As we prepare to settle into the holidays – to commune with family and friends, and to remember what life is really about – it’s time to put this terrible year behind us.

Not that the economic devastation it has brought us since the Lehman bankruptcy is over. It’s not. When the President of the United States, the Chairman of the Federal Reserve and the Secretary of the Treasury – trying to get their godforsaken but necessary bailout bill passed – appear on TV and warn the nation that we’re in the grip of a crisis that threatens the very foundations of our financial system and of the economy itself, the whole country sits down on its wallet, and you get a recession.

There can be little doubt at this point that GDP in Q408 would have to be down as much as 4%, and that unemployment can eventually go higher than it’s been since (though not as high as it was in) 1982. That’s probably the extent of the bad news: with the tidal waves of liquidity sloshing through the system and a 1% fed funds rate – not to mention the unprecedented scale of cash on the global sidelines in individual, corporate and sovereign coffers – you may have a GDP contraction that’s as deep as 1981-82, but it’s very hard to imagine one as long (i.e. 16 months). And remember that markets start recovering before the economy does.

No matter. The thing for personal financial advisors to do now is simply to learn everything there is to learn (or re-learn) from this annus horribilis, incorporate those lessons into their belief systems and business plans, and look to build a bigger, stronger, healthier business in 2009 and the years beyond.

Look: your existing business is, at this point, in relatively little need of your constant attention. The damage is largely done. The people who are going to leave you have left (or you are confidently awaiting the transfer papers). The people who are going to capitulate and flee to cash have virtually all done so. And the people who are going to muddle through – holding their portfolios and/or continuing their regular accumulations – are doing that. For good or ill, people have made their decisions.

This frees you to focus outward – to be consumed not with how upset your clients are, but with how upset everybody else’s clients are. And to prospect like there’s no tomorrow.

All my years and all my experience tell me that, by the end of 2009, a quarter to a third of the personal financial advisors who held licenses or RIAs at the beginning of 2007 will be gone. All the more so since so many were still just hanging on after the devastation of 2000-2002. This doesn’t necessarily mean a proportional number of clients or quantities of AUM will be orphaned, since most of the casualties will be below-average producers. (That said, a lot of senior advisors with devastated books, and without the energy to rebuild, will sell their books and retire.)

This all adds up to one energizing perception: you may never in your career find so many people with so much money so permanently disenchanted with their current advisors as you will in this next block of time.

Nor, by the same token, may you ever experience a magic time where your recommendations do so well so quickly. Remember (per Ned Davis Research) that from the market lows associated with the ten official post-WWII recessions, the total return of the equity market averaged 32% in the next twelve months. This is the time for the opportunistic advisor, counseling the long-term investor, to be joyously pounding the table.

And as you craft a new business plan for the rest of your career, make sure you remember what these difficult days can teach us all.
(1) You don’t know what you don’t know, and there’s no such thing as a “standard” deviation. No matter how much time and energy you wasted on economic commentary, market prognostication and tortured comparisons of past performance, you and your clients got completely blindsided by the events of the last eighteen months in general, and the last three months in particular. Timing and selection aren’t a value proposition; they’re a black hole.

(2) Take all the time and energy you’ve been used to wasting on timing and selection, and put them into behavior modification, where they might actually do some good. As always, the critical issues are: do clients throw too much money at fads near their bubble tops (dot.com 1999, condos 2005, oil 2008), and do they capitulate in a panic at bottoms. If you can just train them not to do these things, you can double, on average, their real-life, long-term return. (This perception is the spine of my new book, Behavioral Investment Counseling.)

(3) Never take on portfolio management without a plan, or at least an investment policy statement, which matches the client’s portfolio to his true long-term goals and to his real time horizon. This is your best chance to keep people from speculating madly at tops, and from panicking at bottoms. Portfolio management without a plan is a performance derby, and you always lose performance derbies.

(4) Never let your fee be associated with “performance;” never let it be quoted back to you in dollars rather than as a percentage of AUM; never negotiate your fee. Your fee is for wise, empathetic and brave behavior modification, which is worth multiples of its cost. Anyone who doubts this should immediately be put off The Ark.

(5) Every six months, do Lifeboat Drills. Train your book to go through a bear market; then train it again. Then train it again. To have the courage to “underperform” at tops by staying diversified, and especially to remain in equities at bottoms, are the keys to superior lifetime returns. These are behavioral capabilities, and they have to be drilled constantly, because they’re not instinctive. Quite the contrary.

(6) A bear market is an extended period of time during which people who think this time is different sell all their common stock holdings – at prices which will never be seen again – to people who understand that this time is never different.

(7) Never have a short- to intermediate-term market viewpoint. A long-term financial planner should never have a market viewpoint; it can only distract her from her work.

(8) Never allow anyone who has not sold to tell you he has “lost” a sum of money in a market decline. Warren Buffett’s Berkshire Hathaway holdings are down peak-to-trough $9.6 billion. He has not lost anything, and neither has your “client.” In a diversified portfolio of quality equities, the only way to lose is by selling.

(9) All bear markets are the temporary interruption of a permanent uptrend. As I write, the S&P index is 900. The night before the first of 13 post-WWII bear markets, it was 19. That ignores dividends. Learn not to focus on the sixteen months out of 60 that there’s a bear market (historically); focus on what happens during those glorious other 44 months.

(10) You can only help people who continue to be willing to be helped. The third time somebody tries to capitulate – after you’ve rigorously explained twice why he should not – stand aside. Send him his check, and never speak to him again.

HAPPY NEW YEAR!