Financial Planners Face Great Expectations

Clients count on seeing their returns soar along with the Nasdaq.
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If this year's stock gains are a gift horse, some investors are looking them square in the mouth.

With the average U.S. domestic stock fund up 24.1% and only three of

Lipper's

42 stock fund categories down for the year, you might think investors would be planning parades for their financial planners. But for many, today's good times aren't good enough.

Some planners say they're getting an earful from clients who want to know why their portfolios aren't beating the

Nasdaq Composite Index's

stunning 81.3% year-to-date return.

"This year, our equity strategy is comfortably ahead of the

S&P 500

, but clients want us to beat the Nasdaq. That's because the highest-performing index any year becomes the benchmark," says Frank Armstrong, principal of

Managed Account Services

, a Miami financial-planning firm.

Planners typically spread clients' assets among many different asset classes, a risk-averse strategy that can keep investors from losing their shirts in a downturn. On the other hand, it also makes it harder to shoot out the lights in heady years like this one.

To match the Nasdaq's returns, investors would have to hold a Nasdaq-like portfolio. That entails making a huge bet on the technology and biotechnology stocks that dominate the index. While such a concentrated investment would have paid off this year, a selloff in pricey Nasdaq stocks could easily lead to significant losses. In 1990, the Nasdaq Composite lost nearly 18%, according to

Morningstar

.

Planners say outsize returns in a sector or index can distract clients from their diversified strategies and long-term goals. Rather than compare, say, a small-cap value fund with benchmarks like Lipper's small-cap value fund category (up 2.6% so far this year) or the

Russell 2000 Value

index (down 4%), clients often compare it with the white-hot funds and indices making headlines.

This year, the market's distractions are the Nasdaq, tech funds, small-cap funds that invest in tech stocks and hot initial public offerings. The average science and technology fund is up 128% this year, and some 100 mostly technology-oriented funds are returning

more than 100% this year.

Jaw-dropping returns like these have captured investors' imaginations, and some are

scoffing at the S&P 500's 20.1% year-to-date return, let alone its historical 11% average annual return.

S&P 500 AverageAnnual Returns

*Through Dec. 23. Source: Lipper

What's worse, investors seem to believe incredible returns can be had with little additional risk, planners say.

"I have a knowledgeable client in his late 50s, an attorney. His average return is 28%, and he thinks it should be higher. Then I ask if he'd like to take on more risk, but he says no," says Joel Davis, a senior financial planner with

Amercian Express Advisors

in Portland, Maine.

Another risk-averse client in her mid-60s wanted to move her 25% bond holdings into stocks but didn't expect higher volatility, Davis adds. He says clients from every walk of life "would feel cheated" if their portfolio's returns fell to historical averages.

"It's just speculation and greed. I have a cousin who's a broker in California. He's got people on the phone, angry about 20% to 25% returns," says Jim Folwell, an analyst with Boston mutual fund researcher

Cerulli Associates

.

Planners say the problem has been building over the past five years. Every year, there are particularly hot sectors. Meanwhile, the broader S&P 500 is on the verge of posting its record fifth consecutive year with at least a 20% return. Consequently, many investors -- especially new investors -- simply aren't impressed with 20% returns anymore.

"This is a concern we mainly see with clients we've picked up in the last five years who haven't been in the market before then. Now, when I show performance to new clients, I practically guarantee them they won't see the last five years' returns over the next five years," says Bruce White, a private money manager with

Clifford Associates

in Pasadena, Calif.

Investors with fewer than five years of investing experience expect an average 23.2% return over the next 12 months, according to a

PaineWebber

study released Monday. Investors with more than 10 years investing experience expected returns of just 16.3% on average, the study found. The investing rookies' expected return roughly matches the S&P 500's over the past five years.

"That's just human nature. We tend to take our most recent experience and project it forward," Armstrong says.

But such high expectations can be dangerous. Investors planning on boffo returns year-in and year-out might not save enough for their retirement or may dilute returns with trading costs as they chase each year's hot sector.

These are the types of clients that make a good planner prove his or her mettle.

"The mistake would be to knuckle under and just put people in the hot sector of the moment," says William Baldwin, a financial planner with

Pillar Financial Advisors

in Lexington, Mass. Baldwin says he currently recommends a stock allocation of 60% growth stocks and 40% value stocks, which have been out of favor.

Planners admit everyone in their line of work loses clients who are unsatisfied with their performance, whether justified or not, and say these "defections" can take their toll.

"I keep an even keel. Some days, clients think you're an idiot, and some days they think you're a hero. Some mornings I don't know who I'm looking at when I'm shaving. I just try to keep them focused on their long-term goals," Armstrong says.

But don't think you have to wear out the knees of your jeans praying for planners because their business is good. Armstrong says most advisory shops are flush with clients, and his firm's assets under management are up 40% this year.

What are your expectations for you own portfolio in 2000? Take our poll.

What Will Your Investment Portfolio Return in 2000?

Negative return

Zero to 10%

10% to 20%

20% to 30%

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Catch Ryan Jacob, portfolio manager of the Jacob Internet Fund, this weekend on "TheStreet.com" on Fox News Channel. Special New Year's weekend times: Saturday at 6 p.m. ET and Sunday at 11 a.m. ET.