Bob Pearson • Portland, OR
Transamerica Financial Advisors Inc.
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Formulating client investment options.

Proactive Advisor Magazine: Bob, what has been the biggest change during your career as an advisor?

It is pretty amazing, but the people I first started in the business with are still some of my closest associates. Over the years, we have all evolved to a far more sophisticated view of how clients’ money should be invested. My generation of advisors was brought up in the days of fairly simple diversification and spreading the money around among some high-quality investments. It was standard asset allocation.

In the mid-2000s, that started to change. We had seen the dot-com bubble and asset prices come crashing down. No matter how diversified you were in equities, your accounts probably took a pretty good hit. Today, we just do not think that is acceptable as a way of investing money, especially for those close to retirement or are already there. Passive investing is not something we do for clients, and, broadly-speaking, I really don’t see a reason to buy and hold any asset class.

How do you implement that approach?

Our broker-dealer took the lead in introducing us to third-party active money managers. A key part of our operating philosophy is in trying to bring the resources that were once only available to high-net-worth clients to our everyday clients. Over time, an effort has been made to reduce the minimums necessary to work with a wider range of managers. That has been pretty successful, and most, if not all, of our clients now have the opportunity to have top-quality money management for their accounts.

How do you determine an investment strategy for specific clients?

I am a branch manager and therefore very involved with the suitability review for many clients. With my own clients, it all starts with some basic “getting to know you” types of questions related to their finances: What are your broad financial goals and objectives? What kinds of things have you done in the past, or are you doing now, in the way of financial strategies, savings, and investing? What have you liked or not liked, and what has your comfort level been with things you have done in the past? Each of these areas provides plenty of opportunity to drill down and find out some below-the-surface attitudes about money and investing.

Then we apply the more scientific part of our analysis and have a variety of tools to get at things like risk tolerance, time horizons, and income needs in retirement. Only when we have the complete picture of both the softer attitudinal side and the harder analytical side can we get into formulating investment options. Our company is driven by suitability and by doing the right thing for each and every client.

“We try to give each client an investment program they can live with over the long term.”

Describe how you explain actively managed strategies to clients.

First we explain the more scientific data points based on their suitability: their risk tolerance, their time horizon, their future income needs, and other factors. We also discuss how the investment piece is just one part of their overall financial needs, and whether it is life insurance, long-term care, taxation issues, legacy planning, or other factors, these can all come into play.

On the investment portfolio side, it’s about making sure they understand the type of expectations we have for their overall strategies. This is a matter of explaining a range of possible returns, potential volatility, and drawdowns. It is more of a goals-based investing approach, trying to minimize volatility and smooth out returns. There are no ironclad guarantees, but we are trying to give each client or client couple a program they can live with and stick with over the long term. We are not looking necessarily for the highest returns, but we are also certainly not looking to see the types of drawdowns or volatility that unmanaged money will have to endure.

The toughest issue I occasionally face is reminding certain clients that it is not really valuable or helpful to track or worry about markets each and every day, week, or month. That is my job and the job of our professional money managers. Our managers will make the changes they feel are appropriate to the investment environment. Most of the time that message comes across loud and clear, and I have an excellent record in retaining clients and client satisfaction.

What criteria do you use for selecting strategies for a client?

Obviously it all depends on what is suitable for that client. In a general sense, many of my clients are retired and need to draw income from their accounts. We typically look for combining more of a fixed-income strategy with several different equity strategies for a blended overall approach, most or all of which is actively managed.

In terms of selecting managers, we have done a lot of the due diligence upfront based on their historical records, their philosophy, and their consistency in applying their strategic approach. We might use anywhere from two to eight different strategies for a client, and that can range from the very conservative to more growth-oriented or a number of combinations of strategies and managers.

The commonality to the best managers we use is that they tend to be quantitative in their approach. They are not trying to predict the market, but they are using algorithms to identify trends and allocate according to the prevailing trends.

I show clients a variety of materials on how individual managers’ models have performed during different market conditions, using different asset classes. Again, no guarantees, but these managers have a good track record of picking up on the trends—moving to cash when necessary or even going inverse the market in a downtrend.

Has your investment approach helped to differentiate your practice?

Without a doubt. For example, I have a relatively new, very affluent and successful client who has had the opportunity to work with other advisors. When he gained some experience with our firm and came to understand our investment approach, he began moving more and more of his money to actively managed portfolios. He appreciates our focus on risk management, as capital preservation is very important to him. I think it is fair to say that attitude generally applies across our client base and has been very important in helping me to attract and retain clients.