Steven Redelsperger • Minneapolis, MN
Redelsperger Financial Group • Cadaret, Grant & Co., Inc.

Lowering client financial risk has been a top priority for Steve Redelsperger since 2008. Integration of the strategic models of active money managers with his firm’s financial-planning model has worked for the good of his clients and the growth of his practice.

Proactive Advisor Magazine: Steve, what are some issues you work through with clients?

It is really the same macro issue over and over for most of my clients. People generally just do not have a systematic tool or model to pull together all of the elements of their financial life and to track their progress versus their goals. They have many financial tools or products that they have accumulated over the years, but no systematic way of making sure they are working together in the most efficient and coordinated fashion. Since one of my top priorities is helping clients in lowering their financial risk overall, I am very process-oriented, especially in the area of risk management.

Can you describe the process?

We use a model that breaks elements of financial planning into three broad categories: protection, savings, and growth. Without going into a great amount of detail, the protection component covers all elements of insurance products, disability coverage, personal liability, Social Security, wills and trusts, etc. The savings bucket covers liquid assets, CDs, savings accounts, 401(k)s, IRAs, annuities, the cash value of life insurance policies, etc. And growth refers to investment assets outside of tax-deferred vehicles, whether it is stocks and bonds, real estate, MLPs, or other asset classes.

In all of these areas we are looking to reduce risk while allowing for financial growth and stability over time. The real beauty of our model is how it can capture the most detailed information and organize and illustrate it in simple and highly visual one- or two-page exhibits. It is a very fluid process that can be updated frequently and efficiently, and also tracks changes in debt obligations and cash flow.

Let’s focus on the growth component. What is your broad investing strategy for clients?

It is all about risk management. I am not interested in trying to hit home runs for clients all of the time. I’m looking for decent rates of return. I can see from my models that if I can eliminate or limit those occasional negative annual rates of return, then the portfolio can have a decent rate of return over time. It is about trying to avoid the one or two years of deep losses that can derail a portfolio’s total performance.

This is a prime reason why I’m using active money management—to protect that downside without losing too much of the upside. I will also consider using insurance products, especially for retirees who need to count on stable sources of income. If our active money managers, for whatever reason, have a lackluster year, we know there will be an income stream available without market risk for those retirees. So we’re looking at all different ways to reduce risk. If I can reduce risk overall in the portfolio by combining products, then I will do it that way, rather than use just a single product.

How did you first get introduced to active money management?

I have been in the business for quite a few years and started out with a pretty typical investment approach: heavy on mutual funds, smart allocation models, and rebalancing and reallocating. My clients were well-diversified going into the dot-com era of the early 2000s, but still, the anxiety and depth of the losses were very tough to swallow.

I believe buy-and-hold investing may work in theory over a very long time frame. The issue is that most people are not mentally prepared to accept large losses that come with downturns—nor should they be. It is a natural reaction to want to run to cash near the bottom in a downturn. 2008 was really the last straw for me, and I knew my clients needed more protection from market crashes going forward.

Frankly, it was a little tough for me to turn over some control of my clients’ portfolios. I have a strong mathematical background, have always been a student of the markets, and I think am pretty sophisticated in terms of investment strategy. But it has become apparent to me that active money managers have tremendous resources and models that I cannot replicate on my own, nor would I have the time to monitor anywhere near as effectively.

I also like the fact that some of the active managers we use have tactical components built into their strategies that allow for profiting during down markets. That is a very appealing strategic element for clients. The more scientific and disciplined approach of third-party active managers also fits in well with my quantitative orientation in general.

What other reactions do clients have to active management?

I told you I am very process-oriented, but that does not mean that there is just one solution for every client. Clients like the fact that the managed accounts we use are completely tailored to their specific risk profile and their financial plan. While we use some excellent risk-profiling tools, we have to make sure that each client’s response is fair and accurate, so I tend to walk them through that very specifically.

We also need to make sure that those assets earmarked for active money management carry an appropriate risk level in the context of every other element of a client’s financial plan. Clients appreciate that we treat their needs as very unique, linking them to the appropriate method of professional investment management.

There is also a secondary benefit to active management in terms of client attitudes. Many clients, especially prospects and new clients, are still overall very concerned with the risk in the stock market after two major crashes this century. Explaining the active management story and its risk-management focus helps overcome at least some of those fears.

As my practice continues to grow, I continue to move more and more client money into active management. This approach has benefited the clients of our firm for several years, and I believe it will remain a successful approach going forward.