Independent advisors see a slow slog out of the financial industry's slump. A tentative sense that the U.S. economy and stock market had put the worst behind it in the first half of 2008 evaporated this month, sending the Advisorbenchmarking's Advisor Confidence Index (ACI) down 5% to 92.22 this month from 97.06 in August.|image1|

"The financial crisis of the past 15 months has now transitioned into a burgeoning economic crisis," said James Dailey of TEAM Financial Managers in Harrisburg, Pa.

The ACI is based on a survey of independent investment advisors that's put together in the first half of every month. In other words, the RIAs who participated this month knew about the U.S.-government takeover of Fannie Mae and Freddie Mae, Lehman's collapse, Bank of America 's proposed takeover of Merrill Lynch, but hadn't witnessed Washington Mutual's demise, the proposed merger of Wachovia's banking business with Citigroup or the rise and apparent fall of a Treasury -and-Fed -backed plan to pour $700 billion (or so) into relieving financial institutions of bad assets.

The ACI goes from a "very negative" 33.33 to a "very positive" 166.67. Its mid point, 100, represents a neutral outlook on the stock market and the economy. The index reached an all-time high of 121.41 in December 2005 and an all-time low of 86.27 in July 2008.

All four of the ACI's components decreased in August. |image2|

The Conference Board's Consumer Confidence Index (CCI) for September is due out today. In August |image3| it rose to 56.9 (1985=100) from 51.9 in July. Slight gains in July and August aside, the CCI has been losing ground all year.

Home to roost

With just part of September's bad news in front of them, advisors' written comments this month were uncommonly somber.

The American consumer and the federal government have been 'credit junkies' for way too long, and the American financial industry -- thanks to a public policy of deregulation and a willingness to look the other way as long as it meant turning a profit -- has played the part of the addict's unscrupulous 'credit pusher,'" said George Cheatham of Columbia, Ky.-based American Financial Consultants.

Rob Siegmann of Cincinnati, Ohio-based Financial Management Group, said equity markets are unlikely to recover soon given "a huge inventory of homes" and the related collapse of banks and government-sponsored companies like Freddie and Fannie. "Inflation has temporarily eased up, but as it re-emerges, an increasing interest rate environment will slow the recovery as businesses and consumers will borrow and spend less," he added. "The environment is good for cautious investing with an eye on preservation of capital for retiring clients."

Kenneth Graves of Atlanta-based Capital Research Advisors says that the phenomenon of retail and commercial banks taking over sell-side investment houses augurs badly for the financial-service industry. "Banks notoriously create a bigger mess in the investment business," he said. "The very reason that Gramm-Leach-Bliley was passed in 1999 was to keep it all separate. If that regulation gets torn apart, watch the wheels really come off of this thing a few years further down the road."

But Mark Danielson, an advisor with Eden Prairie, Minn.-based Intelligent Financial Strategies, sees a bright side to the market crisis -- at least in the long run. "The American public will have the opportunity to buy some truly wonderful companies at valuations not seen in a generation, but they will have to have at least a three- to five-year time horizon in order to see the benefit." But, given a cultural predilection for instant gratification, he expects to see "considerable pain and second-guessing over the next six to 12 months as our financial crisis finally unwinds and we get an opportunity to see who the survivors may be."

Advisorbenchmarking is an affiliate of Rydex Investments.-FWR

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