Episode 9: What do money managers do?

This episode discusses the role of a professional money manager and what they do in support of financial advisors.

Transcript

SPEAKER_03 0:02

Discussions on this show should not be construed as specific recommendations or investment advice. Always consult with your financial investment professional before making important investment decisions. Securities offered through registered representatives of Cambridge Investment Research Inc., a broker dealer, a member of FENREC SIPC Advisory Services through Cambridge Investment Research Advisors Inc., a registered investment advisor. Cambridge and Innovative Financial Solutions Consulting Group LLC are not affiliated. So today I thought I would tackle a subject that comes up quite a bit in my daily interactions with people, and that is the question of you know what do financial advisors do. And how do financial advisors actually manage people's wealth or assets or investments and things like that. And that's a pretty fair question. And not every advisor does the same thing. So for example, there is a difference between a financial advisor and an investment broker. Some people may not realize that there are financial professionals that are investment brokers and really all they do is make trades and place investments for people. They don't necessarily uh advise them in the in the sense of what a financial advisor does, nor do they manage their wealth or their assets. They simply uh facilitate transactions for clients. And that's a common uh position in in in the financial profession that while technology has created the ability for people to do stuff on their own, there's still a lot of people who work with investment brokers because investment brokers typically in most cases will have a little bit more knowledge and more information and more understanding about investments, and so they are able to have a dialogue per se with people to answer questions and things of that nature. But they don't necessarily manage like two, three, four, five million dollars or eight hundred thousand dollars or something like that. So there's a difference. Whereas a financial advisor or wealth manager or someone using that term may actually be a person who manages the assets for a person they may have you know, so many millions of dollars, hundreds of thousand dollars have a 401k or a TSP or 403B or something that they rolled over when they retired, and they want that money to continue to be invested, but they also want that money to supplement their income needs, and they want to do it in such a way where they can manage their risk, where the money can still grow, and pay out you know, uh supplemental income to them for their living expenses and lifestyle. So there are again different dynamics and there are different ways that advisors do what they do. And so I thought that they would be a good opportunity to just uh highlight some of the things uh that that are different about you know a financial uh financial advisor versus an investment brokers, uh, versus even a a CFP. Uh a certified financial planner is not necessarily a licensed financial professional, and they are not necessarily a person who manages assets or wealth. They do financial planning, and that financial planning may or may not include uh helping the person make decisions regarding their investments. And so uh CFP is a academic designation, but you don't have to be licensed to become a CFP. You have to have certain academic credentials, and then you have to, of course, pass the CFP test. Whereas a person like myself, who is a licensed financial professional regulated by the SEC and you know uh accountable to the broker dealer, people like myself have to go through vigorous uh testing and training to get certified or get licensed, then we have to go through continuing education on a regular basis so that we are constantly updated on you know what's going on in the industry and what's going on in the in the the regulation changes and and all those types of things. Uh new products come out, so we have to be trained on that. So we get we get trained in multiple areas. We get trained on products, we get trained on practices, we get trained on rules and regulations, and that's an ongoing thing. So, in my opinion, a licensed professional that has again the type of licenses like I have uh series six, series sixty-three, series sixty-five, uh series seven, I have all of those different licenses. In my opinion, that person is at the very least, the very least at the level of what people perceive a certified financial planner to be, if not higher. Okay, now my opinion is that person actually has more training and more extensive um training in different areas than what a CFP does because CFP isn't required to go through all of those different CFP isn't required to go through trainings about annuities, they're not required to go through trainings about um you know uh different types of investment uh products