Financial Pros Switching Tactics

May 21, 2009
Special Feature

When the markets turned sour last year, just about every asset class collapsed, leaving traditional buy-and-hold investors awash in red ink. As a result, many financial advisors are facing angry clients and some are switching tactics to preserve their client base.

Although financial advisors may choose different mixes of investments for their clients, most stick to a strategy of buying diverse assets and holding them for the long term. When the markets turned sour last year, however, just about every asset class collapsed, leaving traditional buy-and-hold investors awash in red ink. As a result, many financial advisors are facing angry clients and, according to a recent survey, some are switching tactics to preserve their client base.

The poll showed that about 15% of the financial strategists surveyed are moving away from a traditional buy-and-hold approach and looking more toward alternative investments. Some have become more conservative, putting clients into a mix of relatively risk-free investments like short-term Treasuries and money-market funds. Others are turning toward more opportunistic trading, trying to take advantage of stock market rallies and dips, or trading in currencies or futures contracts.

If your financial advisor suggests some of these approaches, there are some experts who advise caution. Cutting back on stocks is just a form of market timing, they say, which can leave an investor out in the cold if the market rebounds. Also, alternative investments are often complex and come with their own set of risks, such as lack of liquidity. Many also sport high fees, which can eat into gains or make losses even worse. Critics also point out that frequent trading can lead to increased investment costs and a bigger tax burden for the investor.