The credit crisis and market downturn have created bewildering, stressful times for financial advisors of all stripes. Now that familiar Wall Street landmarks are gone, advisors are trying to determine what the new, brutal market environment will mean for their businesses, what may happen next and how it might affect their client relationships. For answers, Financial Planning went to leading figures from some of the nation's top firms. Here's what they had to say.

Anne Lester
Managing director and portfolio manager
JP Morgan Smart Retirement Funds
New York, N.Y.

Test the Limits

This crisis is really highlighting the need to have a plan and to stress-test that plan. Unfortunately, saying that doesn't help people who are now finding out that their plan is inadequate.

In our portfolios-speaking as a manager who's in the middle of this and making fiduciary decisions on how people should be invested who have, say, four years until retirement-we have always thought to address this by focusing on diversifying portfolios to minimize downside volatility. Though under times of stress, correlations do increase in the very short term, you do see some big differences as soon as you focus on more than a two-day view.

What is holding up well for us is owning a little less equity than our peers and, instead of buying straight fixed income, diversifying into things like high yield and emerging markets debt-which have suffered, but not nearly as much as those equity holdings did. We deliberately chose to diversify to live on a higher efficient frontier. But instead of going up the chart and targeting more return with the same level of risk, we went to the left and targeted the same level of return with less volatility. So in relative terms, we feel very comfortable that the funds are performing. But in absolute terms, it's a very difficult time.

I don't think any of us stress-tested for this. But I will say, did you imagine that something very bad could happen? Maybe you didn't quantify the depth of the pain, but did you think about everything going wrong as well as everything going right?
There isn't an easy solution for folks who are near retirement and didn't save enough to start with, or who saw their savings take a real hit right now. The advice one can give is about figuring out a way to save more and perhaps defer retirement. If you're already in retirement, you can cut back and spend less.

One of the things that this volatility has highlighted for me personally is the dangerous assumption that you can put your income distribution on autopilot in retirement. I think anybody approaching retirement has to acknowledge that there's a portion of spending that cannot be viewed as a constant. There needs to be a little bit of flexibility.

Daniel Moisand
Principal
Moisand, Fitzgerald & Tamayo
Melbourne, Fla.

Know Clients' Fears

Planners who have given their clients the impression that they can predict the future might have a problem right about now. Folks who are doing what they said they would do stand a good chance of not only surviving, but also thriving. The more independent your firm, the more likely you are to thrive, not just survive.

So much of the angst is about the fundamental soundness of the financial markets. Back when the tech bubble blew up, people were concerned about Cisco Systems and Lucent, but they weren't worried that they wouldn't be able to get their money out of their account at Washington Mutual. This puts the emphasis back on all that boring stuff about being broadly diversified and matching your holdings up with your goals.
The public is very fickle. A danger to the public is that when a crisis hits, they flee to something they perceive to be safer, such as art or collectible cars or something like that. They run to principal-protected securities and equity-indexed annuities, which sound really conservative and attractive. Then they get stuck. But for the next little bit of time, they are going to be attracted to simple products that they understand and know, like mutual funds and plain-vanilla ETFs. They will shy away from anything that is a derivative or related to the mortgage industry.

When the client says, all I want is something safe, the planner's job is to say, safe from what? You're 60 now, would you like to be able to afford bread when you're 80? If you're getting 2.5% or 3% on a Treasury security, you're guaranteed to lose your standard of living. Then the advisor brings the conversation back to what the tradeoffs are.