WASHINGTON Nov 16 Anxious investors have been
dumping their fears on financial advisers in what might be
"They are absolutely petrified," says Diane Pearson, a
money manager with Legend Financial Advisers in Pittsburgh.
Declining 401(k) balances and abrupt market sell-offs have
people going to advisers and asking for security, safety and
The problem with that is this: Guarantees are not free, and
when you tell an investment professional that you want one, the
answer you get will depend on that adviser's business model and
world view. Different advisers have very different ideas of how
to manage those fears (and, more importantly, the risks that
are prompting them).
The price you pay for those guarantees will vary, too.
It's a little bit like when the breast cancer patient is
told by one doctor that she needs a lumpectomy and
chemotherapy, and by another that she needs radical mastectomy
and radiation. She has to decide which answer she likes better
and choose her doctor accordingly, even though she's never been
to medical school.
The "patient" -- in this case the investor -- has to decide
which financial adviser's answer she likes better, though she
may not feel qualified to make those decisions.
Here are some of the answers you might receive if you go
running scared to a financial pro now.
-- You need an annuity. These insurance products have been
flying off the shelves; if you confess your fears to a person
who is paid to sell annuities, don't be surprised if you get
"This year is truly poised to be a historic one for the
industry," said Cathy Weatherford, president of the Insured
Retirement Institute, an annuity trade group. Sales are up for
variable annuities, often used pre-retirement for investing, as
well as for fixed annuities, typically used by retirees for
These and other insurance products appeal to worried savers
and investors who like their guarantees: An annuity typically
promises a minimal monthly payment or long-term rate of return.
But they all carry fees, some of which are very high. And the
guaranteed payouts of income annuities are currently near
record lows, because they are predicated on interest rates
which are also near record lows. "We are fee-only," says
Pearson. "We don't sell annuities."
-- You need to trade more and hedge more. "This is a pretty
active time and an ever-changing time," said Richard Brown, a
Minneapolis money manager with JNBA Financial Advisers, and
also a fee-only adviser. "Anyone who just sat with their head
down in pure asset allocation lost their shorts."
Brown has used more frequent trading, short-sold some
investments (borrowing securities you don't actually own to
sell them) to offset others that his clients owned, and put
more of his clients' money into commodity funds.
The downside? More trading means more trading costs, and
more bets could minimize losses during market routs, but they
could also go against you. Too much hedging and you're giving
away the upside.
-- You need options. More than 4 billion options contracts
have been traded in 2011, the first time that's happened in a
single year, and double the volume recorded five years ago,
according to the Options Clearing Corporation. Both E*Trade and
TD Ameritrade have recently bolstered their options tools for
independent advisers and their clients.
"We're seeing advisers selling covered calls more than they
have in the past," said Jeff Chiapetta of TD Ameritrade. In
frightening times, investors may be encouraged to sell covered
calls -- the right to buy stocks they already own. That doesn't
protect them from losing money on the stock, but it puts more
cash in their pockets from the options contract sale to buffer
The downside? There is a trading cost to buying and selling
options, and if the price rises past the option strike price on
your underlying investment, your shares will get called away,
so you'll sacrifice at least some of the upside.
-- You need more bonds. "The safer you want to be, the more
I put in short-term, high-quality, fixed-income," says
Christopher Van Slyke, a fee-only planner in Austin, Texas.
Among fee-only financial advisers, this is a common
response. If you hold an individual bond to maturity, you'll
get your principle back and whatever interest the bond is
paying. Short-term bonds are less risky than stocks or long
bonds, but their returns are low, too. Short-term government
bond funds are up 1.92 percent year-to-date through November
10, according to Morningstar.
To bump up returns while minimizing risks, Jonathan
Krasney, a Mendham, New Jersey, money manager, has created a
conservative income-driven portfolio that consists of 75
percent municipal bonds, "laddered" over 5 years (meaning that
their maturities are spread out over that time) with a quarter
of the portfolio made up of a variety of high-yield corporate
bonds, inflation-proof bond funds, convertible bonds and other
higher-yielding bond-like investments.
The downside? Yields are low in safe bonds, and bonds that
aren't wholly "safe" do carry default risks. Moreover, if
interest rates rise, the value of your bonds (and bond funds)
could fall. And even bond-lovers like Krasney believe that
bonds are close to the end of their 30-year bull market,
because interest rates have no place to go but up.
-- You need a pep talk. Many advisers feel that scary times
don't call for different investing strategies, just for more
hand holding. If you have a diversified mix of investments that
fits your long-term investment objectives, you stick with it
and avoid worrying about short-term volatility or arcane
strategies, goes this view.
"There's always risk," says Van Slyke, "If you want to do
more than keep up with inflation, you have to take risks. And
you have to be patient."
(The Personal Finance column appears weekly and at
additional times when warranted. Linda Stern can be reached at