The Trusted Adviser
October 2008 | Volume 1 · Number 5

When Advisers Need Advice on Investing

Many of your clients, and perhaps you as well, are experiencing legitimate angst over current economic conditions. As their trusted adviser, clients may ask you what to do. That is a common question here. In more normal times we usually begin by asking questions in return, on the order of:

How are you presently invested? How did you come to those decisions? When will you need to start using these funds to pay for your living expenses? Do you have a long-term plan to meet your financial needs, and if you do, how often do you review it? Who advises you on those decisions?

The goal is to get the client off the theme of roller coaster markets, interest rate movements, and the latest darling or debacle on Wall Street. No investment is a good one unless it makes sense in terms of the overall goals and long-term plans of the client. People don't need investments. They need a plan.

But in this particularly violent market, there are legitimate questions that go to the core of investment philosophy. Who would have thought that Merrill Lynch would collapse on itself and the once vaunted firm of Morgan Stanley would have to morph into a bank in order to attempt survival.

How does the collapse of the real estate market ignite a world wide investment panic? Who is responsible for this and how can it be fixed?

The answers are both complicated and evolving, but in a nutshell, mortgages were too easy to obtain for borrowers with no ability to repay them. Investment bankers and others packaged them up and ran them through the sausage grinder, taking the bits and pieces at the back end and repackaging them for sale in "derivative" investments. They deepened the problem by highly leveraging the new derivative investments. And the whole world bought them. Now no one can sell them, not because they have no value but because no one knows what the real value is. There was no liquidity. The United States Treasury pumped over 700 billion dollars in and that was not enough to satisfy the markets. This is not over yet.

What does a prudent investor do in this environment? They stay the course, if they have a plan. If they don't have a plan, they make one, hopefully with the help of a trusted adviser, like you. And you can turn to us to help your clients.

We are not prescient, but last February we moved all of our liquid funds into U.S. Treasury backed securities. We are not prescient, but we have not made many equity investments in the last couple of years (that is a long story for another time). Those are the actions of experience rather than reactive behaviors.

It would be improper to imply that we outsmarted the markets. We simply took a defensive stance in uncertain times. But here is another key: While we did not make many equity investments, we have not sold much either. Why? Because we did not buy stocks, we bought companies. Dividends matter. Balance sheet debt matters. Cash flow matters. Sure, some of the companies we have invested in suffered in this downturn and more likely will. But these purchases were made as part of a long-term plan, not just an investment program.

In October 1987 I was managing a small trust department in downtown Chicago. When the market crunched, we had every employee on the phone calling our customers advising them to do absolutely nothing. Again, that was not fortunetelling, it was fortunate experience. Markets move in many long and complex cycles. But solid companies with good earnings, barriers to competition ("wide moat" is the buzz word term these days), strong balance sheets and, this may surprise you, companies that pay income taxes are candidates for a solid equity portion of an overall, long-term plan. (We like companies that pay taxes because it means they are making money, not moving things around on the balance sheet and income statement to boost earnings figures.) If you held what you had before the 1987 downturn until the following January, you were made whole again.

Once more, we do not buy stocks. We buy companies. Companies have personalities, traits, and somewhat predictable behaviors over time.

People do not need investments. They need a plan. And they need someone to talk with about their plan, especially in the tougher times. Try calling your discount brokerage house to find out what to do.

As trusted advisers, your clients will turn to you for answers. We have answers, but first we have to ask those pesky questions. There is no magic bullet for this scenario, but a plan that is personally tailored to the client needs, one that stands the test of time and is reasoned, reviewed, and carefully examined regularly is the right way to do this.

When your clients have questions, we can help them find the answers. You are their trusted adviser, and we are here for you.

THE TRUSTED ADVISER is published by Attorneys’ Title Guaranty Fund, Inc., P.O. Box 9136, Champaign, IL 61826-9136. Inquiries may be made directly to Mary Beth McCarthy, Corporate Communications Manager. ATG®, ATG® plus logo, are marks of Attorneys’ Title Guaranty Fund, Inc. and are registered in the U.S. Patent and Trademark Office. The contents of the The Trusted Adviser © Attorneys' Title Guaranty Fund, Inc.

[Last update: 10-20-08]