Cliff Aiken • Port Charlotte, FL
AWA Investment Advisors • LPL Financial
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Proactive Advisor Magazine: Cliff, how do you position your services to clients when you first meet with them?

I am a wealth management advisor, offering comprehensive financial planning as well as investment management. I advise clients that we need to look at all areas of their financial lives. While investment management is certainly important, it is only one of the services our practice offers. We also look at liability management, tax planning, risk management, legacy planning, retirement income strategies, and charitable solutions. In a nutshell, we look at the client’s entire financial picture.

That starts with trying to understand where people have been in their financial lives, their attitudes about money, risk tolerance, and their goals and objectives. Many new clients will ask if they should bring all of their financial statements, brokerage account information, insurance documents, and so forth, to our first meeting. I tell them no, just bring yourself and your spouse. We want to have a conversation to get to know each other and to get the important issues out on the table. We will dig deeply into the specifics as we work through the planning process, but the informal information gathering is critically important.

I ask a lot of questions during these meetings: Where have you acquired your financial guidance in the past? Have you worked with another advisor? What about that process did you like and dislike? Where do you see yourself and your family in the next five, 10, and 20 years? What is important to you now and in the future in terms of your financial goals? What are the unique circumstances of your family life?

I find that clients respond well to starting our relationship in this manner. I tell clients that I am interviewing to become their lifetime financial coach and that means being transparent with each other, even if some of the discussion can be difficult. All financial advisors basically have access to the same types of tools and a lot of the same resources, but the ability to build a trusting relationship is what creates a successful team. My role is to make sure I can bring those tools and resources to bear knowing the relevant facts and having a good understanding of the client’s mindset and attitudes. Only then can I become an effective financial coach, delivering the strategic options and recommendations that are most suitable for their personalized situation.

“Risk might be managed very differently for different objectives.”

Talk about your planning process for retirement income.

Once we have completed the data-gathering and developed some understanding of goals and objectives, I use planning software and my own methodologies to get at a needs-based retirement planning and asset-management approach. The goal is to help clients determine how much income they need beyond fixed sources and then figure out the most tax-efficient way to produce that income.

I frequently advise clients to think about the distribution phase of their life differently than the asset-accumulation phase. Whether someone worked for themselves or for a large corporation, the minute they retire they have to start writing their own paycheck. An individual usually has a far more limited pool of assets than a company to write that paycheck.

I work with clients to approach this serious and important planning in a realistic fashion. We look at their pool of assets and determine not only what someone would like for retirement income, but how much they can actually afford to take in a prudent and conservative manner. Many new clients have never received that guidance before and may have had unrealistic expectations.

I explain the concept of needs versus wants when discussing retirement, and have some fun doing so, comparing it to what I used to tell my young children when they asked for one too many toys. Once we can work with a client to make sure their needs are covered via a conservative income plan, we can then start discussing strategies for further growth of their assets. Here is where we get back into their aspirations and try to determine their priorities moving forward. Is it providing a legacy for their children, funding education for grandchildren, giving to charities or church, or purchasing a dream retirement home? Once we have solved for the income piece, we try to address these aspirational goals. Nothing makes me happier than helping clients build a plan that can help them address both their needs and their wants.

 

How does your philosophy of investment management fit with this approach?

They go hand in hand. It really is a goals-based approach to investment management. We are not looking to chase the highest returns in a good market year, but we are trying to avoid steep portfolio drawdowns in poor market years. Based on the client’s objectives and plan, we can identify a range of returns that should allow a client to meet their income withdrawal needs. We do not want to see clients take excessive risk trying to reach for returns that are not necessary for their goals-based approach.

The positive flip side is that I never want a client to be in a position where we have to decide that they need to cut back on their income withdrawals because they experienced a big hit to their portfolio. That is just not an acceptable outcome, and we will do everything in our power to avoid it. We want to try to take the ups and downs of the market out of the income distribution equation. The idea is that controlled portfolio growth and income-producing investments will continually refill their income bucket each year, keeping them ahead of the game throughout their retirement years.

How do you manage risk within client portfolios?

A critical piece of that question is identifying each individual client’s risk profile. I do that on a disciplined, quantitative basis and probe their emotional attitudes toward investments. How did they feel in the past when they saw attractive returns in their portfolio? How did they feel when they experienced losses of 20% or 30%? How did they react during the two great market downturns this century—whether they were working with an advisor or not?

We know that as strong as the market has been, we will see a large market displacement again. We need clients to prepare for that. And, given their attitude toward risk, their goals-based objectives, and the type of investment plan we have constructed, we might manage risk differently for different elements of their plan. I do not like labeling clients as conservative, moderate, or aggressive. People have different pockets or buckets of money that may be earmarked for different objectives and different time horizons. Risk might be managed very differently for different objectives.

For the money that needs to be preserved and provide conservative growth over many years, I favor an active investment approach. When I first started in the business, and for several years after, I was in the camp of passive, long-only, buy-and-hold investing. My mantra to clients in times of stress was “hold on and ride the wave.” That might work for young people who have many years until they have to touch their investments, but it is not going to work well for clients ready for retirement.

New technologies and investment managers using quantitative strategies have become much more available to investment advisors and the average client investor. We now have access to sophisticated, proactive strategies that can stay in tune with market conditions and are not bound to classic long-only, fully-invested strategies. Buy-and-hold, I tell clients, works until it doesn’t. And then your portfolio can end up in very poor shape, sometimes causing emotional reactions that work against you in the long run.

Doesn’t it make more sense to mitigate risk using multiple actively managed strategies that can be proactive in poor market conditions? And doesn’t it make sense to construct a well-diversified investment plan with strategies that can adapt to changing economic, monetary, and international conditions? The rules of the old economy have changed, and because of that, we need more adaptive investment strategies. Our job is to construct a portfolio that fits a client’s unique needs and combines the attributes of being diversified on several levels, manages against downside risk, and provides opportunities for growth. The portfolio strategy should be able to weather market conditions, no matter if the market is bullish, bearish, or sideways.

The other major point I emphasize with clients is that being proactive and managing risk are not just confined to their investment portfolios. I am strongly committed to periodic client review sessions, where we talk about their investment plan, its performance, and also changes in their life situation. People face change throughout their lives, and I think it is the role of a good financial advisor to make sure that their plan evolves along with their life circumstances. This approach, I believe, serves clients well over the long term.