that are being presented to clients in meetings and in you know different venues as a financial advisor. Okay, so from that perspective, not that I'm knocking or you know, belittling a CFP. It's just different. And many financial advisors who again have the kind of licenses like I have, they also do financial planning and and go through, you know, the information that's uh that's uh provided for a person to become a CFP is not exclusive to CFPs. You know, that information is public information that's available to anybody. It just so happens that they have a designation, a certified designation uh that accompanyes it. Well, people like myself, we go through financial planning training, the same kind of training and more that a CFP goes through. So I just kind of wanted to highlight those differences because there's oftentimes a misconception when people ask about a professional health, well, are you a CFP? Are you a fiduciary, right? Well, pretty much a licensed financial professional is a fiduciary. That that that's a buzzword now that's thrown out here that's used to uh uh attract uh uh clients to a particular firm. But for the most part, if you are a financial advisor, you're a series 65 or series 7, you're a fiduciary, you have fiduciary uh responsibility to the clients that you work with. Right? So I thought again it would be a good idea to highlight some of that information. Uh but today I want to actually put a little bit more focused on as a financial advisor, I believe then this is just true in general, that the more focused you are in a particular area, typically the better you will do or be in your performing in that area or servicing that area. And so as a financial professional, oftentimes we use different resources to to help us to serve the clients that we work with. And I'm no different in that regard because my primary focus is my client. My primary focus is understanding my client. My primary focus is understanding what their needs is. My primary focus is making sure that I'm attending to and serving their best interests. Is the best way for me to do that? To be a try to be a subject matter expert in everything? Probably not. I can't be a subject matter expert in everything and try to uh serve myself in every capacity estate planning, taxes, investing, the insurances. Like I am knowledgeable about all of those things, but do I have the time Do I have the time to be the best informed uh professional in every one of those areas? Do I have time to to study everything about what's happening in the tax law on an ongoing basis? Do I have time to study everything that's happening with the changes in the regulations and the industry, you know, rules and guidelines? Do I have time to uh study everything about annuities and the changes that's happening to the annuities and the different annuities that's coming out on the market and the different you know variations that there are? Do I have time to study all of that? It's only 24 hours in a day. And focus on my clients. Do I have time to study everything that's going on in the market and in the economy and what's happening within you know the political climate and how that's impacting uh the markets and the investments and the interest rates environments? Do I have time to focus on all of those things extensively and still be the best that I can possibly be? Probably not. So like most professionals, we utilize resources to help us to be properly informed in the area that we need to be informed about as it relates to servicing our clients. And so one of the things that I do in terms of managing assets and helping clients is I utilize money managers. And money managers are people who concentrate strictly on the things that's going on in the economy, in the markets, the interest rate environment, and all of those variables and the actual investments themselves and what's going on with them to understand when they need to make make changes, what kind of um uh adjustments you know they should be made, uh, when they should be made, and you know, all of the influencing factors that's happening that impacts the market and the economy. So what I uh want to do today is I want to uh share a discussion that I had with uh my money manager and let him uh give you a first hand account on what money managers do and in particular how he does what he does as a support to a person like myself who is a financial advisor and who engages in my particular case holistic financial planning. So today I have with me a very special guest. He is somebody that I work closely with, and um he is in my opinion uh one of the sharpest people in this particular area of specialty that I've known as being in this industry since 2015. So I have a great degree of confidence and trust in him, he has a great amount of credibility. And without further ado, I want to introduce my money manager, Mr. Jason Dom, who works again closely with me and helping me to serve my clients. So, how are you doing today, Jason?

