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Tactical strategies to combat risk

by May 8, 2014Advisor perspectives

Tactical strategies to combat risk

by May 8, 2014Advisor perspectives

Michael Pennica • Colorado Springs, CO
Pennica Financial Group • J.W. Cole Advisors, Inc.

Following his 23-year career in the United States Air Force, Michael Pennica embraced Colorado as home to Pennica Financial Group. His background in areas such as military intelligence and analysis provides a unique skillset for the building of his financial-services firm.

Proactive Advisor Magazine: I see from your biography that you had a distinguished career in the military. Tell me how you made the transition to financial advisor.

I had a combined 23 years of service in the Air Force. The Air Force was wonderful to me—providing a terrific education, training, and affording great opportunities around the world. But I like to say they made a mistake sending me to Colorado first, as that then became where I knew I would want to end up. So after leaving the service, and after a few twists and turns getting my feet wet in financial services, I have now been an advisor for over 20 years in Colorado Springs.

Is your practice centered around military personnel?

Not exclusively, but it gravitates toward them. Trust and familiarity in relationships is so important to that community, and we speak the same language. The Colorado Springs area is full of current and retired military, many of whom have started their own businesses, and many others in the defense-related industries. We have a very good client base and referral network in that regard.

You started your own firm, Pennica Financial Group, in 1993. What do you believe differentiates your practice?

First and foremost, one of the principles we stand on is that we do not distinguish between high-net-worth clients and those who may not have a ton of investable assets. Our goal is to serve all clients with the same level of service. A big part of this is our belief in active investment management. Active management is not just something that should be reserved for the ultra-wealthy—we want to show people from all walks of life how it can make a difference.

How do you explain active management to potential clients?

It becomes relatively easy to explain once we are able to look at their current investments. Most will walk through the door to that first meeting with a typical buy-and-hold approach to their portfolio. And that is where it becomes interesting.

I will typically say to a client, “Let’s look at your returns over three years, over five years, over 10 years, and even from inception. What’s the average return on what you have been doing and what has the volatility been?” And then I review the historical performance of some of our active managers and show them what happened to the markets in 2008 as compared to their portfolio—real numbers, apples to apples.

Then I ask: “If that were to happen again, how would you want your portfolio managed?” And 99.9% of the time the answer is the actively managed approach.


Do you think within the context of that conversation that most of your clients or prospects understand portfolio risk management?

We spend a lot of time talking about that. Are they an expert like us? No, but clients do understand risk.

Do they understand the technical details of that risk management, in terms such as alpha and beta? They probably don’t. But when I take my car to an expert auto mechanic, do I really need to know what kind of sealant they used when replacing the seals?

Not really. I’m just concerned that I am able to get in my car, turn the key, and have it do the things it needs to do. Similarly, I want my clients to know risk is being managed at all times for their portfolios. I have personally seen three major downturns in the equity markets, as have many of my clients. Conversations are very different today than they might have been 15+ years ago, and protection of capital is of prime concern for everyone.

The flip side of that, though, is the need to grow assets, right?

Absolutely. And again, this is where active management comes in.

The third-party managers we use provide a lot of tools made for easy comparisons for a client to look at.

We can take a copy of a client’s brokerage statements, plug it into our management system, and we’ll plot out a very specific comparison.

We can say, “Mr. and Mrs. Client: here are the funds that you have used, and if we were managing the account, at the same risk level, here’s a range of probabilities we could have expected the portfolio to perform using a modeling scenario.” And I would tell you the majority of the time, if we were going out over, say a decade, active management is usually going to win in terms of returns and risk management.

Why is that?

It’s because of the tactical strategies and execution that active management has, that you simply can’t do in a buy-and-hold scenario. Look at target-date funds nowadays. We believe they are a great example—a great example of where you don’t want to be. And the potential for improved performance we are talking about here becomes critical in compounding growth over time, outpacing inflation, and ultimately providing the funds needed in retirement.

How do you determine what strategies to employ from third-party managers?

Depends on a large number of factors.

First, we’ll conduct the thorough due diligence on a client’s financial-planning situation and risk profile to map out broad objectives. Then, we look at three buckets in terms of planning: short-term, mid-term and truly long-term needs.

Let’s just speak about the long term. A client will need to get some adequate growth out of that bucket, simply factoring in inflation. We’ve got to be able to stretch this money as long as possible so that people have a good standard of living.

In this crazy market, I’m looking more and more at multi-strategy approaches, simply because I’ve seen firsthand the positives they can bring. They can really cut down on the volatility and be responsive in just about any market condition. And we have third-party managers who can bring multiple strategies under one umbrella.

This helps, of course, as it all starts with the risk-management piece and determining with the client where they fall across the risk spectrum from conservative to aggressive and every shade in between. Having multiple strategies that can be refined for each client is our preferred way to go—minimizing risk as much as possible while still obtaining desired rates of return. I use these same strategies for my own investment portfolio.

Thank you for your time, Michael. Any closing thoughts?

What I get out of bed every day, what really gets me going is sitting across the table from a client and hearing their appreciation for the knowledge we have shared. I hear time and again, “Mike, nobody ever explained this to me quite like this before, or took the time to go over things in such detail.” The satisfaction from that is better than any paycheck I might get.

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Disclosure: Michael Pennica is a Registered Representative of J.W. Cole Financial, Inc. Securities offered through J.W. Cole Financial, Inc. (JWC), member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Pennica Financial Group, JWC & JWCA are separate and independent entities. Non-securities products and services are not offered by JWC/JWCA.

Photography by Paul Wedlake Photography

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