Five years after crisis, advisers can sleep at night, but clients still nervous

Five years ago, as Lehman Brothers Holdings Inc. was allowed to fail and Merrill Lynch & Co. Inc. sold its 17,000 brokers to Bank of America Corp. to avoid its demise, financial advisers quickly realized the country wasn't facing just another market blip. “There was the sense that unthinkable things were happening behind the scenes and that this wasn't like previous market crises,” said Gerard Klingman, president of Klingman & Associates LLC. “We were looking at the potential reworking of our financial and banking systems.” Five years later, those systems are largely restructured but even clients who have recovered losses — and in some cases enjoyed noteworthy gains — are still hesitant to invest and lack confidence for the future, advisers said. They're worried that it will happen again. Our visual timeline of the main events of 2008's crisis: During the darkest days from Sept. 10 to Oct. 10, 2008, when the Dow Jones Industrial Average lost a quarter of its value, advisers and planners spent sleepless nights stressed over their clients' investment losses and trying to make smart decisions. They also worried about their own revenue, which, in most cases, tumbled along with assets under management. Brokers, who also tried to limit client losses, watched the value of their personal deferred compensation sink along with financial company stocks. At the same time, the cachet of working for a Wall Street giant became an encumbrance almost overnight. “It didn't take advisers long to figure out there were big systemic problems that were going to impact investor confidence for a long time,” said Rebecca Pomering, chief executive of Moss Adams Wealth Advisors LLC.

More cash than ever

Wealthy Americans are sitting on more cash now than before 2008 and they are spending less, said Ron Carson, founder and chief executive of Carson Wealth Management Group. He describes a client who sold a company two years ago for $60 million but continues to deny himself the $300,000 Ferrari he wants. “People are making irrational, emotional decisions,” Mr. Carson said. “We still have scarring from that time.” Investors also have become more skeptical financial consumers, asking more questions about the risks associated with everyone and every institution touching their money. Clients ask their advisers which companies actually hold their funds, where their money is invested, how they expect the market to perform in the short and long term, and about fees, Ms. Pomering said. “Since 2008, the nature of the conversations with clients has changed a little, and with prospects, it's changed a lot,” she said. “They are asking questions now that they should have been asking all along.” Rick Kahler, president and founder of Kahler Financial Group Inc., said he pays more attention today to controlling client costs — everything from investment fees to taxes. He's also created a blog just for clients, to keep them abreast of his current thinking on the markets. In addition, he encourages his retired clients to have cash reserves that would cover one to four years' needs. Many financial advisers said they communicate more often with clients today than they did before the market crisis of 2008-09.

Biggest client acquisition opportunity

Mr. Klingman said keeping in regular contact with clients over that difficult time, including daily e-mails during the most volatile periods, helped him retain investors and even build his firm. “I never want to live through it again,” he said. “But it was the single biggest client acquisition opportunity of our lifetime.” Clients who couldn't get any or enough feedback from their advisers during that stressful period and — those who were unhappy with how their advisers had positioned them leading up to the turmoil — have largely left firms they had stayed with for years. Mr. Klingman said his firm picked up two clients from an adviser who was traveling on a month-long European vacation during the Lehman collapse. Today, Klingman and Associates reaches out even more regularly and frequently than it did before 2008, including formal quarterly commentary on the markets and interim outlooks as things change. Despite consistent communication, clients are still risk averse and concerned about debt, Mr. Klingman said. Many advisers — and their thoughts on financial planning — were changed by the financial crisis, which was touched off by a bursting housing bubble and Lehman's bankruptcy. About 47% of 56 financial planners advisers questioned in February and March 2009 said the financial crisis had caused them to rethink how they help people create the life they want. The study, published last year in the Journal of Financial Therapy, theorized that the high anxiety levels advisers experienced during the crisis led many to shift away from strategic asset allocation (or simply setting target allocations and re-balancing to them) toward tactical asset management — investing based more on fluctuating market movements than buy and hold. One of the study's authors, Brad Klontz, a therapist and certified financial planner, also points to advisers' increasing use of annuities — a product many looked on with skepticism before the crash. “This was an event so stressful that advisers want to do whatever is possible to avoid that stress,” he said.

Going tactical

Mr. Klingman said he relies more on tactical investing today than before 2008. The firm's advisers regularly make changes to their asset allocation models based on their outlook on valuations and models, he said. “I came to believe that markets can go to extremes and you can't simply say … stick to the plan no matter what,” he said. Even the makeup of the financial advice industry has been altered by Lehman's collapse and the events that followed. The advisory firms that survived the economic downturn are those that were already focused on running the business as a business — or learned to do so quickly — Ms. Pomering said. “Management consultants had been talking about this already,” she said. “But in 2009, advisers came back and said, 'What did you mention about managing to a bottom line? I'm ready to listen to that now.'” Meanwhile, the economic reasons for working at a brokerage firm buckled with the drop in financial company shares and Wall Street's image problems. The breakaway trend that began before the Lehman collapse hastened. From the end of 2007 through 2011, the asset share of the four wirehouses fell to a combined 41.1% from 47.8%, according to data from Cerulli Associates Inc. The big brokerages took note of consumer preferences and shifted the focus of their adviser forces toward more-comprehensive financial planning and use of fee-based compensation models. Distinctions among the different channels in the financial advice industry — and those evident to consumers — have grown less apparent ever since.