Rod Smith • Stockton, CA
Bank of Stockton • National Planning Corporation

With active investment strategies to suit investors of all types, it’s all about finding the right fit.

Proactive Advisor Magazine: Rod, what is the nature of your advisory practice?

I work in a somewhat different model than most independent advisors. I am employed as an investment representative by the Bank of Stockton and provide investment services to banking clients. However, I also have my own independent roster of clients who are not necessarily clients of the bank. For both components of the business, my broker-dealer is National Planning Corporation, which has contracted with the bank. I am very happy with this structure, as it gives me the best of both worlds in many ways.

What differentiates your approach with clients?

First, we do not distinguish between high-net-worth clients and those who may not have a lot of investable assets. If a person has a need that we feel we can address and make a difference, then it is my obligation to serve them well, no matter what their net worth is.

Second, we focus on educating clients so that they have a good understanding of what tools we are employing in their portfolio and why. So many people have sat across from an advisor that talked over their head and they left feeling frustrated or, worse yet, did nothing because they didn’t understand what was being presented. It is my top priority to speak my clients’ language and for them to leave feeling like they have a better grasp of what they are doing and why.

I also have a strong personal belief in active investment management for clients, when that is the appropriate investment approach. Many advisors, like me, were trained in the philosophy of “buy and hold”: a strategy that obviously works well in the good times, but doesn’t do much to protect assets in the bad times. My practice and belief system have evolved over time as I look for risk-adjusted returns that match my clients’ objectives. I believe that any advisor worth their salt should be looking for ways to not only play good offense but also ways to play good defense. Any consistent, winning sports team employs both good offense and defense, and that is at the heart of tactical active management.

We remove the “I think we should … ” from the scenario and rely on the methodology of the strategy.

How do you put that philosophy into practice?

Taking the emotion out of the equation is extremely important. We are all emotionally attached to our money—we have angst and fear when the markets are down and we are experiencing loss. Conversely, we are excited and celebrating when economies and markets are treating us well. Left on their own, most investors will want to chase returns and make decisions about their money based on the basic emotions of fear and greed. Neither of those emotions is necessarily bad, they just shouldn’t be what drive our investment decisions.

We take the emotion out by thorough discovery of the client’s needs and objectives as well as their risk tolerance. We then look at strategies that match that discovery, and when active management fits the need, we employ third-party asset managers that constantly monitor the markets and make investment decisions: whether to be long, short, in cash, etc., based on quantitative analysis and not emotion.

We remove the “I think we should …” from the scenario and rely on the methodology of the strategy. When that message is conveyed clearly to clients, the light bulbs come on and they get excited knowing that a strategy is in place to make adjustments, no matter what the market cycle. I make sure that they understand that there are things that we cannot control—and one of those is the market. They also have to know that there is no perfect science out there; there will be times when we are on the wrong side of the fence and we will experience loss. Our objective is to minimize the downside so that we don’t have to work so hard just to get back to even.

How do you think about managing risk, and what is the role of third-party managers in that context?

There are certain things that I am looking for in a portfolio strategy depending on a client’s specific needs. We have a lot of manager options on our platform to choose from for each client. I look at each manager’s historical record, with an emphasis on what their real risk-adjusted returns are over time and how their specific methodology has played out. That helps me determine what type of strategy is going to fit for a client.

For example, if I am considering a strategy that is fundamentally lining up against the S&P 500, I look at how much risk they’ve taken in comparison: What’s the beta versus the S&P 500? What’s their return, and did they take more risk or less? If they took more, was it worth it? Did they see higher returns? Conversely, a strategic portfolio approach may consistently demonstrate lower beta to the S&P 500 and fulfill our goals over time. That is really the sweet spot for an active manager and what I am ideally looking to present to my clients.

What role does active management play within the overall mix of services you offer to clients?

For years, high-net-worth individuals have had access to investment strategies that were not available to the general population. But now, through technology, those barriers to entry have been reduced. Access to these investments and strategies, through third-party asset managers, has opened the door for the average hard-working individual to plan for their future much like the high-net-worth do.

I highly doubt that high-net-worth individuals just sat there watching their portfolio value decline by 20%, 30%, or 40% as the markets fell in 2008 while their advisor told them to just “hold on, it will be ok.” No, they expect action, and they expect their advisor to look for solid returns in the good times and preserve their capital in the bad times.

And today, with tactically managed strategies through third-party asset managers, that is what we strive to do with clients of all types. Even relatively low asset levels can now be accommodated by our money managers for active portfolio strategies. Money management can be coupled with income planning for retirement, college savings for children, life insurance needs, and 401(k) plans for employers to allow us to utilize a diverse mix of products and services to meet our clients’ needs.