Adviser Alert

Adviser Alert
By Kristen McNamara, Suzanne Barlyn, and Shelly Banjo
The stock-market recovery has seen some investors swing from near-panic about portfolio losses to anxiety about missing the rebound. As a result, financial advisers find themselves repeating basic messages about diversification, goal-setting and timing.
Bobbie Munroe, a financial planner in Atlanta, says she’s tempering the enthusiasm of some investors who want to get back in the market. She recently told a prospect who sold her stock holdings in March that dollar-cost averaging—or investing a fixed dollar amount at regular intervals—is a better way to re-enter the market than diving in all at once. “My role has been more to dampen the confidence right now, just like it was to dampen the fear in March,” Ms. Munroe says.

Florida financial planner Dan Moisand encourages clients to recall how they felt during the market lows of last fall and early March, unpleasant as that might be. With those who were “close to pushing the panic button”—or selling their equity holdings—he discusses options for reducing their urge to flee during future market drops.

Colin Higgins, president of wealth-management firm Golub Group, with offices in Pasadena and San Mateo, Calif., says some of his firm’s clients are asking about investment opportunities in emerging markets such as India and China. He warns them against investing in “overheated” markets and says the blue-chip stocks clients hold give them exposure to international markets without the risk of a direct investment.

The longer the U.S. stock market stays at current levels or continues to rise, the more likely the fears investors felt will fade, says Joe Jennings, investment director for the greater Maryland area at PNC Financial Services Group PNC -1.78% Inc.’s wealth-management business.

“Now that the market is starting to recover, it’s not as attractive an opportunity to buy as it was three to six months ago, but investors are more willing to do so,” he says. “Human emotions work against us.”

Fighting Off Fraud

Bernard Madoff’s massive Ponzi scheme not only ignited fear about financial advisers swindling investors, it also got advisers thinking about fraud within their own firms.

While the Madoff case is extreme, and has so far involved fraud at the very top of the firm, wrongdoing by even one employee can spell not just financial loss for a company but huge costs in time, legal fees and damaged reputation.

It can happen because a firm outgrows its compliance systems, views staff as incapable of bad behavior or regards prevention as an expense at odds with profits.

“If you have a lapse in quality control, the brick falls on the organization’s head,” says Jahan Raissi, a securities-litigation attorney and former enforcement attorney for the Securities and Exchange Commission. Screening prospective hires, developing internal controls and ensuring employees know monitoring is in place are key to heading off trouble.

Candidate background checks, which can be done by outside companies, can identify red flags with prospective employees. Letting job candidates know in advance that they will undergo scrutiny may discourage those with questionable backgrounds from pursuing the interview process, says Kenneth Springer, a certified fraud examiner and former agent with the Federal Bureau of Investigation.

Employees should understand that rule breaking isn’t tolerated and carries consequences, says Joseph Armao, an attorney with the global law firm Linklaters who conducts corporate investigations.

Dividing up responsibility among employees is another strategy. At Lassus Wherley & Associates, a fee-only wealth management firm with offices in New Providence, N.J., and Bonita Springs, Fla., one employee approves equity trade orders, another executes the trades and a third verifies the trades after execution, says co-founder Diahann Lassus.

Family Firm Inc., a fee-only advisory firm in Bethesda, Md., sent a letter to clients in June outlining the steps it takes to prevent unauthorized withdrawals from client accounts, which include confirming such requests before processing transactions. The letter also urged clients to open account statements and review contributions and withdrawals.

“Just because you’ve hired a financial adviser, you’ve not abdicated responsibility for your investments,” President and Chief Compliance Officer Mary Malgoire says. “You really have an obligation to stay on top of things.”

Even Advisers Seek Advice

Financial advisers might not seem like the kind of people who need help with their own finances.

But some of them say the opposite is true: By turning to peers, advisers can get their own financial houses in order, glean tips on running their businesses more effectively and gain insights into the client experience.

“For 20 years, there was always some client ahead of me needing immediate attention,” says Rick Kahler, president of Kahler Financial Group in Rapid City, S.D. “I finally made it to the top of my list of things to do.” Mr. Kahler has seen two planners since 2002.

While advisers may be able to manage their own investments, an outside adviser can facilitate financial discussions with a spouse and stay on top of the family’s finances if the adviser dies. “My wife breathed a huge sigh of relief after our first meeting with the planner,” Mr. Kahler says. “She thought, thank God someone else understands all this stuff and could help if something were to happen to me.”

Bryan Lee, founder of Strategic Financial Planning Inc. in Plano, Texas, continues to manage his own money but sends his planner statements “so he can stay on top of my asset allocation and hold me accountable.”

Mr. Lee’s planner has also taken on tasks such as helping create a succession plan—something Mr. Lee put off for years.

Robert Walsh, founder of Lighthouse Financial Advisors Inc. in Red Bank, N.J., says he and another planner serve as each other’s adviser.

“We all need a mirror,” Mr. Walsh says. “Sometimes we need someone to look at us and say, ‘This is what I see.’ “