SPEAKER_00 14:33

I'm doing well. Well, thanks for having me and uh appreciate the kind words.

SPEAKER_03 14:37

Cool. So today, Jason and I are just gonna talk a little bit about what money managers do and the role that they play in uh supporting uh financial advisors as a part of the team of servicing clients, and then he's probably gonna share some intricacies that's uh above my pay grade about being a money manager because I'm not a money manager, I'm an advisor. And um, hopefully those intricacies will help those of you who are who are listening to understand a little bit more about money managers and what they do. So, Jason, let's start off with the basic question. What is a money manager?

SPEAKER_01 15:17

So it's a good question because I'm glad that you offered a distinction because sometimes people will confuse their financial advisor with the money manager. Some advisors will wear both at in that they'll be the money manager, or we'll call it Rep. PM or Portfolio Manager, uh, whereas others are going to do it more on an outsourced basis and use other professionals to help them, sort of what I'll call a general contractor, subcontractor basis. Uh, I'm gonna fall into the second camp, which is gonna be more of a subcontractor for the investment management piece of the broader relationship. So obviously, you're as the advisor, you've got a lot of different specialties. You're gonna be involved with cash flow planning and risk management and insurance and estate planning and test and really kind of runs the gamut of all the different things that could touch someone's financial plan. And ultimately, the investment management is just one component of that. We'll get into it a little bit later. My specialty in my firm tries to touch on multiple elements of that, not just the investment management specifically, but broadly, investment managers or money managers are going to really run money within that subset. So either they could do it on a strategy-level basis where they're going to be uh an individual component of a broader portfolio. Maybe they'll take the full portfolio of all the investments and go towards a risk target. Um, maybe they're just a fund manager. Maybe they're running into a specific strategy and they do it inside of an ETF, mutual fund, some other type of chassis like that, all would be kind of encapsulated in that money management or investment manager um. It's just a matter of which direction and how which component piece of that we're looking at.

SPEAKER_03 16:59

Okay. So as it relates to the engagement process with you and the advisor, of course, I know the answer to this question, but everybody else don't know. So as it relates to the engagement process with the financial advisor and the client, how does that interaction work as it relates to decisions that are made regarding the investment options and the you know the general management of the portfolio?

SPEAKER_01 17:31

Yeah, and again, I'll hearken back to again the GC uh general contractor type of situation where you're really sort of gathering, you know the client best, you're the relationship manager, you're gonna understand their situation best, whether it be with their specific risk situation, what their goals are, what are they trying to achieve from a cash flow perspective if they need cash flow, uh, if they're just the longer term, what phase in the in the overall planning process they're in? We like to sort of break that up into three kind of primary parts. You've got your accumulator phase, you've got your de-accumulation phase where you're getting ready for retirement, and then you have their after, which is the pure distribution phase. You know, different phases call for different parts and different strategies, and then each individual person has their own risk, both capacity as well as risk willingness. One is the willingness is how much risk they can actually stomach, what's going to make them lose weight with night. The risk capacity is their specific situation, how much assets do they have, how much timeline do they have, who is their dependence, how many people are relying upon that money. Those are the situations and things that need to be incorporated. You as the advisor are going to be much closer to that client to get a real feel for those answering those questions. There are surveys that can be taken to help start the conversation and guide those, but ultimately we rely upon as professional money managers, you as the advisor, to kind of give us the final say on that, help us understand and broker maybe the client situation to the end actual execution, and then we'll build the portfolio or uh build the risk profile accordingly based off of the specific client needs you push along.

SPEAKER_03 19:07

Okay, cool. So if there's a a client who happens to have some specific interest as it relates to what's going on with their portfolio, while they may want their portfolio to be managed, of course, professionally, but they may have some specific thing like hey, I'm I'm I'm on some NVIDIA or some Amazon or you know, I want uh my my my SpaceX.

SPEAKER_00 19:30

Everybody wants SpaceX right now.

SPEAKER_03 19:31

Yeah, SpaceX, exactly. So um those whole are those options available for people if you know you have they have a money manager?

