I’ve been fortunate enough to celebrate my 33rd year in this business, and I am prompted to write about one of the biggest fallacies and frustrations that I have regarding assisting clients and prospects in laying the groundwork necessary to lead a richer life.
The fact that RZ Wealth has a fiduciary obligation to continually focus on the best interests of our clients may be valuable for those that have funds in previous 401(k) plans, who work within a mutual fund environment or use traditional investments or tools in building a successful investment plan.
To that end, we consistently fine-tune the strategies and tools that will allow us to manage a client’s assets with an extremely high level of diligence, care and to a large degree predictability. The tools and techniques we employ as well as our access to institutional money managers and investment companies suggest a pale comparison between those attempting to manage their assets with limited tools and resources vs. what we can offer our clients. A comparison analogous to “apples and elephants.”
Retirement plan platforms are generally mutual fund-based solutions and therefore (other than low-interest money market funds or stable value funds within the plan) there is no predictability of outcomes. The same could be said of employing mutual fund solutions, Exchange-Traded Funds (ETFs) and other investments that generally do not focus on managing risk and defining outcomes through unique and specific strategies.
We at RZ Wealth create investment strategies for growth and income with an objective of managing risk and defining outcomes to coincide with needs such as college education, buying a second home or retirement.
Individual Issues for Fixed Income
The simplest of these strategies is that of laddering individual fixed income rather than buying a fund for fixed income.
- By selecting individual issues and laddering maturities, we choose the issuer, ratings, taxability, yield, and maturities of the underlying bonds. In this way, we have a great sense of what those funds will earn when they will mature and at what value. We can choose between taxable or tax-free, current interest-bearing, coupon bonds, or bonds that accumulate to larger face value, zero-coupon bonds.
- A mutual fund or exchange-traded fund for fixed income will have a great diversity of underlying bonds but these are generally not transparent to the fund owner. The bond issuer, ratings, yield, and maturity are generally unknown and there is not a defined endpoint as to a specific date of maturity or value.
Equity-linked CD’s or Principal-Protected Notes
We also have access to equity-linked (structured) CD’s which offer exposure to underlying investments or indices but without risk to principal through either FDIC Insurance on the CD issuer* or the backing of the issuer in the case of principal-protected notes. This is a great way to seek market returns without risking your initial capital!
The downside risk is in the opportunity one would have by buying a traditional interest-bearing CD with a certainty of a rate of return. With the historically low-interest-rate environment that we are in, this opportunity risk has been minimized and has therefore been a risk worth taking for many of our investors.
Institutional Money Management
Additionally, we have access to institutional money managers with a variety of investment strategies many of whom focus on risk management. Some of these are tactical managers who use their considerable research on historical and current data to use signals to dramatically alter the underlying allocation of the overall portfolio. Asset allocation is a generic principal that is used to mitigate risk. Beyond this basic strategy, we seek managers that will also concentrate on their best ideas and offer concentrated portfolios in various areas of investments. A number of these managers work with large institutions or very high net worth clients but are now available for much lower minimum investments through firms such as RZ Wealth.
In addition to the merits of asset allocation and our access to quality institutional managers we also focus on what is now known as “asset location.” Asset location is a strategy that I had written about over 25 years ago which seeks to enhance returns through Tax Alpha. Simply put, it requires financial management with recognition of tax efficiency. Higher yielding and shorter-term trading are relegated to tax-deferred accounts such as retirement plans while tax-exempt, capital appreciation holdings and longer-term trading are focused within a taxable account. Studies have shown that adding Tax Alpha strategies to an overall portfolio. may add several percentage points of return annually.
One of the tools that we have employed and are currently expanding on are our options strategies. In this way, we employ the use of options in hedging risk, increasing yield and seeking an opportunity with limited risk. These strategies are especially important for those investors that have large gains concentrated in a few highly appreciated holdings.
In summary, in market environments such as these, it is necessary to work with an advisor that not only has a fiduciary responsibility to their clients but has the necessary tools, products, and strategies to diversify a portfolio well beyond the realm of traditional asset allocation.
When selecting an Advisor, keep in mind how important the following are,
1) the knowledge to deliver creative resources and management to clients;
2) the ability to work with institutional money managers and Chartered Financial Analysts® to the benefit of clients;
3) having tools that will manage risk and coordinate the style of management to the goals and comfort level of clients in order for them to “live the life they choose” and to sleep comfortably while doing it!
*Principal invested is subject to FDIC insurance.