So what's an investor to do?

It's no secret that this has been a particularly rough year for the stock market and for investors. Coming off the sizzling fourth quarter of 2001, the market seemed poised for the rebound that everyone had been waiting for after two bad years in a row. But while economic indicators have been generally positive and the Fed's prime rate remains at a 40-year low, the stock market has lost ground this year and the Dow, Nasdaq and S&P 500 are more or less back to where they fell in the wake of September 11. Consumer confidence and spending have remained solid, if not exactly buoyant, but now there's a new problem to confront, and one that's far closer to home for many advisors-an erosion of investor confidence.

Who can blame them? After all, stocks are supposed to go up when the economy's good, not down. But the dramatic problems on the accounting front have taken their toll on both the market and the psyche of investors. Since Enron's collapse last year, accounting woes have clobbered the stocks of Adelphia, Tyco International, Xerox and now WorldCom, the nation's second-largest long-distance carrier. And these are not dotcom start-ups that investors rolled the dice on back in the heady days of 1998-99. As far as anyone knew, they were all world-class companies, safe bets that were featured on the cover of magazines and ranked high among the Fortune 500. Equity in these companies was held by individual investors, of course, but also by mutual funds and pension funds.

As if the accounting debacles weren't bad enough, investor uncertainty has also been stoked by the ongoing threat of terrorism and the crisis in the Middle East. Taken all together, it's easy to understand why investors are restless or even irate.

What's An Advisor To Do?

Whether or not an advisor had promoted WorldCom to his or her clients, questions remain. How should an advisor communicate with clients when more bad news hits the front page? Which clients should be called? When should it happen? And what does one talk about?

The first step, and it's one that we've advocated in this column for any number of advisor/clients issues, is to make contact. If there's any single message that has run consistently through all of the research we've conducted among affluent investors over the past decade, it's that they crave interaction. They want to be communicated with on a personal level, and the advisors who do that will be rewarded with a better relationship, more assets to manage and referrals.

The level and the nature of that interaction will vary, of course. Advisors will not be able to spend 15 minutes on the phone or face to face with every client on their roster. Thankfully, they won't have to. Based on the advisor's knowledge of the client, the nature of the established relationship and, importantly, the client's value, a list of clients to be contacted should be prepared. Depending on how many clients make the cut and the amount of time the advisor expects to spend on each call, there probably will be somewhere in the neighborhood of 25 to 50 names on the list.

Client Triage

The next step is to practice client triage: Focus on clients who are particularly nervous about the turn the market has taken or individuals with significant exposure to stocks or industry sectors that have been adversely impacted of late. The clients who aren't going to be called should not be ignored, however. At the very least, they should be sent an e-mail addressing the situation. And it should be sent within a day or two of the market event. Given the investment climate right now, no client should have to wait until the next quarterly recap to be contacted.

Have A Script In Hand

Once an advisor has decided which clients to speak with, it's important to script the conversation in advance. This is not the time to wing it. That doesn't mean that an advisor should robotically stick to the script. There will be questions and detours that have to be accommodated (and, if they serve the purpose of getting the client heard, encouraged). The script may also be refined as the calls progress or slightly varied for some clients depending on their hot buttons. But, in every case, there should be a script that steers the conversation. (The completed script also can be used as the e-mail sent to those clients who are not called.)

Offer An Ear, Not Solutions

In preparing the script, the first thing advisors should remember is that they can't change investor sentiment any more than they can alter the course of the stock market itself. At this stage, advisors do not need to offer solutions. The call is not about beating the market; it's about reassuring the client. The single most valuable thing advisors can do in this case is to let a client know they are on top of the situation and are staying informed, all of which can be implicitly achieved by the very fact of having made a timely call and being proactive.

Warning: Anger Management Ahead

It's also important for advisors to know that their clients aren't likely to be in a great mood, no matter how proactive the advisors are being. They're going to be at best very nervous and at worst very angry. The way to handle those emotions is to deal with them head-on. Ask the clients how they feel. Empathize with them and validate that they have a right to be upset (or nervous).

Hopefully, there also will be some positives to accentuate. Most clients, however nervous or cross they may be in the short term, will still be buffered by asset allocation and diversification. In short, the current crisis is a blip-albeit a painful one-in terms of their long-term goals.

There's Still An Upside

(Believe It Or Not)

Later in the conversation, or maybe in a follow-up e-mail, advisors can also address some of the more prosaic and more positive issues. Economically speaking, for example, the key indicators are still strong: GDP is well, interest rates still are low, consumer spending and confidence are solid, housing starts are at a record pace, and corporations gradually are making a profits recovery that will, slowly but surely, lead to a return of capital spending. Advisors might also underscore the fact that the accounting problems have led to a new emphasis on solid research that carefully scrutinizes a company's strategy, management, and accounting procedures.

Above all, however, this crisis in investor confidence affords advisors an opportunity to deftly remind their clients what it is they do. They're not stock pickers. They're not product pushers. They're providers of advice, guidance and expertise, and perhaps most importantly, they're relationship managers who realize that interaction at the personal level is a fundamental part of the job they perform for their clients.

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.