More times than not, assessing a potential new client portfolio, I see a mix of mutual and exchange traded funds. Some of these are managed mutual funds that carry a high expense and some low-cost exchange traded funds, typically to cover the bond allocation. The question to my potential new client is rhetorical in the sense that I kind of know the answer before I ask. I ask them if they answered a risk questionnaire. They often say yes, and tell me they were a 6 or 7 out of ten. The S and P 500 risk is about 7, on that scale. When I drill down further with questions that identify how much of their portfolio they could potentially lose via market risk, interest rate risk, credit risk and sequence of returns risk, the profile changes dramatically. Then we may discuss the purpose of the portfolio that is not at all addressed in a risk assessment. You must understand that the retail financial advisor community is directed by the broker-dealer that in my opinion, uses risk profiles to cover their brokers, but does not go far enough into risk, other than market risk and certainly doesn’t address the real purpose of those assets being profiled.
Most of us understand market risk, especially with the equity markets having been on a tear over the last year, and then having a Black Swan event, like the Covid virus dropped on us. But many of the portfolios I see involve bond funds or bond ETF’s that have interest rate and credit risk. These funds are perpetual, in other words, have no maturity date. If interest rates go up, bond values go down and you lose money. As an asset manager, I use individual bonds that pay a coupon rate that is steady and sustainable, as well as predictable with a maturity date, so we can manage the income needs of the client while immunizing the portfolio against interest rate risk. We can mitigate, but not eliminate credit risk by using only investment grade bonds. In extreme conditions as we have experienced lately, investment grade can down-grade to “junk” status overnight. We can assess a real risk tolerance and manage a small portion of market risk by using some conservative option strategies. Sequence of returns risk is then managed, in part, because we have managed or mitigated the other risks we already discussed!
We at MHP Asset Management may use a software program that can give us a good first blush at our client’s true risk profile, but even that is not as effective as discussion with the client about the true purpose of the investments and assets. From that point on we can determine the purpose of the assets in the portfolio. We design portfolios with conviction and purpose, and because we are the asset managers, you will never pay a “relationship” fee! What that means to the client is that your portfolio will be crafted for the client’s needs and true purpose, and by doing that, the client will have a true risk and needs portfolio that works just for them. We are a fiduciary advisory that works for our clients, not a broker-dealer. Our specialty is portfolio design, implementation and management. Our clients work with the manufacturer of the portfolio, not the retailer with their additional cost mark-ups. Experience the difference of having an actively managed portfolio that can adjust to market conditions.
