Investment Planning & the Three Primary Risks

Number 1 out of 13 in our Wealth Management Issues Series

Our last blog post provided a brief introduction to not only what it means to be a holistic wealth advisor, but also the 13 Wealth Management Issues most consistently impacting our clients and their families. In these and upcoming posts, the focus will be each of the respective issues in order, this being tips for investment planning and acknowledging risks.

At first glance, the words, ‘Investment Planning’ likely seems fairly straightforward. We have the money. We invest. We hope for positive outcomes. Although a typically held view of investment planning, our position is this subject has much greater depth; particularly a number of common risks to which investors expose themselves unnecessarily. A comprehensive view of Investment Planning begins with gathering a full inventory of all assets…ALL assets. All too often, clients and advisors alike, take a segmented approach. Let’s review the 401k. Let’s review the IRA. Let’s review the 529. Let’s review the brokerage account. Etc. Etc. Etc. Holistic Wealth Planning evaluates all assets in an effort to make sure certain risks aren’t being taken on. Really, this approach is a philosophic approach. Our investment philosophy is rooted in the feelings our clients have with respect to risk. After conducting a disciplined discovery process and an individualized risk profile questionnaire to determine what type of investments are appropriate; we utilize a three-tiered approach whereby various investment strategies are aligned with clients’ goals. More on the three-tiered approach, shortly.

Often, AFTER gathering a client’s full inventory of investments and having an in-depth conversation about their goals & expectations and risk profile, and PRIOR to discussing actual strategy, our process includes reviewing three primary investment risks.

1) Inappropriate Asset Allocation
2) Failure to Monitor and Maintain Asset Allocation
3) Inappropriate Asset Correlation

Inappropriate Asset Allocation: A thorough review of a client’s situation, future, feelings, family dynamics, complexity, goals, risk tolerance, and time horizon is critical. The benefit of an advisor is objectivity…being detached emotionally. Often we review portfolios with significant overlap in AA due to a segmented approach to individual accounts rather than a comprehensive view.

Having multiple advisors virtually ensures your asset allocation will be inappropriate.

Failure to Monitor and Maintain Asset Allocation: Your portfolio is not static. Market forces are often like Mother Nature. All over the place! This being the case, it’s critical to have a disciplined and systematic process for review and rebalancing. Additionally, your life, which isn’t static either, may dictate changes to your portfolio and risk. Note: having multiple advisors significantly increases this risk. Regular monitoring your portfolio and your feelings about risk on a regular based is strongly advised.

Inappropriate Asset Correlation: Each investment must interrelate appropriately without overlaps or gaps to ensure success. Lack of correlation leads to overlap which simply means your portfolio is not balanced appropriately. Concentration Risk is when a client has too much exposure to one stock or one sector. Additionally, this risk often leads to the risk of missed opportunities when other sectors do well.

To offset this final risk, our approach is to take a three-tiered approach utilizing Traditionally Asset Allocated Investments, Opportunistic Investments, and Guarded Investments. Traditional investments include equities, fixed income and cash. Stocks. Bonds. ETFs. The strategies you google. Where we differentiate and where we assess appropriate asset correlation is via Opportunistic Investments. These strategies include asset classes that do NOT correlate with the market. In some respects, these options provide a hedge against traditional market risk. Utilizing publicly non-traded REITs, oil/gas, 1031x, BDCs, leasing programs, etc. for a portion of a portfolio may enhance diversification. Finally, Guarded Investments. Certain types of investments protect you against market decreases, i.e. no risk of market loss, grow and distribute tax-free, while also providing layers of asset protection against lawsuits & creditors. Implementing our three-tiered approach goes beyond the traditional modality of asset allocation providing clients with a unique platform to achieve their goals & objectives.

Consider this medically based example: If you need to have your knee reconstructed, would you have a different Orthopod work on your MCL, another work on your PCL and yet another on your ACL. Of course not. Imagine that OR, however! What risks would that pose to the patient? What would happen if there was zero coordination amongst those surgeons? Moreover – could you ever trust any of those surgeons again for exposing you to those risks without properly explaining them to you so you could make a different decision? Would you let them operate independently? You’d probably say “I’d never do that in 100 years!” But if you did, what would you have to do to make sure the procedure had a favorable outcome. You’d probably have to have a meeting with all three orthopods to discuss specifically what each of them would be doing while also making sure their respective teams are working collaboratively. Now…consider your current investment and retirement goals. If you have assets with more than one advisory firm, who is responsible for coordinating the “operation” among your investment advisors/orthopaedic surgeons? Who’s responsible on your team today for creating that alignment? In the investment world, we call those choices “asset allocation”. That’s the choices and strategies that your advisors put together to help you achieve your goals while mitigating as much risk as possible

In the same way you should trust your surgeon to explain all possible risks to which you are exposed, so to should you expect this from your advisor or wealth strategy team. If you have money currently invested with 2-4 advisory firms, who is on point to coordinate between them and mitigate those risks?

In summary, our disciplined process provides insights into your current situation, your future goals, your feelings with respect to the market, a review of risk, and ultimately an analysis with our findings is provided. On an ongoing basis, our wealth management platform, Mosaic Wealth Portal, provides each individual goal the ability to, in real time, determine if you are on track to meet each objective. Our continued philosophy of goals based reporting is never more prevalent and nothing more important to a client having confidence their goals are being and will be met in the future.

Securities and advisory services offered through Cetera Advisors LLC, Member FINRA/SIPC, a broker/dealer and a Registered Investment Advisor.  Cetera is under separate ownership from any other named entity.