After the Panic, People Will Wonder the Wisdom of Their Advisors

After the financial stress is over, the mental stress will begin. Investors and small business owners will realize they have been marketed to in half-truths. Not lies, but perhaps, mis-information for our time and situation.

In the article “Still Holding Back” by Lawrence C. Strauss published in Barron’s on October 13, 2008 an eye opening statement was made. Mr. Strauss was interviewing Jeremy Grantham, the chairman of GMO, states “But it is much worse than I thought. All the fundamentals are turning out worse than I thought they would. All the competencies of the senior people at the Fed, Treasury and (firms like Merrill Lynch and Lehman Brothers) have turned out to be much less than I had expected; that’s very disappointing.” This is a profound statement because mentally investor and small business owners will begin to wonder if it is just not our leaders that lack the competencies, but their individual financial planners and other advisors.

Many investors and small business owners will begin to re-evaluate the profit motives of their planners and advisors. Currently, many financial planners’ profit motives are to purchase investments. The planners receive most revenues through purchase transactions and fees from mutual fees. This leads many financial planners to state in a decreasing market that “stocks are on sale” or “think long-term, equities return an 8%+ return”. These planners do not fully understand the value concept and are looking at historic information. The mis-truth of these statements is not an understanding of the current situation. We cannot compare our current economy to past economies since our economy continues to morph throughout time. Thus, historic comparisons of our economy cannot be compared fairly. A very real example is the DOW index is now just about flat for the past 10 years (October 1998 to October 2008). One might argue that the index pays dividends, but the dividends have not kept pace with inflation.

Many small business owners will Tax Advisors begin to inquire out the wisdom of their other advisors as well, including their tax advisor. Small business owners will begin to determine that the wisdom of “great” tax deduction to reduce their prior year income taxes lead to a deteriorating financial position. The “wisdom” included spending all monies which has lead to a lack of cash when needed the most and financing tax deductions resulting in debt requiring mandatory monthly payments when cash is need to reposition the business. Small business owners will begin to understand the advise they were given was what they wanted to hear, therefore making it easy to accept, instead of the message they needed to hear (spend less and save more). The profit motive of the tax advisor was to get the small business out of or reduce paying taxes, instead of making sound business decisions and then structuring them tax efficiently.

The advisors will have to change their industry practices to align their profit motives with their clients’ best interest. The change will be difficult to manage financially and mentally due to the re-training through understanding how the advisors and other industries overlap (the financial components of a tax deduction or the risks involved in making an investment), increasing the amount of work necessary to properly serve clients and aligning clients goals to an overall effective strategy during a time when clients are questioning your value and departing due to feeling “burned”.