Late last summer, most advisors were well aware that equity prices could fall further even though the markets were already down about 20% from their late-2007 highs.

Yet few financial savants imagined that stock prices could fall as far and as fast as they did last September and October, or that a manufacturing powerhouse like Japan, the world's second-largest economy, would see its exports drop 40% in a few weeks, or that a global corporation with triple A-rated debt like General Electric could face a life-threatening event when it was unable to roll over its short-term commercial paper in a credit market paralyzed by the bankruptcy of venerable Lehman Brothers. Suddenly, unthinkable events became reality, and it shook our financial confidence to the core. For many financial advisors, the recession that began in late 2007 and later imploded into a near-depression was the most difficult period of their careers. It tested old assumptions and left some contemplating new ways of doing their jobs.

Senior editor Jeff Schlegel spoke with six advisors about what the recent turmoil taught them about their practice and the industry in general.

Richard Kahler, president of Kahler Financial Group, Rapid City, S.D.
One of the things I've learned from the financial crisis is that there's great value in alternative investments. I've been using alternative investments for at least ten years with commodities and REITs, and more recently with absolute-return strategies such as convertible arbitrage and merger arbitrage. I use mutual funds, not partnerships.

As part of the crisis, I've added managed futures and changed the commodities structure a little. And I've also added some new absolute-return funds with managers who do short selling and covered calls. These include Hussman Strategic Growth fund, Caldwell & Orkin Market Opportunity fund and Leuthold Core Investment fund.

On the bond side, I've learned not to do corporate ladders anymore. I had clients in Lehman Brothers and Washington Mutual, and all of my bond ladders suffered about the same losses as a bond mutual fund. I sold them when Lehman Brothers went down because I realized I can't trust the ratings anymore. Until they change the way bonds are rated and I can have confidence in Moody's, S&P and Fitch, I'll use bond funds and not ladders.

I started out as a financial planner, and about five years ago was pretty solid in terms of being an investment manager. Then I started ramping up to do more planning and basically got there when the crisis hit. And I'm glad I did because I lost a higher percentage of investment clients than planning clients--three on the investment side and one on the planning side, or about 5% of my total.

I'm thinking I may not take investment-only clients anymore, because with them it's more like, "What have you done for me lately?" This crisis absolutely brought out the difference between investment-only and financial planning clients. You're providing so much more value to financial planning clients, especially when you add innovative financial products or life planning services into the mix.

That relationship is so much stronger. Their focus isn't so much on returns; it's about making their lives better and the whole financial picture, asset protection, cash-flow management and everything else. I'm more valuable to those people as a financial planner than as an investment manager. That's a real wake-up to me.

The crisis also reinforced the great benefit of embracing technology and having a lean, scaled-down operation. We cut our number of full-time employees by half because of the recession, so we need more efficiencies to make up for that. We've put more information on our Web site and made the site more interactive to make it work as an employee for us.

We're looking at rebalancing software. We're looking at online client portals as a place to put all of their stuff. It would eliminate e-mail and cut down on mailing costs, and would make it easier and quicker to send information to them. I've learned how to put some of my communication on my podcast and Webcast.

Dan Moisand, principal at Moisand Fitzgerald Tamayo LLC, Melbourne, Fla.
Amid the turmoil, we revisited every angle, assumption, philosophy, process and management issue we could. One of the glaring lessons is that many of the often-heard pieces of advice regarding practice management are spot-on and really showed their value in adverse environments. Some are repeated so often they can be seen as clichés, such as choosing clients carefully, doing what you say you will do and not making promises you can't keep.

Others include keeping a close eye on your financials and key economic drivers, making sure that firm leaders are on the same page-and that financial planning is key to making good decisions for clients, all firm personnel and the firm as a whole. And managing expectations is at least as important as managing money-both the clients' expectations and the firm's.

We found out we did a good job setting expectations for our clients. Formulating a game plan for a simulated decline is smart but we think clients can be better prepared for making real-time decisions during an actual decline when we add to our processes some coaching on the media's influences on them and their friends. We have plenty of material from the panic of 2008 to remind people what it was like.

We'll also look at a number of different ways to communicate performance. We like using internal rate of return because that's what people ultimately have to eat with. We are considering issuing "special reports" to illustrate timely concepts such as the rebalancing we did. Sticking to our discipline has paid off for clients and we should show that.

I think as an industry we're relearning lessons we already knew, and if you paid attention to them beforehand, you're probably in good shape now. But one concern I have from what I've been hearing are all of these suggestions about things we should be doing differently. You should certainly review your process, but you should be cautious about big changes.

