Actively
 managing
 personal
 economies

Eric Alexander • Dallas-Ft. Worth, TX
Personal Economics Group • OneAmerica Securities
Read full biography below

I think we are a little different than the usual advisory or planning firm you will encounter. Our firm name, Personal Economics Group, is pretty descriptive of what we do. Our firm was created to bring an economics-based approach to helping clients with financial decisions, using a sophisticated, research-driven, strategic approach.

We believe that as a culture we need to get back to the basics of money. I focus on the two critical aspects of money with clients: the “how” and the “why.” Once someone understands how and why money works and flows through their personal economy, then the questions of “what” to invest in and “when” start to make more sense.

I do a lot of hard-nosed computations for clients—every day I work as hard as I can for my clients to fight the effects of inflation, taxes, and challenging markets. Money is necessary to play the game of life and I want to help everyone become the best steward possible of the resources they have worked hard to earn.

But I also think that it is not all about money. I want to help people have financial peace of mind so they can do what they enjoy and are passionate about. I want to help educate clients to be smarter and more disciplined in their financial choices to be able to reach the goals they feel are most important.

Our philosophy on managing money and wealth is really pretty simple: to protect against the downside and let upside gains run. We try to build portfolios that can reduce risk and volatility while focusing on the available long-term growth opportunities.

Risk and volatility management is essential in helping clients to have success over the long term. Without a proper allocation, most people will have a lower return than is acceptable for the amount of risk they are taking. Conversely, someone could be seeing very nice returns in some years, but are largely unaware of the excessive risk they are taking to achieve those returns. We believe that first we need to work with clients to understand their appetite for risk in the context of their overall financial plan.

“Classic allocation strategies can be like driving while looking through the rear-view mirror.  We think quantitative, rules-based strategies offer a more modern approach.”

Next, we want to construct portfolios that have a high level of diversification that are suitable for that client’s specific needs. Diversification does not just mean allocations between stocks and bonds—it should involve multiple asset classes and diversification within asset classes. This is also where the component of active management comes in. Another layer of managing risk and volatility beyond diversification can be added through the use of active strategies.

This takes us well beyond the core concept of Modern Portfolio Theory and is a much more important component than when that theory was first developed. The 2008-09 period showed that diversification alone was not enough to try and manage risk, with basically all asset classes moving down together. We are definitely moving more toward the use of active strategies for client portfolios.

It is a sophisticated theory but I think most clients can readily understand the concept of trying to mitigate large losses to their portfolios. We do go through the math of that, which most people do not usually know—the classic example that it takes a 100% gain to overcome a 50% loss.

I also use a golfing analogy. Like they say, “Drive for show and putt for dough.” In other words, it is the combination of all factors of the game of golf that make for a winner and not just who can hit the ball the furthest on occasion. You need to carry a full complement of golf clubs and have to be able to use them all.

It is the same thing in investing. You need all of the appropriate strategy tools, not just one or two, and need to use and apply them at the right time, with discipline and with skill.

On a golf course you also have to be able to react to changing weather conditions. A certain hole may play one way in benign conditions but should be played more defensively in the wind and rain. The same holds true for investing, being able to have strategies that can adjust according to the market environment.

Yes. I think our planning story around personal economics is our real foot in the door for speaking to prospective clients about a different and more modern way to address financial planning. But when it comes to execution, whether it is in the insurance area, legacy planning, or investments, we want to be one of the early adopters. Active management, through the use of sophisticated strategies from money managers and some of our own proprietary work, has been taking hold at our firm over the past few years and should accelerate going forward.

Here is the truly compelling piece of that story: Far too often, I think, financial advisors have been limited in their investment strategy choices for clients. This is not to say they are doing anything wrong or not suitable for their clients, but it has ended up in an industry that essentially offers plain vanilla investment choices. These classic allocation strategies are like the cliché of driving while looking through the rear-view mirror. With quantitative, rules-based strategies, we think we can offer a new, more modern investment approach to clients.

There are three broad elements to that. First, a conservative or moderate client will be able to employ investment strategies that have strong defensive components already incorporated through models, algorithms, and that rules-based approach. The objective here is for clients to participate in equity market gains, but in a more controlled and managed fashion, and to minimize the impact of large market corrections on their portfolios.

Second, for investors with a greater risk appetite, we can use strategies that are still managed for risk, but might have more alpha potential and can even take inverse positions on the market. Or, if appropriate, we can build portfolios for many clients that may include several different types of strategies, each with its own objectives and rules.

The third point relates back my statement of adding a layer of risk management, as we are now able to diversify within strategies and also by using combinations of strategies. And since each strategy on its own is less constrained and does not necessarily have to take a long-only, fully exposed position at all times, there are really several methods of risk management all working together.

As a firm, we are constantly analyzing new actively managed strategic approaches in this vein. For every client we ask ourselves, “Is this where we need to be? Is this the suitable product? Is this the appropriate tool for this particular client’s situation?”

I will relate it to how great musicians perform within the context of a complex symphony. They might not always hit the perfect note at exactly the right time, but they have the skill to make adjustments fast and find that right note. That is how I view active management. It might not be perfect in every decision, but it has the ability to make adjustments quickly and without missing a beat. I see that as a big part of the value proposition we can bring to clients’ personal economies.