Investors fret about how to survive a debt default

NEW YORK (Reuters) - Americans are bombarding their financial advisers with questions about what to do if the U.S. government defaults on its debt.

An Indian broker reacts while trading at a stock brokerage firm in Mumbai, January 22, 2008. REUTERS/Arko Datta

Call volumes to major wealth managers have risen - and a lot of calls are about whether they will get badly hurt by the events in Washington.

Concerns seem to be escalating as the August 2 deadline looms for the U.S. government to extend its debt ceiling or face the prospect of being unable to pay its bills.

While people aren’t yet heading for the hills - no talk in the mainstream at least of stocking up on weapons or sticking money in a suitcase - many are asking their financial advisers about converting to cash or selling bonds.

“Should we tell people to build a bunker and bury their money? Then you’d need the guns,” said Lydia Sheckels, chief investment officer with Wescott Financial Advisory Group, which manages a portfolio worth $1.5 billion and has offices in Pennsylvania, Florida and Washington, D.C.

Instead she says, the best advice she can offer is that investors have to be broadly diversified. This is not the time for that risky bet on one emerging market or commodity.

Between water cooler conversations at the office and the pundits on TV, it’s becoming impossible to ignore the noise and just sit and wait for the crisis to be over. For financial advisers, that means a lot of touching base this week.

Leslie Farnsworth, 36, was one of those content to sit out the frenzy, and hadn’t opened up account statements in months. She wasn’t even especially worried about the state of the financial markets - until her adviser showed up at her office with two colleagues to review her investment portfolio.

“Is it really dire?” wondered Farnsworth, who is CEO of FrogDog, a consulting firm in Houston. Her adviser, who works at UBS, said: “We don’t need to sit tight. We need to change.”

Those changes included dropping American Funds’ Growth Fund of America for Wells Fargo Growth Fund, due to the underperformance of the former.

Farnsworth’s adviser also shifted money out of stocks into less risky investments, including a 15 percent allocation in Princeton Managed Futures, which is designed to reduce volatility by betting on futures, options and other securities. She now has a 50 percent allocation to equities, which is low for a person of her age.

The prevailing wisdom from most advisers, however, is to assess but sit tight. Matthew Tuttle, the chief investment officer at Tuttle Wealth Management which is based in Stamford, Connecticut, is among those who are optimistic a deal will be reached in the nick of time: “The debt deal will eventually be worked out in some way, and we will react to it when it happens.”

For wealth managers at funds and brokers there has been a lot of contact with clients in the past few weeks, often by phone.

At Fidelity Investments, phone volumes are slightly higher, although customers “are not making any significant moves” to cash or other conservative investments, according to Adam Banker, a Fidelity spokesman. Fidelity managed more than $3.6 trillion in assets as of June 30.

“I’d estimate that our call volume increased by a third last week, and is up 50 percent over that this week,” added Jim Russell, regional investment manager for U.S. Bank, which manages $60 billion in client accounts. Surprisingly, one of the primary questions his clients are asking is whether this is an opportunity to get more exposure to capital markets.

He said he is hoping the situation will be like it was three years ago, when Congress initially voted down the Troubled Asset Relief Program (TARP) for bank rescues and the markets dropped, only to rebound a few days later after it passed.


Americans usually get a bad rap for having short memories, but many have not forgotten the most recent financial crash. “The ones who are concerned are the ones who have been fretful since 2008,” said Sheckels of Wescott Financial.

She has one client in his 80s who calls her daily, worried because he is now 100 percent in a U.S. debt money market fund. “He’s our outlier,” she said. “He used to be growth-oriented, but what happened in 2008 hit him very personally. But if you can’t find safety in short-term Treasuries, there’s no where left to go.”

Out of 650 clients, Scott Tiras, a senior financial adviser with Ameriprise Financial, has only one who moved any money around. “He emailed me and said ‘I have to sell all the equities.’ Mind you, he didn’t say sell the bonds. We’ve clearly and strongly communicated with our clients that our advice is not to make adjustments.”

So, in summary, besides calming fears and holding hands, what actionable advice are managers offering?

*If you are thinking about moving to cash, think carefully. “Market timing has never worked very well in the past,” said Frank Armstrong, president and founder of Miami-based Investor Solutions, which manages $500 million. “Predictions are easy, while accurate predictions are difficult. A few people always get it right, and they never let you forget it. But most people lose the wager and generally don’t advertise their failure.”

*Consider alternative assets. Cliff Caplan, certified financial planner and president of Neponset Valley Financial Partners in Norwood, Massachusetts, said: “I’ve extensively used managed futures, long/short strategies and market neutral funds. I have also made use of the FDIC version of structured notes that utilize futures contracts for specific strategies while guaranteeing principal.”

Yet at the end of the day, “I am still recommending that the majority of the portfolio stay the course,” Caplan says.

*Diversify with gold but don’t go overboard. “Our biggest question is in not owning gold - especially since we have in the past. There is just so much hype about gold, everyone thinks they should own it. But potential volatility has me worried,” said Bill DeShurko, author of “The Naked Truth About Your Money” (Penguin) and president/owner of 401 Advisor, LLC in Centerville, Ohio. In conjunction with a potential gold drop, DeShurko sees “a bump up in the dollar with a budget agreement, but then the trend down will resume.”

Added Caplan, “For very nervous clients, I have apportioned a percentage of their portfolio to the gold exchange-traded funds, GLD.”

*Rethink asset allocation. “On the bond side we have both shortened duration to protect against rising interest rates and hedged against a falling dollar by including foreign bond positions,” said Jon McGraw, president of Buttonwood Financial Group, LLC in Kansas City, Missouri. “We are holding steady with our equity exposure as we are well-diversified both domestically and internationally. And with about 25 percent of portfolio assets already invested in alternative investment strategies, we feel we are as well positioned as we can be for either a compromise or failure.”

Additional reporting by Lou Carlozo, Editing by Martin Howell