SPEAKER_01 19:39

Certainly, certainly. You know, we we always and some money managers do allow that. I'll answer their question for myself and then more broadly, because it does depend. So our situation, the way that we manage, we do allow for customization, so it's not just a cookie cutter templated type of situation where everybody looks exactly the same if they're in the same risk target. Uh, we like to hear from the client and understand what they're going through. Typically, that ends up coming, most clients don't care so much about which funds we choose if we're in a fund or mixed type of situation. But with individual stocks, everybody has their opinions. They like to see you know certain stocks, uh, maybe they have an opinion about Apple, maybe they have an opinion about NVIDIA, maybe they like SpaceX. You know, we can add that into the profile and then build around this. So we're not just gonna look at it as a total offshoot, and we're not necessarily looking at it as a competition either. I think that's sometimes a misnomer that people get into is to think, well, I'll message my own little sleeve of money here, and then you manage over here, and then we'll see how which one does better. Well, that's difficult to say because it's all still your money, it's also part of your household if there's a client, and I want to make sure that those portfolios are interacting together, they're not running it up, so that we don't have one size. I don't think most people are going to be shorting, but let's say, you know, in the promoter sense, somebody shorts something and more lost. Well, sometimes offset, so what's the point of holding in both of those? So you have to have your left hand comes to the right in that regard, but we do a lot of work. We want to work around those other either outside positions if they're managing it themselves, or bring them in and then we'll manage the four to them and just say, look, if you have specific circumstances, you want to hold that as a position, or you want to hold NVIDIA in artisanal portfolio as an example, we'll hold Marvell in the portfolio. Very similar to NVIDIA because Justin Long people of NVIDIA just the other day came up and said, Yeah, this is the next trillion-dollar company. They've invested in it themselves, but we also hold it as Marvel instead of NVIDIA and use it sort of as an alternative. So if you want an NVIDIA instead of Marvell, we can basically go one over the other. So we'll work around some of those outside positions using the positions we already have and just look for correlations. And then we would just substitute that so we don't overconcentrate. So we're not going to hold a bunch of Marvell and NVIDIA because both are so tightly tied to the data center build out in the AI train.

SPEAKER_03 21:56

Yeah, so okay. So It's a true, uh, for lack of a better word, a true partnership kind of arrangement between you, the money manager, me, the advisor, and the client as well.

SPEAKER_01 22:11

Yeah, exactly. It's it's meant to be a partnership. It's a lot, the relationship, the way that we have it built, is built for scale so that you're still working with the client and answering some of their other questions, the answering the why behind what they're trying to achieve and getting at some of those other things we talked about. And then you can just pass that along to us and say, hey, by the way, you know, I just met with, you know, you know, X clients over here and they want to do XYZ. You pass that along to us, we make sure we execute it. You and I can talk. That allows you to get back to working with the clients, and I can do that multiple times over with multiple advisors. So it allows us to then be able to furnish and ultimately service a lot more clients as part of that customized type of situation. Whereas the rank and file advisor that's doing it on their own, or what I described at the beginning, the rep SPM, will have a lot harder time doing that because they have to customize while they're also still meeting with the clients. So at the end of the day, they're out of time and they end up in a spot where they have a really hard time scaling in practice or doing both things really well, either being a really good money manager or being a good relationship manager. Those two things are really two full-time jobs. Right, gotcha.

SPEAKER_03 23:16

Absolutely. All right, so last two questions before I let you get out of here. The first one is in terms of looking at what's happening in the markets, the different sectors, you know, the US markets, the international markets, obviously, uh, you know, textiles, uh, technology, healthcare, right, pharmaceuticals, et cetera, all these different industries and so forth. As a money manager, how often and um how intricate, I guess, for lack of a better word, are you looking at all of these different, you know, the political climate, like all of these different things that are impacting um the markets? And um how much does that affect your decision to make adjustments to the portfolio?

SPEAKER_01 24:17

Yeah, it's a it's a good question. There's a lot of nuance to it because there's different styles that certain investment managers carry. Some managers are going to be much more tactical, meaning they're going to make basically anything that they see that could potentially be shorter term in trend or mispricing, maybe in a market, a better way of saying that. But they're gonna go chase that and will ultimately make trades based off of that tactical decision, versus others that are more strategic are going to look more long-term. They'll still look at those shorter-term news type of items and add it to a thesis or to basically building a mosaic towards building a portfolio. And that's really where we fit in. We're more in the second camp is I try to be much more broad strategic, but I'm still paying attention to all the things you just described: geopolitics, politics, you know, what's happening with valuations, markets, economics, rates, et cetera. Like those all factor in to the broad decision making. We just actually just released uh our monthly newsletter that comes about as part of that, just broad talking points. The goal then is to take release the talking points and then have you pass that along to the client. So then the client says, okay, what's the client feel about that? How do they feel about some of the things that we're pushing along? Does that change their risk factor? If I say the market looks like it might be a little extended, we're on a you know four-year bull run effectively, we're at levels cape ratio, adjusted price earnings that we haven't seen since the you know pre-March of 2000 tech crisis, is that a concern? We're not saying call it one way or the other. We're not gonna make broad wholesale changes, just automatically sell off equities as a result of that. But if the client says, gosh, my situation, I've had a big run-up in stocks, I'm getting closer to retirement, things are looking really good, maybe I should take some risk off the table, then we can react accordingly based off of their reaction. So we're gonna take more of a broad strategic approach and keep things pretty much sort of in between the lines, but we'll still give you the feed, the mechanisms to make those have those conversations to ultimately customize the risk to the end client so that they're ultimately adjusted to their specific their specific needs. If you have a client that's 60 years old that's had the same run-up versus somebody like me who's 40, I got a long longer time horizon, you know, those mini shorter term adjustments aren't going to be as required for me as maybe that 60-year-old is going to be retiring in two years.