The premise for making changes is that the pillars of traditional investment management--buy-and-hold, diversification, asset allocation--failed during the panic of 2008. I don't hear anything behind that accusation other than the fact that values declined. When you look at the alternatives being suggested, their values declined too. Hedge funds designed to provide absolute returns lost money. Everything went down.

Before the crisis hit, whatever your investment philosophy was is what you chose over other alternatives. With everything else basically failing, to say that the decline [of traditional investment methods] means failure borders on lack of discipline. Don't tell me that traditional methods failed and then offer me an alternative way that stunk worse and still has the negative qualities that caused us to reject it in the first place.

I wonder if advisors' own fears made them capitulate to their clients' anxieties. I have concerns about that based on some knee-jerk reactions I'm hearing. Clients need us to be rational and disciplined. The last thing clients need in a time of crisis is a panicked advisor.

Michael Dubis, certified financial planner, Madison, Wis.
The two things I learned through the crisis were discovering my niche and why I'm really on my clients' payroll.

First, we in the industry talk about working with specific demographics, whether it's professors, doctors, retirees or whatever. I couldn't understand why I didn't like that idea. I struggled for years about who's my niche or whether I wanted one.

Then I realized I had always had one, but that it's a psychographic niche, not demographic. I like and attract certain types of personalities. My clients consist of executives, small-business owners, surgeons/specialists and trustees/beneficiaries-whether retired or working. All are successful decisions makers in their everyday life.

I've subsequently re-engineered how I deliver advice. I've altered my writing style and tools to help my busy, decision-making clients make better decisions and save time. For example, advice is presented in executive-summary agendas. I attach supporting documentation in recap letters and visuals so the client has the details to refer to. I give clients the option to meet by phone or online to save them time.

Secondly, I confirmed why I'm really on my clients' payroll: to provide them with principled advice in a time of need and to advise their portfolio under a model of structure and discipline. These two services are what I define-and what my clients value-as financial planning.

I am concerned that the past 12 months has inspired a possible identity crisis for advisors. Obviously the focus this past year has been on investments, but I think some advisors are letting their clients define who they are rather than advisors taking a step back and reminding them what financial planning means, which is much more than just reactive investment advice.

For example, I've read that advisors want to include alternative investments in client portfolios in response to the crisis. Others are making radical allocation shifts in their portfolio models, offering no frame of reference as to why. It seems like a lot of alternative medicine is suddenly being practiced.

I want to practice clinical medicine, based on sound academic theory. I recognize some alternative medicine ultimately becomes the standard of care in clinical medicine, but that requires clinical "trials" before that occurs. Clinical trials of alternative medicine can lead to severe side effects. My clients didn't sign up for clinical trials.

Financial planning works. We should let financial planning drive the investment management process. I think advisors have to decide whether they want to be financial planners-which requires a lot more effort and probably requires a shift in how they're paid--or do they want to be just investment advisors. Everyone should ask themselves why they are on their clients' payroll.

Ultimately, we all have to accept the fact that financial and investment planning are soft sciences. We have to be open to new insights but to couple that with experienced intuition so we can serve our clients well in any environment whether it's calm or crisis.

Jennifer Cray, partner at Investor's Capital Management LLC, Menlo Park, Calif.
Years to come, I think a lot of discussions with clients will refer back to this period as their touchstone, much like the Great Depression was. The Great Recession won't change the substance of what I say, but it will probably change what I emphasize. I haven't figured out yet what that'll be because I haven't taken on any new clients during this period-because I've been busy with my existing clients. But I think with new clients it will be a different type of first meeting in terms of what we talk about. I always ask clients during our first meeting to tell me what's on their mind, and I try not to talk about investments right away because I find other issues are more urgent, such as insurance and estate planning. But I think investments will be front and center for a very long time.

Regarding investment management, we've come up with a new set of fixed-income funds for people taking-or about to take--distributions. We previously used mostly actively managed bond funds. We'll continue to do that for clients who can tolerate more risk. But we picked a portfolio of passively managed, very boring short-duration funds. So we're taking risk on the equity side, not on the fixed-income side. I tell my clients that boring is the new sexy. That's the most significant investment change we made.

On the client management side, one of the things we started doing was to comment to clients about what's going on in the markets. We never did that before because our clients are long-term investors and we teach them not to pay attention to daily gyrations. But we started communicating about market conditions via e-mail, in addition to our monthly newsletter.

