Chris Ferretti, CRPC • Chesapeake, VA
Integrated Financial Partners, Inc. • Lincoln Financial Advisors Corp.
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Actively managed investment strategies are Chris Ferretti’s defense of choice.

Proactive Advisor Magazine: Chris, what did you learn from your early years as an advisor?

I went through a comprehensive two-year training program when I first entered the industry and have always pursued ongoing professional education. It is a business and investment environment that never stops changing, and it is important to stay current on best practices.

My initial training was invaluable. I learned the discipline of financial planning and the importance of a needs-based approach to ascertaining clients’ objectives. We did not consider investment strategies until we had a thorough financial review in place and a strong sense of an appropriate plan of action for a client. My attitude around that is the same today, although the tools at my disposal have greatly changed and improved.

How about the investment side?

When I first entered the business in the late 1990s, modern portfolio theory (MPT) was really the driving philosophy in our organization, and at that time it appeared to be appropriate. It was all about determining a suitable asset allocation for clients and then, more or less, setting it and forgetting it.

There is a major problem with MPT that has become apparent over the last 15 years. Using the principles of MPT, asset allocations are established that should deliver a range of expected returns. However, there will always be a period of time when returns fall outside of that range, and that can have devastating effects on a portfolio. When events are at their worst and the markets are in panic mode, supposedly diversified portfolios will have asset classes that tend to go down at the same time.

While I think the basic principles of MPT are appropriate for a portion of client money as a base, much more is needed in terms of new techniques and strategies. One of the factors that attracted me to Lincoln and IFP was the ability to access a wide range of sophisticated investment strategies.

I needed additional tools that were not previously available: different types of products, more active management, and more portfolio hedging strategies. These elements are designed to help protect clients on the downside so they can ultimately meet their financial goals. They also help with the behavioral finance and psychological aspect of clients, with actively managed portfolios giving them more confidence to stick with an investment plan and stay in the game over the long term.

“Effects can be devastating when returns fall outside of the expected range.”

What does your planning process look like now with clients?

We have a structure where the sharing of ideas and knowledge is very important. I can consult with staff resources on an informal basis or dive into the analytics of a specific client’s planning situation. We have instant access to CPAs and attorneys if there is a need for that expertise.

IFP also has an advanced planning model called the Lifetime Income Model, which is designed to implement a strategic retirement distribution plan over time with a goal of helping clients minimize risk while maximizing tax efficiency and the growth and preservation of assets.

I had never before been able to definitively tell my clients how much money they needed, or the returns needed, in specific time periods when considering their retirement years. The core concept is in applying different strategies to different time frames and managing money with the appropriate amount of risk management based on each time frame. We might, for example, look for lower risk and lower returns early in retirement and then look for higher returns for money earmarked for a time period much further out.

It all depends on the client’s planning needs, but the beauty of it is in getting someone’s money working as efficiently as possible based on quantified return assumptions and appropriate risk measures. If there is excess capital available in one phase, and the client is comfortable with our risk assessment, we might look then toward strategies that are more aggressive and growth-oriented over a longer period of time.

How does active investment management fit within this approach?

I believe active risk management has the potential to avoid big market mistakes. We use a variety of managers with different active strategies, not because of what we do know, but because of all of the things in the market environment that we don’t know.

I use charts with clients that look at market trends over the past 20 or so years. From the early 2000s to about 2013, we had what I term a “Rip Van Winkle market”—the S&P 500 went nowhere over that time in terms of absolute levels, and you could have gone to sleep for 13 years and awakened at the same place. However, it was anything but a sleepy market environment, with the dot-com crash and the credit crisis of 2008. Clients who are close to retirement or in retirement cannot afford that kind of volatility, given the havoc it creates for portfolio planning scenarios and for the sequencing of returns and withdrawals.

I go through an educational process with many clients. On the one hand, they are worried about preserving their capital when they see all of the scary headlines about what is wrong in the world. On the other hand, they read the arguments for buy-and-hold investing and how the market has averaged decent returns over its history. Both feelings are based on a certain amount of truth.

First of all, clients do not necessarily have a 50-year time frame within which their portfolio can weather volatile ups and downs. I like to show a picture with a famous quote from Yogi Berra: “Averages don’t mean nothing because if they did you’d have one foot in a bucket of ice and one foot in fire and you’d be perfectly comfortable.” They get a kick out of that but it does illustrate a point: To get the “average return” of the S&P 500, you have to be willing to take both the good and the bad, and the bad can be very bad in the form of 40% to 50%-plus declines.

If you are dollar-cost averaging over your working accumulation years, volatility can at times work in your favor. In your distribution years, volatility can be very destructive. My job is to narrow the range of returns by using active management to minimize volatility over the inevitable up-and-down cycles of the market. Active management strategies are available to help protect clients in the most vulnerable years and to help them grow their assets in favorable market conditions.