unknown 26:35

Wow.

SPEAKER_03 26:36

So what I what I what I hear you saying uh is uh, for example, we just recently uh because of the conflict with you know Israel and and and uh Iran and what have you, we just recently had uh a major uh uh political climate, let me use that terminology, that you know had people a little nervous in terms of uh you know selling off and in the market and what have you. So what you're saying is those types of situations don't necessarily um move you to to take any immediate action because your your broader long-term strategy kind of has risk mitigation you know strategies built into the long-term view.

SPEAKER_01 27:23

Well, exactly. It's more it's macro versus micro. So are we making broad wholesale changes to every single portfolio that we're managing as a result of that? No. Are we making micro level decisions and things that happen at each individual client level? The answer is maybe. It depends on the client situation. At the very, very micro level, if we're doing things on a security-based level, then yes, that will impact our decision making as to the climate that we're in. But we we don't like to chase necessarily based off of news flow. Um, again, some tactical managers will do that. They're looking for more of that shorter term, call it alpha, of outperformance to the market. We're gonna take the approach instead of saying, look, those are all news items. I believe that most of those are gonna be factored in already to the pricing, so that by the time you actually respond to them and make the trades, you're already behind the curve. So, how much extra extra value do you get with that from a risk management perspective? The answer is probably not a lot, especially after taxes and when you adjust for risk. So we're more looking at it as purely risk management. Every time that we see, you know, risk management and investment management are totally inseparable. So I primarily see myself as a risk manager if something reaches to a point where I would describe it as a rubber band. If the rubber band is pulled so hard that when it ultimately snaps, which is inevitable that it will, we want to make sure that on the other side of that, that our clients aren't going to feel as much pain. So, can I manage more sorts of the downside and look out to see where are the potential landmines, what's going to happen to trip this market up that would allow us to get out in front of that so that their plan isn't necessarily disrupted for the overall risk management of their portfolio. But that said, some people don't, again, don't necessarily need that, especially if they're hyper-aggressive, if they want to remain long, they don't necessarily need some of the hedges and risk management that we put in, which is why I'm not going to apply it across the board. Some people's risk dictates that they stay in, others, people's risk says, yeah, this might be the time for us to pull back on the reins a little bit, take some profits, or move towards something that's going to be, you know, a lot more hedged to the downside.

SPEAKER_03 29:25

All right. Last question. Uh, before I let you get out of here, uh, I know you got uh somewhere to be or something to do. So um as as as uh um efficiently as you can, answer this particular question. What's the difference between having a professional money manager and all of the nuances that accompany what they do in terms of you know risk mitigation, making adjustments and many of the comments that you just made, versus the belief that uh I can just throw my money in an index fund and you know I'll do just as well. Speak to them.

