One morning I received a call from a frantic client who said that he and his wife needed to meet immediately. A few hours later, I sat across from "Ed" and "Betty" and found out what was so urgent: "We want out of the market immediately. We cannot tolerate the volatility any longer. We will wait for a better time to reinvest when there is more certainty regarding the direction of the economy. It does not matter what you say-we are not going to change our minds."

I gave it my best effort to dissuade Ed and Betty from straying from the long-term plan we had put in place for them, but to no avail. We proceeded with their wishes and sold all of the long-only equity investments in their portfolio. The date of that impromptu meeting: March 6, 2009. As we all know, the S&P 500 bottomed out on March 9 and appreciated approximately 65% from that point to the end of the year. I imagine that the conversation I had with Ed and Betty was repeated in thousands of advisors' offices in late 2008 and early 2009. One of the more challenging components of the discussion was that, at that time, the clients' rationale for wanting to hide their assets under the mattress seemed reasonable. Investors were grappling with a treacherous economic landscape and what seemed to be possible financial Armageddon.

These investors felt the need to protect themselves from further losses by liquidating or substantially reducing their long-only equity allocations and sitting on the sidelines until economic data presented a more attractive or predictable investment landscape. Clearly, this sentiment flies in the face of traditional portfolio management that stresses emotionless discipline and adherence to the long-term plan. I have often reflected back on that March 6 meeting, as well as on my prior interactions with Ed and Betty, wondering if I could have said or done anything differently that would have deterred them. Is there a specific formula that would prevent the Eds and Bettys of the world from making rash decisions? Why did the methods advisors typically employ to accurately gauge a client's risk tolerance fail to forecast that the couple would stumble in the face of extreme volatility?

Throughout my career, I have learned that solid client service and effective communication are the keys to building a successful long-term relationship marked by trust and mutual respect. It is this trust and respect that allows clients to "turn the keys over" to you and believe in the plan you have laid out for them. Yet these techniques did not predict or prevent Ed and Betty from abandoning their plan. Much has been written about how investor psychology and certain emotional biases can impede the portfolio management process. Rarely has this sentiment been more evident or the disparity in portfolio performance more pronounced than in the financial market collapse of 2008 and in the ensuing market rally over the last nine months of 2009.
Clients who did not succumb to panic amid perilous market conditions have experienced a sharp recovery in the value of their assets, while those that did have missed a historic rally and may still be sitting on the sidelines waiting for the "right" time to re-enter the market. While Ed and Betty remained steadfast with their decision, I have found it useful to remind myself of the following time-tested tenets when working with clients in an uncertain market environment:

Stay in front of clients and proactively communicate with them. If they contact you about something you could have contacted them about first, you lost an opportunity to show them that you are proactive and that their well-being is in the forefront of your mind.

Acknowledge clients' feelings. Clients want to feel that their advisors hear them and understand them. After they saw a portion of their portfolios evaporate in just a few months, they are perfectly reasonable when they fear what could happen to their remaining assets. Let them know that they are not alone in their feelings.

Remind clients of their plan. Presumably, you set out a long-term plan with each client at the beginning of your relationship with them. This plan was most likely based on each client's time horizon, cash-flow needs and risk tolerance. You may also have pointed out at that time that there would be instances when not deviating from the plan would be tough emotionally, but that sticking to the strategy was imperative to the long-term success of the portfolio. Remind clients of that conversation.

Make minor tactical adjustments to the portfolio. Portfolio decisions do not have to be all or nothing-for example, you can reduce the allocation to equities yet keep the allocation within the tactical bands you outlined in the original investment policy statement. Making slight adjustments on the periphery is not market timing and is not considered deviating from the long-term strategic goal. Ideally, the advisor will make these minor tactical adjustments according to his or her expertise and market views, but if the adjustments are initiated by squeamish clients, it should at least give them peace of mind that they are being heard and that action is being taken.

Document discussions. Documenting recommendations and the thought process that went into them gives clients something tangible that they can reference if they begin to doubt the current strategy. In addition, if you unfortunately find yourself with a litigious client later, your documentation of the plan, showing its appropriateness for the client, will protect you.

Ed and Betty have been dollar-cost-averaging back into the market since August and are now close to their tactical target asset allocation. At a recent meeting with them, I solicited their feedback on the events from last March. They said, quite simply, that nothing could have made them change their minds. No graph, statistic, hypothetical situation or communication technique would have stopped them from doing what they wanted to do. Even they did not expect to react to the market volatility in the manner that they did. I deduce from this example that there will be situations when sufficient education and proactive communication will falter in the face of powerful human emotion. Even if you follow every lesson and employ every technique in your arsenal, there are some clients for whom you can do very little to keep emotions from driving the decisions.

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