One of the big drivers of everyone's anxieties was constant breathless commentary on how the sky was falling. Instead of telling people what not to watch, we told them about what to watch if they wanted to make sense of everything. One of the things we pointed them to was a podcast called Planet Money (www.npr.org/blogs/money), a combination blog and podcast on NPR that does very in-depth and entertaining segments on financial topics.

We also pointed clients toward something called the Marketplace Whiteboard from American Public Media (http://marketplace.publicradio.org/collections/coll_display.php?coll_id=20216), a series of short videos that describe what's going on in the market, such as what is a credit default swap. We recently recommended www.khanacademy.org/.

We realize that not everyone will find all of these as fascinating as we do, but the more they understand the better because I want well-informed clients who understand why I recommend what I do.

Another new thing we started last year was conference calls. We invited our investment management clients to join a short lunchtime call. The response was great. Even clients who couldn't attend thanked us for having the call and said they felt better just knowing we were doing it.

Roy Ballentine, president of Ballentine, Finn & Co., Wolfeboro, N.H.
We significantly increased the amount of communication we were doing, with the flow of documents we sent out as as e-mail attachments or paper documents roughly doubling. But one of the things we learned is it's not enough just to send materials and assume that we've done our job.

What happened was the clients weren't reading the e-mails, or they read it but didn't remember it, or they didn't understand it and didn't let us know. And those things turned out to be very important later. We found out we had to follow up with phone calls and personal meetings to make sure clients really incorporated or understood the main points we were trying to communicate.

The second component of this was internal to our firm. Having never been through something this long, exhaustive or severe, this is the first time we ever encountered any issues relating to the morale and energy level of our professional staff on the front lines dealing with clients every day. Making sure those folks got the proper support and coaching from management, along with time off whenever possible, was really important.

Another thing we didn't anticipate was that reports that formerly were done quarterly were in demand as much as a couple of times per month, so people's workloads shot up. We actually added staff during this period. From a management perspective, even though revenues were decreasing due to market conditions, we found you may need to add staff--and thus, costs--to do the right thing for clients and to maintain the client base during difficult periods.

Going forward, that means we have the capacity to handle growth as we come into the recovery period.

One of the things to keep in mind going forward is just how flawed risk-management tools are in the investment management business. We already knew that, but we just had a dramatic demonstration of this.

The whole industry is still looking at statistical risk measures that are mathematically pleasing but seriously flawed in representing the amount of real-world risk. If you ask why this is going on, the simple answer is these are the best tools they've devised and we use them even though we know they're flawed.

I think we owe it to our clients to make our presentations around the issue of risk management in a way so that our clients understand how imperfect the information is. And to show that risk levels represented from various sources substantially underestimate real risk.

Paula Hogan, founder of Hogan Financial Management LLC, Milwaukee
How many times in the middle of a tough personal experience have we each said to ourselves, "This will make me a better advisor." In the same sense, my hope is that the experience of the past year or so will make us a better industry.

As the bubble grew to its peak, Joe and Jane Consumer experienced increased risk in their personal lives as Social Security became less secure and defined-benefit pension plans began to disappear, and all this is happening as longevity increases. Employment became less secure because of globalization and the shift towards a knowledge society. Yet throughout the bubble, it was not unusual to hear stock investing touted as the primary protective strategy. Why would we advise increased financial risk for an investor whose human capital risk was increasing? In the bubble, were we part of the problem instead of the solution?

What I'm pointing to is the basic idea of first looking at whether a person has basic financial security before you take on investment risk. Human capital is the net present value of your lifetime earnings, and what you do in the workforce fundamentally determines your standard of living.

If a client has a risky career, if all else is equal they should have a less risky portfolio. In contrast, if they have tenure, a pension and lifetime health insurance, they're better positioned for investment risk than, for example, an entrepreneur or somebody in a boom-and-bust kind of business. We should start with human capital and tailor financial capital to that.

Is the AUM model dead? I think it is. If you think about human capital first with financial capital melded around that, and if you think securing a base level of standard of living is what you do before taking investment risk, and if you want to counsel clients on whether to make a big gift to charity or to their family, or counsel them to quit a job that makes them miserable, why would you want your compensation model based on whether the financial capital goes up or down?

I believe you're more aligned with the totality of what you're doing for your clients if your pay is based on an ongoing fee. I want to work with clients on a retainer basis but I don't think the fee should go up or down based on money management, which is a small part of what I do for them.

Just as other businesses are going back to the drawing board to take a fresh look at bedrock assumptions, I'm wondering what we will find when we do the same. But I think we're poised for really good, wonderful change because a lot of people are trying to figure out how to make positive contributions to what's going on. Everybody wants a good future for our clients and our industry.