A Changed World for Financial Advisers

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In the future, many advisers say, they will spend much more time with each client trying to determine an appropriate level of risk. In hopes of winning bigger returns, clients in the past often insisted they could handle a risky, aggressive portfolio.

Based on the past few months, many of those clients were wrong, says Elaine Scoggins, client experience director at Merriman. After large losses, "people can't get through it emotionally," says Scoggins, vowing to push clients harder to consider more conservative allocations.

Emphasizing Cash Flow

Many investing rules of thumb are likely to change. Often stock experts advise against putting any funds in the market that you will need in less than five years. Maybe that's not long enough, Korb says. Jay Hutchins of Comprehensive Planning Associates in Lebanon, N.H., will emphasize cash flow, making sure that, whatever markets do, clients always have enough cash for at least the next three years. That sort of detailed planning is "time consuming," Hutchins says. But "it's a price that people in my profession are going to have to pay."

Financial advisers say their day-to-day jobs are changing. The Bernard Madoff scandal—in which his $50 billion hedge fund collapsed in an alleged Ponzi scheme—will have repercussions even though Madoff was a hedge fund manager, not an adviser. Most advisers are already required to place investments in the hands of a third-party custodian, a practice designed to prevent fraud. But, like other financial planners, Richard Kahler of Rapid City, S.D., said he suspects the Madoff scandal "will result in me spending more time and money in burdensome over-regulation of my practice."

For advisers who choose hedge funds for their clients, the Madoff scandals points to the need for more vigilance. Michael Stutzer, a professor and director of the Burridge Center for Securities Analysis & Valuation at the University of Colorado, says advisers may need better skills in quantitative analysis to evaluate strategies and look for results that are too good to be true.

Advisers and planners often paid lip-service to the idea that their responsibility is their clients' total financial outlook, not just investment returns. But this broader, more holistic approach to financial planning was often neglected in an era of steady investment gains.

New Nest Egg Strategies

Now that investment strategies have failed so spectacularly, clients will need other strategies to reach retirement dreams. More and more, "our retirement is going to be based on those items we can control, rather than hoping great investment returns can get us there," Boucher says. After all, if clients rely less on risky equity returns, investment styles will need to be more conservative—aimed at protecting hard-earned dollars rather than making those dollars grow by 10% each year. That puts a premium on other methods of building a nest egg. Among examples cited, advisers can help clients make sure they are earning enough, saving enough, not borrowing too much, have realistic retirement plans, and have enough insurance.

Stutzer says "financial advisers will have to be forthright with people," especially about how long and hard they will need to work to achieve retirement dreams. "They may need to tell people things they don't want to hear," he says.

And clients may be more willing to listen. "In the middle of the bubble, people only wanted to talk about return," says Hogan. That gave a competitive advantage to those advisers who emphasized potential gains and ignored the potential downside. "It's easier now to talk about risk because people believe it."

The market disaster of 2008 may rewrite some of the rules of investing. But it also reinforces old lessons that many had forgotten. Milo Benningfield, a financial adviser in San Francisco, sees some fellow advisers arguing for the wholesale dumping of the profession's assumptions about investing. He says he suspects, however, that these radical reformers are the same advisers who, before the crisis hit, forgot time-tested wisdom by taking too much risk with their clients' portfolios.

Less than half a year since the steepest market declines, it's not too soon to ask questions, but "it seems awfully soon to be drawing any strong conclusions," Benningfield says. "What happened here is extraordinary but not unprecedented," he adds. Within living memory, investors lived through the Great Depression, the stagflation of the 1970s, and the dot-com bust.

But in the midst of the crisis and with an economy still deteriorating, it does feel as though the investment landscape has forever changed. The hope is that all this economic pain will not be in vain. For millions of investors whose retirement plans have been altered by the past year, it may be too late. But perhaps the lessons carried away from the crisis by the professionals charged with steering investors' portfolios could protect clients from similar pain in the future.

Steverman is a reporter for BusinessWeek's Investing channel.