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Oh, No! My Client Read the Business Section!

By Chris Latham April 11, 2013

Macro global economic events like the Cyprus bailout and the U.S. fiscal cliff grab headlines and investor attention. But should advisors jump to rejigger clients’ portfolios?

On the one hand, reacting to news can sabotage returns, because markets tend to price in many events long before they hit the front page. On the other hand, surprises may warrant immediate action.

“When there are events that create a macroeconomic shift, I think you have to look at the portfolio and make decisions,” says Leo Kelly, managing director of HighTower Advisors’ Kelly Wealth Management, who manages $750 million for about 180 clients. “And when those occur, traditionally there are warning signals, and hopefully you’ve moved the portfolio ahead of the actual event. We try not to be reactionary.”

At the same time, extreme events often produce investment opportunities. Andrew Altfest, executive vice president of Altfest Personal Wealth Management in New York, says that while the firm does not try to time the market, it will look for such opportunities. For example, he says, Altfest PWM, which manages $1 billion for about 500 clients, is considering certain European stocks with attractive valuations as Cypriot banks restructure, the Cyprus government works to avoid default, and the country tries to hang in the euro zone. The Cyprus General Market Index, which is heavily bank-weighted, is down 13% year-to-date.

"When we start to see a sell-off, we ask, what’s the reason?” Altfest says. “The first risk is that you’re too early and things get worse. You have to be prepared and keep that in mind whenever you’re buying into negative news. The other risk is a value trap. Oftentimes you’re looking at it more closely, and you’ll realize it could be cheap for a reason, so leave it alone.”

Some large advisory firms try to get ahead of global events by investing in deep quantitative and qualitative analysis. Convergent Wealth Advisors, with $10.6 billion under management, employs two proprietary tools. The firm’s risk management software uses models to signal equity market downturns, looking forward six months to a year. And it focuses on one country at a time.

“We think about downside protection,” said Douglas Wolford, Convergent’s president and chief operating officer. “If I know a neighborhood is dangerous, I don’t drive through it or walk through it.”

Wolford says his firm’s research and analysis inform its investment decisions, no matter what happens in the world. “We’ve applied that same discipline in every crisis,” he says. “People get in trouble when they forget discipline and react globally.”

Panic Button

When clients see wall-to-wall media coverage of the latest economic disaster, whether at home or abroad, they often call their financial advisors in a panic. Persuading them to stay the course is an art.

Michael Byman, a senior wealth advisor at Alexandria Capital in Washington, D.C., recalls how several clients called the firm late last year at the height of the political drama over the fiscal cliff. The response at Alexandria, which manages $400 million for about 250 clients, was to walk clients through different scenarios regarding U.S. budget changes and how each scenario might affect their portfolios.

“As the evidence bore out, trying to make a change on one factor, such as [the fiscal cliff], is more likely to get you in trouble than make you money,” Byman says.

Yet there are rare, unprecedented events that make an immediate impact on specific market sectors. Those are the times that require both swift portfolio changes and thorough client outreach.

HighTower’s Kelly recalls the economic upheaval in the wake of the 9/11 terrorist attacks.

“When that happened, we sat in shock looking at our TV like everyone else in the world,” he says. “Very quickly we gathered ourselves, we looked at other significant events of that magnitude and what were the stock market reactions at that time. And we called every client we had. It was the hardest part of my career.”

The S&P 500 dropped more than 11% between September 10 and September 21, 2001. Asked which securities required immediate attention after 9/11, Kelly is unequivocal: “You sure as heck did not want to own an airline."