Whenever markets decline significantly, much of the focus leans toward the issue of whether people should flee to cash. The financial planning community rises up to remind clients that this is usually not a good move. Experienced planners know there are plenty of other mistakes clients can make now besides moving to the sidelines.
I’ve been through more than a few bad markets and each time a steady drumbeat of negativity makes some clients and prospective clients consider investments that they would not consider otherwise. This is fertile ground for scams, but there is a subtler way to hinder a client than an outright fraud. Bear markets are good conditions for inducing clients to buy an inferior product and rationalize the buy as a sensible “adjustment.” Planners beware: the pitches for bad products are coming.
Based on past market malaise, here are some products planners should be prepared to address.
Alternative Investments
Alternative investments get a lot of play during a bear market. The press loves to profile people who called the top or profited from the decline.
It all sounds so good. Hire the grand wizard that will zig when the market zags. There is a certain cachet to that.
Even advisors can succumb to the cachet. Some want to bring an air of sophistication to their offering or think talking about something new will give their clients the impression they are working harder for them. In some cases, advisors put clients in these because their employer is emphasizing the products.
If you want higher costs, greater risks, greater dependency on management’s crystal ball, less transparency, low tax efficiency and limited or no access to the funds, alternatives are worth considering. Fortunately, most clients find these qualities unattractive. Add to that the inability of most clients to understand how the products work, and these pitches are among the easier to reject. Other than cachet and commissions (I do not work on commission), I can’t see why an advisor would be interested in exposing their clients’ futures to so many unknowns.
Yes, ‘40 Act products help with access, but the rest of the negatives typically remain. And, yes, I know endowment funds and the uber-wealthy tend to own alts but my clients aren’t endowment funds and are not uber-wealthy. The markets are risky enough for my clients and my clients can only spend cash, not cachet.
Gold