic net-positive for everybody except commission-based advisors who had small amounts of money under management and were turning it over too often. It's arguably the single best thing that ever happened in my career.

Fees put the advisor and the advisee on the same side of the table, squarely and solidly, for the first time in my career. Fees create a linear relationship between the long-term investment success of the client and the long-term income of the advisor. Even when the markets deal out short-term pain to the investor, he can take some comfort from the fact as it is a fact that his advisor is taking the same percentage income hit. Not only does the advisor prosper as the client prospers, but if there's any comfort in this, the advisor suffers when and to the extent that the client suffers.

That's one of the great benefits of fees. The other, frankly, is that the advisor is now not only rewarded but incented to tell the client to do nothing when, as it almost always is in a properly-structured goal-oriented portfolio, nothing is the right thing to do. With commissions, even when the right thing to do is nothing an advisor couldn't get paid to tell anybody that.

Simonoff: What changes do you expect to see over the next 10 years?

Murray: Well, the obvious ones are a combination of the continuing globalization of financial services, which is a very, very powerful force and in the industry in the largest sense, and I think has potentially though not automatically great advantages for the American advisor and a general raising of the ante, which depends upon continuing consolidation in the industry. Consolidation and convergence are not the same thing. They're two very different things, but the combined effect of both and each is to raise the ante. Citigroup destroyed Glass-Steagall, and that was the most important thing that it did or that anybody could do at that precise moment in history.

But the other thing that Citigroup did is by an order of magnitude was to raise the ante. And I think that that is a process that is still playing out and has a long way to go, a long way to go.

Those are sort of the big macro changes-convergence, globalization and consolidation-among which there's a lot of overlap. As far as the business is concerned, you have to realize that at this juncture, weighted for income and age, the whole country's turning 55.

Simonoff: Yes.

Murray: Now that would not be true if you just said weighted for income-I mean weighted for net worth. But weighted for income and assets, the whole country is turning 55. I mean intuitively and from personal experience, somewhere in there comes the magic moment when you stop being portfolio-oriented and overnight practically become planning-oriented.

I go to bed the night before my 55th birthday dreaming of how many stars my mutual funds have and what their standard deviation is and how well they're performing next to the other similar mutual funds, and I wake up on the morning of my 55th birthday and say, "Do I have any reason to believe that our money will last through a retirement which for one or both of us may be 30 years long?" The minute I open the door a crack to that thought, I think what if I die and the Feds take away 55% of my five-star fund?

You see? And that is the great sort of psychological [watershed] that either does or does not happen to people as they come through their mid fifties. So to the extent that demographics are a governing variable, if not the governing variable, of the retail financial services industry, at least at the high end, you would expect the business to get a whole lot more planning oriented, a whole lot more relationship oriented, a whole lot more holistic and a whole lot healthier in its approach to people.

Simonoff: One thing that the bubble taught many advisors is that they must become more selective about choosing the clients they work with. It's obviously possible to be more fulfilled by working only with those clients you like. Is it possible to maintain or increase your income doing so?

Murray: It's not merely possible, it's inevitable. Again it's almost a "why not." The number of millionaires in this country is growing somewhere between five and seven times faster than the population as a whole.

Which is to say that the number of potentially good clients for the good advisor is growing not arithmetically but exponentially. If I can't find 250 people, 250 households/families with-just to pick a number-$400,000 of manageable assets each, forgetting insurance commissions, forgetting planning fees, forgetting everything else, if as the whole world turns 55 and accretes both income and wealth on a scale not only never before experienced but never before imaginable, if I the advisor can't go out over some reasonable period of time and put together 250 $400,000 households such that I gross at a 1% fee one million dollars, they ought to put me down like an old dog.

Simonoff: What are the best measures or ways to determine if someone who is a prospect is the type of client that an advisor would like to work with?

Murray: I think the large answer is that it's not a technique. It's sort of how do you know you're in love or how you know you want to be somebody's friend. I don't think that that's quantifiable and I don't think you get to it through the left side of the brain. I think most great client-advisor relationships are essentially chemical and the chemistry is sort of what it is.

Now having said that, I think that the advisor has the right and the duty and the need and the obligation to tell the prospect what kind of client he wants. And you do that by saying how you operate. I don't buy individual stocks. I don't buy bonds at all. I don't watch the market. You know I take a long-term perspective.

Even before you get into issues about financial planning, I think anybody who has any sense of himself can tell somebody in 60 seconds what kind of an advisor he or she is. Then you just sit there and see if they turn green or see if they bolt for the door. If they do neither, you know you've got a prospect, or at least a suspect. I think the real bottom-line answer to your question, which is a good one, is to thine own self be true.

Simonoff: If someone says they once spent four hours a day watching CNBC ...

