Some of the country's leading financial advisors gathered in Worth’s offices recently to discuss ways that affluent individuals can effectively plan and manage their investments despite the often-debilitating uncertainty caused by the current economic climate, the war in Iraq and the threat of terrorism.
| THOMAS MELCHER,
managing director & chief investment officer, Hawthorn, a PNC Advisors Company.
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Worth: What are your clients’ main concerns right now? Robert Elliott: Clearly, we are in for a period of rising interest rates and climbing inflation; we are seeing evidence of this in the markets as we speak. Individuals who previously relied on fixed income markets for their “sleep-well” investments are asking how they can obtain that same risk reduction and low volatility now, either without the same amount of fixed income or with active management within fixed income, or by using alternative investments. Jeff Applegate: The main issue is clients’ growing focus on absolute returns. We had a terrific bull market run from ’82 to almost 2000, and a terrific bond market run for more than 20 years. And then we had a period when we couldn’t do anything right. So there is really more of a focus on wealth preservation. People are also asking how they can grow their assets. There is more interest in absolute returns and how you can get them using alternative investments. Mary Doucette: I agree. If you go back five years, the focus was much more on the kind of return an advisor could achieve for a client, and today it’s much more about preserving wealth and prudently growing it. Clients also ask, “What is a safe asset class?” You can find issues with every asset class. We all are expecting interest rates to go up, so bonds are not a safe asset class any more. There are so many dollars chasing hedge funds and private equity deals, you have to ask whether they are good alternatives. Are the equity markets, now that we have had a run-up, overvalued?
I think there is also a general sense of nervousness and concern. Whether that is because of the war, the events of 9/11 or of having a rather prolonged and challenging bear market in equities is unclear. But I think clients are much more focused on risk, control and management and less concerned about return. Worth: Are clients making investment decisions now, or are they waiting until the dust settles and there is more certainty over currencies, rates, the war in Iraq or the budget?  | MARY DOUCETTE,
senior vice president, Wealth Management, Northern Trust. |
Mary Doucette: Some of our clients did play the waiting game. I’ll give you an example. A client at the beginning of 2003 liquidated a large stock position and needed to invest the cash. We were about to enter a war with Iraq so there was uncertainty there, so he held off. Then we had a successful—it appeared at that time—end to the war within a month’s time. Then he waited because the economic data was uncertain. In all this time, the equity markets were rallying.
I think that the appropriate, prudent thing to do is to make sure that you have investments in a number of different areas that are going to protect you, for different contingencies. So if there is another terrorist attack, bonds might be the place to be. But we have a huge, growing deficit so they should not be too large a part of the mix. Equities might make sense for inflation protection. We tend to advise our clients to make sure they have protection for different contingencies by having a well-diversified portfolio. "We are telling clients now to be much more opportunistic and much more tactical, much more focused than they used to be. They have to become more Machiavellian."
-David Darst |
Thomas Melcher: The overriding macro concern that I hear is the political direction of the country and the implications that it has for all of us. Whether they are the deficits and the fiscal components that go along with them, or the idea that we have been perhaps a little too macho in our behavior and have increased the likelihood of a terrorist attack by it, the big macro factors seem to be centered directly on the policy coming out of Washington. Then there are all the things that flow from that—the deficit, the currency, the oil prices, everything that we can recite chapter and verse.
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