SPEAKER_01 30:10

The question is always related to at what what points do you do you change the initial investment into the index fund? There isn't much nuance, there isn't much difference. So that's that always comes as a surprise to people by me saying I'm compensated based off of getting them those assets, right? So, like, well, if I could just do it just as well myself, why wouldn't I? Well, because when you first get in, and if you're just basically going to buy and hold for the foreseeable future, there's probably less value to come with just that on the investment management side. It's all the other ancillary stuff that comes with it. So we usually like to accompany our service that allows us to be able to justify some of the asset-based fee that we're charging, more maybe on the tax management side, or if there is risk management that we can do in the intermediary. But as you get closer and closer to that de-cumulation and full-on distribution phase, there's a lot more nuance to what does it look like from, all right, I need cash flow, where am I pulling it from? If I have multiple accounts, if I've got a qualified account, if I've got a Roth account, if I've got a taxable account, a trust, where am I pulling that money from in order to generate the cash flow that I ultimately need to backfill for where I was from an income standpoint? And then how does that factor into some other things? Like so security planning, Medicare, all those things that are impacted also by other taxable income. So where are we ultimately pulling income from, or where are we pulling cash flow? It's very much dictated, but also how much risk should we be taking based off of the overall plan? That's something that I think there's you could do it yourself. There's a lot of you know of literature now available. AI certainly is moving a long ways towards being somewhat igenic in terms of answering and prompting some specific questions. But until you really know the situation very well and the client, you know your client, the the the uh intricacies of how a client responds to risk. In my opinion, that's something to where the the behavioral coaching side of walking you through what happens when a market pulls back by 10 or 15%. What happens to your situation? What's gonna is this another 2008, or are we just in a s in a in a simple short-term adjustment? 2008, 2020, when COVID happened, most recently, Liberation Day last year, we saw a peak to trough of almost 20%. There were lots of people that were more do-it-yourselfers that were saying, look, I need to go to cash. Like I just can't handle this risk. Well, those people ended up selling early if they didn't listen to us and missed out on the next basically rebound, and the rest of the year was up. So those are circumstances it goes the other way too. There are people that now, because the market's been super, super on a full run, are now chasing. They're saying, like, gosh, my portfolio is much, should be much riskier so that I can capture all those returns that my neighbor is getting. It's sort of the, you know, the I'm the missing out approach. Well, you know, at that point, now you're getting in, your entry point is much higher, your risk is much greater at this level than it was had you gotten in three or four years ago. And because you're older now, too, it's sort of doubly impactful. So there's a coaching element to that that I think is just somewhat missed in that perspective, that we can enhance the value that the advisor is providing from a professional side. And ultimately, you know, from my where my fee is, if I can't justify the fee that I'm charging, which I think is is pretty minimal relative to the overall you know value we're adding, then we wouldn't have a business for the last 15 years.

SPEAKER_03 33:26

Yeah. Um, and not to mention the fact that do you have the emotional discipline when there's turbulence going on? Yeah, that induct fund is great when you know the right the tide is rising, but what happens when the storm comes? What happens when that tide is now going low? Do you have the emotional discipline um and and a and a firm enough strategy to be able to hold course and not again do what most people do, which is buy high, sell low, as opposed to buying low and selling high.

SPEAKER_00 34:01

So exactly.

SPEAKER_01 34:02

When to sell and which we didn't say which index to get in either. There's that that that's people define the market. The market is quite segmented and broad-based. And there are certain parts of the market where we say, yeah, our portfolios are really heavy towards index funds and the SP 500. That's a hard index to beat. But then there's other markets like the mid-cap, small cap, international emerging markets, international small cap, some of the fixed income markets. Like those are all distinct markets that maybe aren't quite as solid or as sexy from a standpoint of headlines and you know talking points on CNBC. So if that's the case, then you know when to get into those. And I think in a lot of cases, understanding the risk with each of those as well, so that you're not getting in at the wrong point or just missing out entirely.

SPEAKER_03 34:45

Jason, Ryan, I really appreciate you taking the time to uh give us some detail and some education about, again, money managers and in particular yourself as a money manager. And um, I know you gotta uh go take care of other business. So I'll of course be talking to you soon, but again, I appreciate it. And um, I'm sure that uh that knowledge that you spilled out will uh be beneficial to those who take advantage of it. Thanks for having me. All right, man. Have a great day.