Murray: You really want to tell them to do that if that's what they need to do. And you want to tell them to do it someplace else.

Simonoff: Now some people believe that competitive pressures are going to raise the costs of doing business for small advisory shops and cause them to look to consolidate or become increasingly marginalized. Do you think that that's inevitable?

Murray: First of all, I don't know what the competitive pressures are in a business that's as intensely relationship-oriented as financial advisory services.

Simonoff: Everybody, from banks to trust companies to brokerages, is moving into fee-based relationships.

Murray: But how does that raise my cost?

Simonoff: It may not raise your costs, it may make it harder for you to differentiate yourself. In any case, some advisory firms are looking, for the first time, at hiring people whose sole job is to be a marketer or a salesperson. For a long time among the fee-based advisory shops, that was a dreaded word. The partners felt that they could survive largely by referral.

Murray: Yes.

Simonoff: Now they're thinking, "With all these different players coming into the business, I need someone to focus on marketing full time."

Murray: Completely different issue. I don't mind addressing one issue or the other. They're not the same issue. The premise of your question is competitive pressures raising my cost of business and therefore or thereby forcing me to consolidate. And I questioned the premise. I don't see how, if the entire world became an RIA, that that would raise my cost of doing business one iota. And therefore, I do not see how that would incent me, much less force me, to consolidate.

I reject the idea that competitve pressures, whatever those are, affect my cost structure. You then went to another issue, which is people not getting enough referrals, which is, of course, not a function of whether they have a marketing person or not, but a function of how happy their clients are. In the end, what would force me to consolidate? I need 250 or so $400,000 families to gross a million dollars. Yes?

Simonoff: Yes.

Murray: The only thing that I can imagine, and I can well imagine, would prompt me to consolidate was that my span of control in terms of the expertise that I brought that family was not sufficient. The consolidation that I see coming in small practices is interdisciplinary, that you will have a CFP and a CIMA and a CPA and a CLU under the same roof. Not a CFP consolidating with other CFPs necessarily. Because the post-Glass-Steagall trend, which is one plan, one planner, one door, one desk will cause or should cause, I think, a lot of interdisciplinary consolidation of practices, which I think is potentially an unalloyed good thing. But it's not responsive to your question, and it doesn't accept your question's premises, if you see my point.

Simonoff: And you think that premise is somewhat flawed?

Murray: Yes I do. Your question, that is often asked, infers a relationship between the number of competitive players out there and the cost structure of a small- to medium-sized practice, and I don't accept that premise. I mean, there's pressure on my salary structure but it's the pressure that's implicit on a 5% unemployment economy.

It's got nothing to do with other pressures that are unrelated to the competitive environment, whatever that is.

Simonoff: Several observers have mentioned that one of the assumptions behind the argument that business is likely to become increasingly institutionalized is that the institutional assumption is it's a faceless relationship.

Murray: All of these devil theories that presuppose extreme price sensitivity, that presuppose dominance as a reality in financial services, ignore the fundamental reality of retail financial services, which is that it is so intensive and relationship-oriented and therefore not price-sensitive. And not even competition-sensitive.

Simonoff: Go back to what you said a minute ago about the increasing likelihood of interdisciplinary consolidation.

Murray: I see it happening in small-to-medium size practices to create the family financial office. That's the wave of the future. Any other approach is counterintuitive. Why did I, with no one holding a gun to my head, go to an investment advisor, a life insurance agent and a bank, all of whom gave me wildly conflicting, indeed contradictory, advice. Why did I do that?

Simonoff: You had little choice.

Murray: I had no choice. Now I do. The human impulse is that unless your doctor sent you to a specialist, you would never go to more than one doctor. Yes?

Simonoff: Correct.

Murray: Health and money are the same thing. They're matters of life and death that we know we don't know anything about. The human impulse is to find one person it can trust, or at least one office it can trust. Up until now, it couldn't do that. It was forbidden to do that. The human impulse was dammed up behind the law. The dam broke.

As America finds out household by household, and family by family, that it may be allowed to walk through one door and sit down at one desk and take the whole nightmare of its financial life off its shoulders and put it on that desk and look into the eyes of somebody that it trusts implicitly and say: "Will you take care of all of this for me?" And have the person sitting on the other side of the desk say with credibility, "Yes, the game's over."

If the person sitting behind that desk says, "I can do this part of it but not that part of it," the family won't let him do any of it. The family will just get up, put that hissing, writhing bag of snakes that is its financial life back on its shoulder and go knock on another door. So the question is not why the family financial office is the wave of the future. The question is how could it not be? Again, we're talking about the most fundamental human impulse, which is to find someone it can trust. The family financial office is the wave of the future because all other paradigms are irrational in that they deny the most fundamental human impulse.