The intersection of art and science

As intensive data-gathering has informed his investment advisory process, active third-party money management has emerged as a frontrunner in client portfolio solutions.

Later I worked for American Express/IDS and CIGNA Individual Financial Services, both of which were very professional, buttoned-up organizations. I learned a tremendous amount there in terms of the full formal financial-planning process, with these two companies being very data-driven and employing state-of-the-art models for financial, retirement, and estate planning.

Around this same time, I earned my CFP designation and, frankly, felt very qualified to strike out on my own. With several other advisors, I started Money Advisors Group, and now I am a principal owner along with one of the other original founders.

When the major displacements hit the markets in the early 2000s, it was clear to our group that it was time to start looking for new investment solutions. The spring of 2000 was really a watershed moment that ultimately led to changing the way we do business with clients and how we manage money. We saw the “tech wreck” just demolish a lot of people’s goals and dreams and were determined to help prevent that in the future.

But the real challenge was time management. We were spending so much time on the active money management that we really didn’t have the time to do what we do best—meet with clients and make sure they are on track in making progress on all of their planning objectives. So we reached the conclusion that you either have to be a full-time money manager yourself or you need to find top managers who could do it for your clients. We chose the latter path and have followed that ever since.

The whole third-party management system was really in its infancy in the early 2000s, and we have done an immense amount of tire-kicking over the years. We always want firms that are easy to work with, have a proven track record, and have a turnkey process for client onboarding and ongoing account management. I believe we have been successful in finding that, and our clients have been very pleased with the end result.

It highlights a key point. When we evaluate third-party active managers, it is crucial to know how they performed during down market years, especially the severe downturns. It also is important for us to have managers who can handle a variety of client profiles and risk appetites.

While most of our clients are boomers and tend toward the conservative side, we do have others who prefer more aggressive portfolios. Our managers have strategies or combinations of strategies that are appropriate for just about everyone. Still, if one is looking for market-beating alpha, that is not the philosophy we generally adopt. We are very respectful of market risk and educate clients that risk-adjusted returns are what really matters over the long term.

The crucial times for a portfolio are about five years prior to retirement and five years after retirement. If you have a major market downdraft and you participate heavily in that downdraft, you don’t have the time to recover, which can certainly affect the quality of life you have during retirement. So, the bottom line is that a buy-and-hold philosophy might be acceptable if you have a high tolerance for risk, an extremely long time frame, and no plans to touch your capital. But for clients approaching their retirement years, it is generally not an approach we would recommend versus an actively managed portfolio.

I often use the analogy of a plow horse with clients. The horse might not be flashy, but it is dependable, does not complain, and works hard during all types of conditions. We want portfolios that are going to be able to keep working during all kinds of market environments, without a lot of wild swings. While it might not appear very “flashy” to clients, what goes on behind the scenes with our managers is very sophisticated in terms of analytical tools, algorithms, and a nimble approach to managing money.

This business is a combination of art and science. I come from a data-intensive background, which is very important in the planning process. But it also takes real people skills to draw people out, identify their true objectives, and present options in a way that helps them partner in the decision-making. That approach and strategy is what our firm has been all about since we started and it has proven to be very successful for us.