When volatility hit the markets in August following Standard & Poor's downgrade of U.S. debt, it left investors and their financial advisors scrambling. Now, several years after the financial crisis, it also begged the question: how ready are firms and advisors to apply the lessons learned in those dark days?
While the Dow Jones Industrial Average took a roller coaster ride in the second week of August, taking steep dives down one day and up the next, it finished that week up 1.1%, closing at 11,269.02.
But the long-term effects of that week's sell off and ongoing European economic unrest will likely be seen in the coming months, including whether those events will loom over investor confidence and if recovery will continue in the wealth industry past the 2008 financial crisis. Reports that American International Group is suing Bank of America for $10 billion for allegedly overvaluing residential mortgage-backed securities helped send Bank of America's stock down 20% on August 8.
For the wealth management industry — which has yet to see a full, uninterrupted year of recovery since the crisis — August's events will set back their profitability pursuits again, says Alois Pirker, research director at Boston-based financial services research firm Aite Group. That comes as investor confidence was already starting to dip in the second quarter, Pirker says, while August's events will likely fully reignite those jitters. "The last crash is just so fresh in many investors memories that they are nervous still," Pirker says. "And that clearly impacts activity levels, and that clearly impacts profitability. So you're still waiting for a full year of recovery."
For recruiters who target top talent at ailing firms, and advisors who scramble to reassure their clients, August's market unsteadiness also meant a return to strategies honed during the financial crisis.
Consider Mindy Diamond, president and chief executives of Chester, N.J.-based financial services recruiting firm Diamond Consultants. The second week of August turned out to be the quietest week of her career. Even advisors Diamond spoke with who were vacationing in Puerto Rico and Greece were more concerned about keeping in touch with clients than heading to the beaches.
But as those immediate emergency concerns subside, Diamond says, advisors may have to consider just how much of their personal wealth is tied up with deferred compensation that might have taken a hit to its value along with a firm's stock.
"Whenever you see major swings in a company stock, Bank of America being the hardest hit stock, that volatility felt reminiscent for a lot of advisors to what they saw in 2008, which motivated so many of them to find a wealth replacement strategy," Diamond says.
If the events in the early weeks of August directly inspire any financial advisor moves, it will likely take months to develop, argues Danny Sarch, president of White Plains, N.Y.-based financial services recruiting firm Leitner Sarch Consultants. Had Bank of America's stock continued to go down it would have resulted in panic and fleeing, he says.
"There's something very ironic about Merrill Lynch having very bad mortgage issues, having to be rescued by Bank of America, and then having to live through it again with BAC (Bank of America) stock going down," Sarch says.
August's volatility put most financial advisor recruitment talks on the back burner for most firms. Still, Raymond James & Associates hopes its increased communication to advisors and clients helped a developing relationship with at least one wirehouse advisor recruit, Senior Vice President and Division Director Tash Elwyn, says. One of Raymond James' branch managers shared a corporate communication piece with that advisor, who then shared that information with their clients.
And while Raymond James saw a definite spike in client anxiety levels in August, reminiscent of 2008, the firm did not see a corresponding increase in trading, Elwyn says.
But drawing from experiences like the most recent financial crisis has helped the firm this time around. "You sharpen the saw and become even better at providing advice to clients," Elwyn says.
Financial advisors around the country, from Texas to Idaho, also put their clients' skills to the test.
In RBC Wealth Management's Midland, Texas office, senior vice president and branch director Kevin Blonkvist says he did not see any clients liquidate their assets during August's volatility. Instead, he says, he saw more investors eager to buy stocks — a sharp contrast from 2008. But that does not mean that he did not have to talk any investors out of making a rash decision.
One investor who works in the oil and gas business told Blonkvist he felt he could be better off redeploying his capital in oil and gas properties. That prompted Blonkvist to tell the investor that when he started as an advisor 30 years ago, the Dow Jones Industrial Average was at around 700 points and oil at about $25 per barrel. In August, Dow Jones' index was at more than 11,000 points and oil at more than $80 per barrel. Likewise, Blonkvist says, investments need time to mature.
"If you cannot give the clients the perspective of history, and markets have moved in different ways at different times, then they're not going to understand it," Blonkvist says. "They're going to just look at it for today." He also says he tells financial advisors, including his son who started working under him three years ago, to read everything they can to best understand the rapid market changes.
A key difference between the markets now and in 2008 is the improved health of the financial services industry, something that Wedbush Securities' practice in Boise, Idaho has worked hard to communicate to its clients, says Gary Whinery, vice president and manager in Boise. Wedbush's Boise advisors also discouraged clients from liquidating any assets, advice that could prove profitable as the markets stabilize.
"The market tends to overshoot, and I believe that we overshot on the downside," Whinery says. "It just went too far for what was actually going on, and I think once people had a chance to actually get a grip on things, people started realizing it."