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.

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