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The Four Top Investment Strategy
Challenges for Financial Advisors

By Susan B. Weiner, CFA
April 8, 2008


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Credit Risks Abound

Advisors used to feel they could trust the analysis performed by major rating agencies. No more–at least not when rating complex debt securities. "How valid is an AAA or AA rating on some fixed income securities? The reputation and credibility of credit agencies has been cast to the wind," said Kaplan.

Morris Armstrong of Armstrong Financial Advisors agreed, saying, "Any ratings that are not for plain vanilla instruments may later be deemed inaccurate.  From both an advisor and investor’s point of view, it is becoming more difficult to truly understand all the risks inherent in many of the debt instruments." He copes by not investing in complex instruments.  

Clients and Their Emotions Pose Biggest Challenge

The biggest challenge to investment success currently facing advisors isn't—strictly speaking—an investment strategy issue. Too often, clients panic and want to get out of volatile markets at the worst possible time. Mark McNary of The Gensler Group said, "For our firm, the biggest challenge is preventing our clients from making a rash, emotional decision to alter their long-term strategic allocation."

His comment was echoed by many other advisors. For example, Michael Flower of Financial Principles, LLC, said, "Between all of the bad news that you see on the TV and clients’ expectations, it is difficult to stick with asset allocation and a diversified portfolio." According to Burk Rosenthal of Rosenthal Retirement Planning, "A few of [my clients] seem to think the world is coming to an end and therefore they must get out of the market (or at least make a major shift in their asset allocation) at all costs.” 

Even an advisor who made a successful shift into cash in July 2007, like Ted Feight of Creative Financial Design, said "The biggest problem is doing the right thing at the right time, even if you have a clue when that is…. When you start to buy back in, some clients do not understand this and want to fight your calls, as to when to buy back in." 

Ron Rhoades of Joseph Capital Management, LLC, is also working hard to ensure that clients stick to their recommended approach of strategic asset allocation with targeted rebalancing. "Each year we have endeavored to educate our clients, repeatedly, that “the markets don’t always go up” and to always “buy low, sell high.”  For the most part we have been successful.  Over 98 percent of our clients have accepted our recommendations this January and February to rebalance their investment portfolio, which often involved selling fixed income investments and buying equities (in our case, low-cost, institutional stock mutual funds)."

Some of the greatest challenges facing advisors are ongoing, like human nature. Others—like alternative assets—are new but may become permanent fixtures. Yet others may shift with the changing tides of markets.

Susan B. Weiner, CFA is a writer-editor specializing in investment and wealth management.  

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