Financial Planning-Reflections on the Past 19 Months

On September 15, 2008 I was attending the TD Ameritrade advisor conference here in Chicago. It was an interesting place to be, along several hundred fellow financial advisor types. This was a day on which we saw Lehman Brothers file for bankruptcy and the Dow Jones Industrial Average fall by 504 points.

By the time the stock market bottomed out on March 9, 2009, the S&P 500 Index had fallen from its 2007 peak of 1565 on October 9, 2007 to a closing low of 677. The index closed at 1192 on April 16, 2010.

During this timeframe I have read much about topics such as the failure of financial planning, how the models and tools many financial advisors have traditionally used proved worthless, and how the 401(k) plan is a failure.

On the one-hand these discussions are extremely healthy, both to the clients we ultimately serve as financial advisors and to us as practitioners. I have been in this profession since 1996 and I question my assumptions and methods on a regular basis. I joined a study group of fellow advisors about three years ago. Besides being able to tap into a vast pool of financial and business wisdom, this group constantly questions each other's business models and how we advise our clients. This is invaluable to me and ultimately to my clients.

On the other hand, many of these articles strike me as a knee-jerk reaction to a period in the markets and the economy that we have not seen since the Depression. One fellow advisor wrote a piece about whether or not Modern Portfolio Theory was worthless in light of the losses suffered by most investors in 2008.

I think the writer of this piece and others are missing the boat. Whether we are talking about MPT, Monte Carlo simulations, retirement planning software, asset allocation software, or other tools, the point is that all of these things are tools, nothing more, nothing less. I don't know of a single advisor worth his or her salt who takes the output of any of these or other tools and gives a client advice solely on that output. Rather most advisors use the output of these tools as a guide, client recommendations are ultimately made based upon our training, experience and judgment as financial professionals.

I readily concede that few financial tools predicted or prepared investors or their advisors for the speed and the fury of the market drop. Let's say they had. I'm curious as to what these folks would have advised investors to have done differently:

Allocate portfolios in a fashion consistent with client goals and risk tolerance? A great suggestion, shouldn't we have been doing this all along? I know this has always been my practice with my clients, likewise with most of the advisors I know. Many investors got hurt because they were taking on far more risk than was appropriate for their situation.

Get out of stocks, move to cash and Treasuries? Great strategy in 2008, not so great in 2009. As for the "smart money" having gotten out of the market, many of these folks locked in huge drops in the value of their portfolios. My question is when did these folks get back in, if ever? They likely missed one of the great recoveries in market history, compounding the damage to their portfolios and perhaps to their retirement plans. I remain convinced that market timing is a fool's errand.

The 401(k) plan is broken and should be abolished? Time Magazine ran a major story to this effect. In my opinion this story was at best "financial pornography." I have many clients who have amassed very nice nest eggs using their 401(k) plans as their primary retirement savings vehicle. Do 401(k) plans need some revamping? Absolutely! Legislation requiring full disclosure of all compensation paid to advisors, administrators, and investment managers should be passed in a fashion that eliminates all loopholes. Legislation clarifying the rules allowing advisors to provide advice to participants should be passed. The rules should totally prohibit advisors with conflicts of interest in terms of their compensation from the plan from providing this advice. Lastly, I'm in favor of any rule that promotes full transparency in these areas.

The market meltdown of 2008-09 was a major event for investors and financial advisors. Questioning that leads us to new and better ways to serve the needs of our clients is very healthy. However, those whose purpose is to tear down the financial advice profession to push circulation/viewership or otherwise advance their own agenda may be doing the investing public more harm than good by promoting fear that will prevent many investors from seeking the professional help and advice they desperately need.