Communicate early and often to keep clients happy.

    In our last column, we examined how affluent investors have altered their game plans and their relationships with their financial advisors between 2000, when the stock market peaked, and late 2004, when it had rebounded but settled down to a far more modest rate of return. The millionaires we surveyed had tweaked their portfolios somewhat in the intervening four years, focusing less on stocks and mutual funds and more on alternative investments, for instance. But it was the nature of their relationship with their financial advisors that underwent the far more profound change.
    And that's not surprising. In early 2000, after all, the Dow, S&P 500 and the Nasdaq had all hit record highs and, despite the occasional naysayer, there was no reason to think the bull market would end anytime soon. Returns of 25% seemed the bare minimum, and some mutual funds posted returns that easily eclipsed the 100% mark. When it came to stock picking, it was hard for a financial advisor to go wrong. Investors, for their part, put more money into the stock market than ever before, many of them abandoning their traditional asset allocation of stocks, bonds and cash in favor of an equity-heavy portfolio.
    So when the Internet bubble finally burst and the stock market went on to post its first three-year losing streak since the Depression, some wealthy investors were feeling wronged and vengeful-and even some of the best advisors paid the price for something that was beyond their control, the stock market's downturn.
    Indeed, as our research showed, the affluent investors we surveyed in 2004 were less likely to move assets to their primary advisor (30.3% vs. 78.2% in 2000), more likely to take assets away (15.0% to 3.4%), less likely to refer a wealthy investor (22.5% vs. 52.0%) and more likely to change (10.9% vs. 3.4%) or fire (14.2% vs. 0.3%) one of their financial advisors.
All of which begs the question: What should financial advisors do when the stock market tanks?
    To find out, we asked several financial advisors, not all of whom are money managers, what they did during the downturn and whether or not it helped. The answer, in a nutshell, is that they communicated with their clients-in advance, often and in an informed manner. And the frequency and quality of communication made a difference as they not only retained their key clients but also added some of the clients and assets that less proactive advisors were losing.
    "Waiting until a crisis comes to act doesn't work because you can't make a case with an alarmed or nervous client," says Merill Lynch's Doug Linker, of the Ward Linker & Associates Group of Merrill Lynch, Pierce, Fenner & Smith Inc. in Paramus, N.J. "If you haven't broached with your client in advance the fact that investing can be a bumpy ride, and justified the wisdom of the long-term plan you've prepared for them, you're vulnerable-and you probably haven't built a relationship that can weather a bear market."
    "Every one of your clients should know ahead of time that volatility is part and parcel with investing," adds Linker. "If people expect to profit from the stock market compared to cash or bonds, then they have to be able to stomach the volatility. If you prep them in advance about what can go wrong and how to react, they won't push the panic button when the stock market falters, as it invariably will at some point."
    "I always take an offensive stance when it comes to communication and that paid off during the bear market," says Gary L. Rathbun, CEO and president of Private Wealth Consultants Ltd., a wealth management firm specializing in the creation, preservation and transfer of private wealth. "I communicate with my clients about 17 times a year, or every three weeks, whether it's a letter, an e-mail, a phone call, a visit or a birthday card. I also make sure than that any phone call gets returned within 24 hours no matter where I am in the country. If you look at lawsuits against financial advisors, you usually hear the same thing: They never returned my calls. But most clients won't blame their advisor for volatility, especially if there's an ongoing dialogue."
    "I also think it's vital to address any client problem immediately," says Rathbun. "If a client is not happy, I will change my schedule and meet with him or her face-to-face the day I hear from them. I do not respond to a crisis with a phone call or an e-mail-not for legal reasons, but because I want my clients to know that their problem is my number one priority."
    Some advisors also wonder how effective the risk tolerance questionnaires they used in the 1990s really were. "It's easy to say in hindsight, but the advisors who oversold performance and ignored communication were the ones who suffered most," says Richard Harris, the managing member of BPN Montaigne LLC, a life insurance consulting firm devoted to helping professional advisors to the very wealthy and their clients deal with issues regarding life insurance. "Those advisors who sold service and relationships, in contrast, thrived during the bear market and often added clients and assets."
    Harris also thinks the downturn gave investors a much-needed reality check. "With the stock market going up for years, when investors were asked about risk tolerance they either didn't have the experience or had forgotten the downside of risk. Once faced with risk as a reality rather than a hypothetical, investors had the opportunity to recalibrate themselves."
    Troy Lindaman, a Merrill Lynch advisor and CFP based in Davenport, Iowa, agrees with Harris about the performance promise. "Performance was definitely the undoing of a lot of advisors. We can't control the market, but we can control service and we can communicate with our clients. A lot of advisors stopped calling their clients during the bear market but I tackled the issue head-on, making weekly calls, sending weekly e-mails and making sure that my clients understood what was happening, good or bad. When service and communication are constants, it's relatively easy to weather a downturn. If there's no service, no communication and no performance, that's three strikes against an advisor."


Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.