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By Janet C. Arrowood

So the long-promised market recovery has been tentative at best, and your clients are becoming increasingly concerned about their investments and financial future. What are their options? The way I see it, you have three choices:

Remind your clients that unless their risk tolerance and investment goals have changed, they may not want to make major changes in investment allocations.

If their risk tolerance and investment goals have truly changed, their assets should be reallocated (probably in a more conservative portfolio) within their existing mutual fund families.

They should give serious thought to moving their money into fixed or otherwise guaranteed investments.

Now is a good time to do an updated risk assessment, suitability form and asset-allocation analysis for your clients. If the risk tolerance and asset-allocation analysis show no major changes, your client should consider staying the course. However, because needs change, fears grow and people make lifestyle changes, some of your clients may need to consider a major reallocation of their remaining holdings in their mutual fund families. Or they may think about moving out of equities into traditional annuities, individual bonds or certificates of deposit (CDs).

What clients need to know
Assuming the results of your meeting indicate the need for major changes, there are a few things you can explain to your client first:

The changes may result in capital losses but there may still be gains to deal with. This means taxes.

The funds may have contingent deferred sales charges (CDSC), and a sale will trigger an additional hit when these charges are deducted.

Current returns on fixed investments are quite low, but are guaranteed to some extent for many products.

If the time horizon has shortened, asset reallocation, or even major investment changes, may be in order.

CDs have interest penalties if cashed early. Taxes are due on imputed earnings, even if earnings are reinvested.

Annuities often have surrender charges and penalties if they are accessed or surrendered before a certain age. However, the tax deferral can be attractive.

Money markets are paying well under 2 percent, with banks often paying less than 1 percent.

Individual bonds require fairly large purchases (often in $10,000 increments) and can be “called” in many cases, just as interest rates are dropping and a new bond is less than appealing.

Once your client understands these issues, he needs to make a choice—he can either go for the most conservative funds in the mutual fund family’s portfolio or move into fixed investments (or a mix of the two). There are some advantages to staying within the original fund family’s offerings—the CDSC should not apply when money is moved, the money is not locked up, and the fund money market almost always has a higher interest rate than a bank’s. Mutual funds also offer a number of bond fund choices, allowing clients to invest in bonds without the hefty minimums of individual bonds, but with the attendant risk of capital that is part of any mutual fund investment.

If a client chooses the fixed options, there are advantages, such as knowing what the investment will be worth in a chosen number of years. But the disadvantages include:

Missing out on market upturns
Tying up the money for a better rate of return and seeing interest rates rise

Potential lack of liquidity
Penalties or surrender charges on most annuities and many CDs

If you’re not Series 7 licensed or a registered investment advisor, your client may not be able to come to you for investment advice about these products, even if they are available through your broker-dealer.

Missing out on market upturns

Tying up the money for a better rate of return and seeing interest rates rise

Potential lack of liquidity

Penalties or surrender charges on most annuities and many CDs

If you're not Series 7 licensed or a registered investment advisor, your client may not be able to come to you for investment advice about these products, even if they are available through your broker-dealer

The VA option
Another choice is a variable annuity (VA) because most have certain guarantees of principal. If your client wants to consider this option, there are additional suitability issues to evaluate (in accordance with NASDR 2310 and VA Notice 00-44). If the client needs liquidity or access to the money and is under age 59-1/2, a VA is probably not an option. Be careful with qualified plan rollovers, too, because the tax-deferral aspects of VAs can raise questions of suitability for qualified money.

The bottom line is simple. If the original investment choices are still in line with your client’s revised risk assessment, time horizon and suitability assessment, staying the course still makes sense. If your client’s time horizon has shortened (due to looming college tuition, retirement, career changes, etc.) asset reallocation, or even major investment strategy changes, may be in order.

Janet Arrowood is the managing director of The Write Source and a registered represen-tative with The Leaders Group, Inc. Contact her at jcarrow@earthlink.net.

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