I was going to write today about a recent vacation my wife and I took to a beautiful beachfront community and our desire to possibly move there someday. The overall theme was going to be related to retirement planning, sequence-of-returns risk, and the importance of risk management for one’s assets.
In light of the tragic shooting in Las Vegas, as well as the continuing stories of devastation and suffering in Puerto Rico and elsewhere due to Hurricane Maria, that article just does not feel appropriate at this time.
Our thoughts and prayers go out to the victims of the Las Vegas shooting, their families, and all of the people impacted by hurricanes in Texas, Florida, and the Caribbean.
I do think one aspect of what I was planning to write is appropriate today. These types of events reinforce the notion that life is fragile, and that, unfortunately, bad things happen to good people all too frequently and unexpectedly.
As the editor of Proactive Advisor Magazine, I have had the privilege to interview over 150 successful financial advisors from all regions of the United States. One theme I hear consistently is how these advisors believe that a major component of their role, and one where they add great value, is in helping clients preserve, protect, and grow their wealth using a variety of risk-management strategies.
While we typically think of risk management in the context of investment portfolios, these advisors take a broad and holistic view of strategies they can use to help clients protect their assets, their lifestyle, and the future needs of their families. These might include insurance strategies in a variety of areas, legacy and beneficiary planning, tax-mitigation strategies, health-care and long-term-care planning, business-succession planning, retirement-income planning, and cash-flow management.
Certainly, risk management and wealth preservation related to investment planning are major components of what these advisors do. I am often told how a tremendous amount of time is devoted to understanding the qualitative, emotional, and behavioral side of how their clients view risk. Advisors then employ more objective and quantitative tools to assess a client’s risk profile, trying to differentiate between a client’s stated risk appetite and “what the numbers say.”
In my experience, many advisors I interview say most clients have assumed too much investment risk before they come to work with the advisor, are unaware of how much risk they really have in their portfolios, and are too focused on short-term returns rather than long-term objectives and goals. Education on these types of issues becomes a major focal point in the early stages of the client-advisor relationship, which is a very sound practice and leads to more positive and satisfactory outcomes in the long run for clients.
A comprehensive 2017 study of financial advisors and affluent clients by IMS Wealth Management Monitor reinforces the fact that, according to a summary by ThinkAdvisor, “the number one investment priority for 74% of asset managers surveyed—roughly three-quarters are financial advisors; the rest work in insurance, institutional investing or commercial banking—is wealth preservation and risk management.”
For affluent investors, the number one stated priority is “growth,” closely followed by wealth preservation and risk management. Other studies show that as an investor’s or family’s assets grow over time, the concern for capital preservation also grows stronger, which makes perfect sense.
In my interviews with advisors, many have turned to the investment management offerings of third-party money managers for a role in their client portfolio allocations. Some of these money managers focus on strategies that mitigate volatility, which is appealing to advisors interested in their clients’ objectives of building a comprehensive investment plan that can deliver long-term competitive performance while attempting to minimize losses in down market periods. Advisors are also attracted to managers that offer sophisticated, rules-based, quantitative strategies, which can help take emotion and manager discretion out of the investing equation.
One advisor I interviewed recently had an interesting example he uses with clients to describe this type of active portfolio management:
“I like to use an analogy with clients related to advances in automotive technology. I ask them if they would rather be taking a long trip on busy highways in a Model T, which has essentially two gauges, one for fuel and a speedometer. Or would they rather take that trip in a Tesla, which has not only all of the most modern safety features and incredible fuel efficiency, but also active driver warning systems, easy access to GPS technology and traffic alerts, and the latest driver technology in every regard. Which vehicle do they think is going to provide a more comfortable, safer, and more interactive driving experience that can avoid the many types of hazards one faces on the road today?
“The same concept is true for their investment portfolio. We use managers who employ strategies that are computer- and algorithm-driven and modern in every sense of today’s investment world. They have advanced indicators and trend-following techniques that seek to keep a portfolio out of harm’s way. Our educational process concerning this sophisticated approach to portfolio management is very important to our practice and our clients. I think it is a core differentiator for our firm and helps drive high levels of satisfaction with our overall approach to wealth management.”
It might seem a little incongruent to be talking about risk management and capital preservation in a market environment that gives no signs of doing anything but go up. According to MarketWatch, “The S&P 500 has turned in a positive performance for eight straight quarters, meaning the last negative quarter occurred in the third quarter of 2015—and it has risen by nearly a third over that period.”
On the contrary, periods of seeming complacency—when markets go up in the face of any and all positive and negative news—seem to be exactly the right time for advisors and their clients to be focused on risk management.
Disclosure: No communication by Dynamic Performance Publishing or our employees to you should be deemed as personalized investment advice. Any investment recommended in this newsletter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Dynamic Performance Publishing, its affiliates, and clients may hold positions in the recommended securities. Results are not indicative of holdings for clients of Flexible Plan Investments. Forwarding, copying, or otherwise duplicating this information for the use by anyone other than the intended recipient is expressly forbidden. These results are not representative of those achieved by clients of Flexible Plan Investments, Ltd. (FPI) due to differences in security selection, timing of trades, transaction fees, and FPI’s management fees.