Active investment management’s weekly magazine for fee-based advisors

Rodney Amicone • Palm Harbor, FL
Southern Financial Wealth Management • Innovation Partners LLC

I believe an important responsibility I have as a financial advisor is to educate clients about risk management throughout their financial plan—and to help them build strategies to mitigate risk. This process begins at the early stages of establishing a relationship with a new client.

During the discovery phase, we discuss all aspects of their current financial situation—from how assets are titled to their retirement aspirations. We learn about their goals and objectives, identify potential problems, and point out areas of opportunity. We also delve deeply into their prior investment experiences and how they have felt during past periods of market stress and portfolio drawdowns—and also when they have seen significant gains in their portfolio or retirement savings account.

This qualitative assessment is then supplemented by a detailed risk-profile questionnaire, which the individual client or client couple completes. The questionnaire we use does a good job of evaluating attitudes about risk from several different angles, using realistic scenarios for assessing the trade-offs of potential gains versus potential losses. In my experience, a client’s previously stated appetite for risk only matches their risk assessment scoring from the questionnaire about 30% of the time. I will supplement the qualitative assessment and risk questionnaire results with insights from a client-completed questionnaire that examines their income, expenses, cash flow, assets, and liabilities.

Retirees today face a number of risk factors, including market risk, withdrawal rate and sequence-of-returns risk, longevity risk, tax exposure risk, and the financial risks associated with health care and long-term-care costs as they age. We develop customized financial strategies to help address these and other risks as clients work toward achieving their long-term goals.

Related Article: Dynamic risk management is right for investor portfolios

Regarding market or portfolio risk, I wrote an article for Forbes in 2019 that was targeted to individual investors and framed some considerations that are important as they begin planning for their retirement journey. Here is a brief excerpt:

“One of my favorite books in college was A Random Walk Down Wall Street by Burton Malkiel. Malkiel is a Princeton economist who popularized the random walk movements of the market. His theory states that no one can consistently outperform the market. If that’s the case when approaching retirement, financial self-defense is vital!

“Wall Street brokers tend to buy equities as their values continue to rise. In a major market downturn, brokers often advise holding until the value returns. Bear markets do happen. …

“Were you able to predict any of the past bear markets? If you or your broker were really able to time the market, you would never have to worry about potentially losing your retirement savings in a bear market. Let’s review an example:

“Retirement saved: $1,000,000

“Major market correction: -50%

“Current retirement: $500,000

“If you and your spouse now have $500,000 of the $1 million you originally planned to live off of, the loss could have a damaging effect on your retirement income. With a currently high stock market, low but rising interest rates, business slowing down, a split Congress, and uncontrollable national debt, you should have a defensive strategy to avoid an adverse retirement situation. …

“Where can your hard-earned money go? Is it worth chasing another 5% market gain as you put your dollars at risk? Is the upside return worth the risk of a downside loss? This uncertainty is why keeping the right mix of investments is of vital importance. …

“Working with someone who can develop an investment portfolio that accounts for your risk tolerance and timeline can help preserve that portfolio in volatile markets.”

Disclosure: Securities and investment advisory services offered through Innovation Partners LLC, member FINRA/SIPC. Innovation Partners LLC is separately owned and other entities and/or marketing names, products, or services referred to here are independent of Innovation Partners LLC.

Photography by: Stephaniellen Photography