Shifting Times Require Modifying our Methods: Chapter One
In our industry as financial planners, we have adapted to many changes over the years, though we acknowledge these are lesser changes compared to the more life-changing events we are experiencing today. The component of financial planning that focuses on investment management has experienced a number of evolutions if not outright revolutions, and true to form, we have come up against even more changes in the current year, which requires finding new strategies.
Starting out years ago, our main focus for our clients’ investments was on investing in mutual funds combined with about a 25% investment in insurance products. This was driven in part by a practice that started small, with clients that had fewer funds to invest, as well as limitations in the investment options available.
As we grew and developed our expertise and knowledge, we began a slow shift to a more broker-based approach, investing in individual company stocks rather than mutual funds. Then, as they developed and became more available, we began using Exchange Traded Funds, or ETFs which are similar to mutual funds with a “basket” of stocks, but they trade like stocks, and perhaps more importantly, tend to be much more cost-effective and tax-efficient than mutual funds. Our most recent evolution was a few years ago, when we stopped using all commission-based products, and we now only utilize brokerage programs geared to practitioners who are registered investment advisers, and in our case, CERTIFIED FINANCIAL PLANNER® practitioners.
It would be extremely easy for us as advisors to use a cookie-cutter approach to investing, and invest the same portfolio for everyone, but we just don’t work that way. Part of our due diligence is developing an understanding of every client or family’s needs, goals, and dreams, as well as evaluating their assets, earnings, savings, and liabilities. There is another important piece of this picture that we need to enable us to proceed with investment recommendations: it is that every single person has a very individualized tolerance for the amount of risk they are willing to accept with their investments. If an individual is willing to accept little to no risk, they are typically not a good candidate for the type of investing that we provide. They will be better served by a CD or other type of banking instrument, though this choice has its own type of risk, of which many remain unaware.
We have tried many different methods over the years to try to help clients identify this Risk Tolerance, but until fairly recently, have never felt completely at ease about their understanding and how clear our communication was of this concept. But in the past 2-3 years, we implemented a program called Riskalyze, which is a series of a few questions that enable each client to set their risk tolerance with a specific number, and we then invest their assets according to those risk scores. These risk scores are determined using the client inputs and proprietary algorithms associated with the program. We have been extremely pleased upon finally incorporating this Riskalyze tool, as it makes the concept of Risk more real in a sense, in that our clients are telling us: “I can accept a portfolio that varies in performance between a loss of $______ against a potential reward of up to $_______ over the next six months to a year. And if they want to change their risk number, they can.
We can pretty safely state that the one constant this year has been Change, and just when we become accustomed to an idea or a way of doing things, along comes another event that knocks us off track, leaving more change to assimilate, more adjustments to make. Our changed economy, financial and market conditions have led us to reconsider some long-held strategies, and we have been coming to grips with how that impacts investment options and choices. We still try to achieve a diversified portfolio for the majority of our clients, believing in the long run that this leads to the most stable level of returns, but we are re-examining the make-up of those portfolios. We will be writing more about these ideas in our next blog post, but in the meantime, if you need a soundtrack to accompany our unrelenting changes this year, I found two YouTube videos to enjoy: