If advisors have learned anything from the last market cycle, it's that they must be ready to stay with unpopular investment strategies and stick to their guns-even if it means losing clients, says certified financial planner Charles Hughes of Bay Shore, N.Y. That certainly was among the hard lessons he learned in the volatile market of the late 1990s.
The 60-year-old Hughes will be the first to tell you he's learned a lot during his years as a planner. He was practically present at the creation of the profession, after starting his own firm in 1981. He remains a sole practitioner today.
A former priest and teacher of classical languages, Hughes decided to become a planner in the late 1970s and served as president and executive director of the Institute of Certified Financial Planners (ICFP) in the 1980s. Over the years, he has taken part in many debates on the profession's standards and ethics.
In his ongoing journey as a planner, he's faced many of the same challenges confronting others in the business. In the late '90s, for example, he faced pressure from clients wanting quick investment returns. Hughes thought it was sensible to adopt a balanced approach to both small- and large-cap stocks at a time that large-growth stocks were booming. "The investment strategy we employed in 1999 was not a radical departure from what we had used before. However, it became dramatically out of favor. Clients became impatient and dissatisfied, and therefore we lost clients," he says.
By sticking to that formula, which Hughes believes was sensible, he alienated and lost about 5% of his clients. That was bad enough, but he doesn't fault himself. What he does blame himself for was his decision to give in to pressure from some clients who believed that an overweighted portfolio was what Hughes should have been doing all along. "In some cases, I must admit that we capitulated, meaning we moved into large-cap and telecommunications areas, and we lived to regret it," says Hughes.
These days Hughes, like many Americans, isn't nearly as optimistic as he was in the 1990s. He expects the current bull market to continue over the next year, but thinks that huge federal budget deficits will probably translate into mediocre markets in about a year. With new risks like the rising budget and trade deficits compounded by the ever-present threat of terrorism, he believes that advisors who hear demands from clients to do the popular thing and pick the investment du jour must be able to say no.
Amazingly, all it took was one positive year after a three-year bear market for clients to start carping, albeit softly, about earning only 15% to 20% in 2003.
Advisors from Bill Bengen in El Cajon, Calif., to Harold Evensky in Coral Gables, Fla., report a sudden outbreak of amnesia among clients who were running for cover only 18 months ago.
Investors understandably would prefer to look on the sunny side of the street. But if a client isn't concerned about signs of froth resurfacing, they may be too giddy to notice that the Nasdaq index has risen almost exactly twice as much as the Standard & Poor's 500 Index in the last year or so, without sufficient underlying fundamentals to justify it.
The last time the growth-stock bubble burst, the majority of Hughes clients were highly satisfied with his services through the bear market of 2000-2002. In that period, Hughes can't recall any client complaints. "We actually have been taking on more clients," he says.