Advisors are rethinking their fundamental asset allocation strategies.

Henry David Thoreau once said, "Things do not change; we change." But if you look at what's been going on in the uneven world of investing during the past three years, Thoreau might be singing a different tune.

Indeed, if financial advisors were to interject, they might tweak the quote to read, "Things indeed do change, and we're trying like heck to change along with them."

This is particularly the case when it comes to the strategies advisors are using to manage their clients' assets in a volatile market. Shaken by the swift transition from a nine-year bull market to a stubborn bear market, advisors are trying to get client portfolios on an even keel again. As a result, they're doing a lot of rethinking of their asset allocation strategies. Whether it is a case of going from passive to active management, or buy-and-hold to technical analysis, the fact remains that the market's unpredictable ways have caused many advisors to make dramatic shifts in their asset management philosophies-even with the recent market upswing.

The success of these changes won't be known for some time. But for many advisors, the decision to change ultimately came down to this reality: You can't change the market, but you can change your approach.

"I would think you would have a hard time finding advisors who have not decided to rethink their strategies," says Ben Utley, president of Utley & Associates, wealth managers in Eugene, Ore. For Utley, the decision to change came at the start of the year, when he shifted client assets from intermediate- to short-term bonds with the expectation that interest rates would edge up. He even surprised himself the year before by moving into and out of junk bonds. He's also considering going into privately held mortgage notes.

Utley, of course, realizes there is irony to the fact that he and other advisors are scrambling to adjust strategies-some much more drastically than he has-in the face of an uncertain market. Theoretically, a good asset allocation should stand up to any kind of market, negating the need for constant rethinking. "The whole point is to stick to it because of 70-some odd years of history," he says. "If it worked through assassinations, world wars and the fall of the Berlin Wall, it's probably going to work going forward."

Yet he, like other advisors interviewed, say the reality of investment management is somewhat different. "I think that as advisors we try to control what we believe is in our control," he says. "The purists will ride things out, but see their client bases erode. And then the purists won't be around. That's the real problem."

Some advisors have retooled their investment tool chest more drastically than a reshuffling of bond holdings. Over the past couple of years, Steven Landis, owner of Landis Financial and Investment Services of Columbus, Ohio, has undergone a complete reversal in thinking as an investment advisor. Landis had been a straight buy-and-hold proponent for 20 years with good success. He would practice asset allocation with a spread of about five or six different classes of funds and usually average returns of about 10% to 12% a year.

But then the Nasdaq crashed in March of 2000, and then came September 11, 2001, which Landis feel shook up his clientele to the point where they needed more hands-on treatment. "At that point, they pretty much had had enough of the market," he says.

Deciding he'd had enough of buying and holding, Landis shifted to active management based on technical analysis. He's also added a high-yield junk bond program to his management system, as well as small- and micro-cap sector trading.

He typically places half of a client's portfolio into active management, leaving the other half in buy-and-hold. "Our goal is not to beat the market, but to get competitive returns," he says. "What my client is looking for is good return with reduced risk." Risk has been reduced, he feels, with charting and market timing that allows him to move assets into and out of cash. His small- and micro-cap investments, for example, sit in cash about 40% of the time, he notes.

Thus far, he says, the conversion of style has given him the low-side protection he's been looking for. In early September, he was up 17% in long index trading, up 12% in sector funds and up 14% in high-yield bonds. At the same time, year-to-date, the Nasdaq was up 34%, the Dow Jones was up 12% and the S&P 500 was up about 13%.

He says about half of his clients, about 50, have agreed to move their assets into active management. The rest remain buy-and-hold. "I have clients I don't even mention this to," he says.

Martin L. Hopkins, president of M.L. Hopkins & Co. LLC in Princeton, N.J., saw about the same ratio agree to convert to a tactical asset approach-about half of his 40 clients. He made the move in January, after using a fixed asset allocation approach for two years.

He made the change after tracking model portfolios put out by Littman/Gregory Fund Advisors, and found that they offered him more flexibility than his fixed strategy. Hopkins, for example, says Littman/Gregory's models convinced him to overweight in high-yield bonds a year ago-which turned out to be one of the better moves he's made over the past year.

Among the other noticeable differences in client portfolios between last year and this year is more exposure to REITs and allocations in cash, which was rare in his previous strategy.

Under his prior strategy client portfolio allocations were generally fixed, with the thinking that they would only be revisited every three years.

"I still see myself as a long-term investor, but I do feel after going through the last few years of the down market that there have been some obviously under-valued opportunities," he says. "Had I caught that high-yield bond opportunity earlier in the cycle, it would have been very helpful to clients."

For some advisors, market turbulence has propelled them in a completely different direction. At CPA Wealth Management Services in Melbourne, Fla., the decision was made four years ago to build an in-house research team to direct its investing. For three years, the firms invested in individual securities largely based on its own fundamental and technical analysis. The firm even had two analysts and two RIAs who were devoted exclusively to research.

Firm President Tom Kirk considered it a solid strategy until he, like others in America, saw his world abruptly change on September 11, 2001. The changes went even deeper in the following months, as Enron and other corporate scandals led to developments that defied the prognosticating abilities of any analyst.

"It got to the point where no matter how good the research we had was, or how well thought out it was, it could be severely damaged by unforeseen events," Kirk says. "So we did a lot of soul searching."

What Kirk decided was that his firm was no longer going to try to out-think the market. It was, for him, a new outlook-one that landed him smack in the fold of DFA Advisors, one of the investment world's more outspoken vanguards of passive investment strategies.

About a year ago, Kirk decided his firm would dismantle his research group and transition his 100 clients, and their $120 million in assets, to a strategy focused on DFA's funds and model portfolios. Twelve months later, he says that transition is about 98% complete. Only five clients were lost through the transition, he says. "It's greatly simplifying our client investment approach, and I think given them a much higher probability of achieving positive long-term investment returns," he says.

Kirk adds that he's not looking to hit homeruns with the change; only to safeguard clients-and the firm-from Worldcom-like events that lie in the future. "Events like that kind of freeze you like a deer in the headlights," he says. "My goal is to have the client achieve returns that are available in the market at less risk."