April 1, 2008

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Going Steady

No matter where the market stands, wealth management professionals set stock in bonding with clients.

Larry Warren

April 1, 2008

As the new year began, news from the financial front was bleak. The stock market recorded a series of heart stopping plunges, the Federal Reserve rapidly cut rates, the Bush Administration and Congress cooked up a hasty economic stimulus package, the financial news channels were filled with doom and gloom and nervous investors fearfully checked their portfolios hour by hour. But Utah’s wealth management professionals, responsible for the performance of portfolios held by Utah’s wealthiest residents, took the chaos in stride, and hoped their clients would too. “We have a range of clients with a range of temperaments,” Albion Financial President John Bird reports. “I would love to believe I’ve educated my clients not to worry about it every day, but we’re humans, of course we’re worried about it.” For Bird, periods of market volatility determine how well he’s done his job informing clients that markets will move up and down and that fluctuations are nothing for the long-range investor to lose sleep over. The education process, Bird says, has to begin when the client-advisor relationship begins. “If you don’t start that process until the market is plummeting you’re behind the curve.” Other wealth managers in Utah agree — building the right relationship from the beginning forestalls a lot of angst at times like these. “The more clients understand how we’re managing their money, the more comfortable they are,” says David Young, president of Provo’s Paragon Wealth Management. “We actually discourage people from calling up their statements online because it creates an emotional response and investing with emotion is a huge mistake.” Instead, Young hopes to help clients understand that the proven way to build wealth is by constantly contributing to a savings plan and staying invested long term. “If they’re bailing out at the slightest panic they’ll never achieve their goals.” To keep that philosophy before his clients, Young maintains a Website with a blog and sends out e-mail updates monthly with a newsletter every quarter. Investors who retain wealth management advisors are usually longer-term investors by nature and should be more intellectually prepared for market volatility. That accounts for why such advisors have not been bombarded with calls from clients. “Its actually pretty mellow because what we’re doing is long-term planning,” John Holmgren of Ameriprise Financial reports. “In a way I’m surprised I haven’t heard more from them [lately.] I don’t know if they’re comfortable or hiding under their bed!” Determining Risk Tolerance When shocked investors crawl out from under their beds and make nervous calls, advisors find client angst is usually the result of an improperly set risk level. At initial meetings with new clients, advisors discuss different investment approaches and their probable rates of return. Even though new clients are bringing substantial assets to the table for professional management, they may not have the sophistication to understand levels of risk. “Markets go up and down,” Kevin Mikan frequently tells clients as he reminds them their portfolios are still up over time. Mikan is president of Western National Trust Company and head of wealth planning for Contango Capital Advisors, both subsidiaries of Zions Bank. “We’ll receive more phone calls [at times like these] and our advisors will be picking up the phone to call clients and tell them ‘here’s what we think.’” Mikan’s clients are following more of a total return investment approach, which tends to smooth out the volatility. “When markets are screaming, we’re not going to scream as much, we tend to remain positive” he says of the times when riskier portfolios are tanking. But clients of many other wealth management advisors may have thought they were more willing to take risk than they actually are. The subject of risk didn’t come up much in the bull market of the past few years, but now it does, experts say. “Clients can misinterpret what their risk tolerance is. They think they’re aggressive but they turn out to be moderate,” says John Holmgren of Ameriprise. “We get calls when clients’ risk tolerance level is not properly set,” Young agrees. “We talk clients through what they are comfortable with, we ask, ‘Would you be comfortable if [your portfolio] dropped $200,000 — what’s the level where you wouldn’t sleep well at night?’” Young continues, “There’s a pain threshold they can live with but people generally overstate their pain threshold.” Deep Breaths Wealth managers universally say once clients have established a relationship with an advisor and determined their risk tolerance, they need to stand back and relax, even when markets are gyrating. Today there is simply too much information out there and trying to make sense of it all leads to anxiety. “You can spend all the intellectual capital at your disposal but you can’t control the mob mentality that can happen with your customers,” Mikan observes. “They’re bombarded; they’re glued to TV; they’re reading articles. Constant information is coming to them.” Albion’s Bird agrees. “We do have clients who have a difficult time making the transition from being fully employed and engaged. They don’t have enough to occupy their time and they think about what’s happening to their money.” Bird finds his most relaxed clients are those who’ve thought about what they’re going to do after owning a business or being employed full time. “Watching CNBC and checking your account value all the time will drive you nuts,” he says. “If money becomes the meaning of your life, that’s got to be rough.” Communicating Calm Most wealth managers try to meet face to face with their clients once or twice a year. Nearly all produce some type of newsletter, generally on a quarterly basis, and some use e-mail and occasional phone calls to stay in touch. “When things are going well we tell clients, ‘this is nice but as we all know, markets don’t always go up,’” Bird says. “The issue is to help clients understand how markets work — making sure we’re grounded on what markets do over time.” Bird anticipates which clients will become nervous at market downturns and gives them a call. “We do think it’s important to stay in touch, but we don’t e-mail, we don’t blog, we do it one on one in a conversational way.” Holmgren builds relationships in a similar way. “I have clients from all different levels of sophistication in investing. If something happens that may have a direct effect, I’ll call people.” Holmgren communicates by e-mail as well and sends market outlook pieces generated by Ameriprise’s head office. He also asks clients how often they would like to communicate. Some say once a year is fine while others require more frequent updates. Young takes a somewhat more active approach. He regularly blogs about investments on his company’s Website, and sends out regular e-mail updates and a quarterly newsletter. “We do feel a need to communicate more,” Mikan observes. “Our customers run the gamut from market savvy folks to average folks, and depending on the relationship, our advisors are picking up the phone to call a client and say, ‘Here’s what we think.’” Different advisors using different approaches produce varied results for clients with widely varying risk levels. Some clients may be looking for a rock solid, safe 5 percent annual return, while others peg their risk level at the high end and ride the highs and lows of a more speculative portfolio. Regardless of the approach, those in charge of managing sizable nest eggs for wealthy clients know communication is key. “Performance matters,” Mikan says, “but for most people it’s not what drives their investment decisions — it’s the relationship — the local advisor with whom they can have a real conversation.” He promises, “We don’t give customers an 800 number to a help desk.” Good Measure How to gauge your financial advisor’s success Wealth management professionals design investments for clients only after sitting down with them, learning of their long and short-term goals and needs, and their tolerance of risk. Then portfolios are devised which address individual client’s circumstances. The process leads to widely varying results. There is nothing out there in the market that measures who is doing how well against their peer group in managing wealth for their clients. As one investment professional said, “You can’t go to ‘performance dot com’ and have everyone who manages money show up on a list along with his or her performance.” To start with, there’s no set definition for a wealth management professional. And there’s no set amount for what constitutes “wealth.” Some financial managers have advised on family investments going back three generations, and take care of all financial matters right down to seeing that the family yacht is maintained properly. Others come from the insurance industry and deal mainly in insurance products with their clients. Some will sign clients with assets as small as $50,000 while others set thresholds at a quarter or half million dollars. “There are credentials that have carried more weight over the last decade or two,” Ameriprise’s Holmgren observes. The Certified Financial Planner designation requires a college degree and passage of a grueling 10-hour exam covering insurance, employee benefits, investment and securities planning, tax, retirement and estate planning. “Chartered financial consultants give you a sense this person has time and experience in the industry,” Holmgren says, “and has experience working through market cycles.” Measuring performance though, “gets a little mushy because there are so many benchmarks,” says David Young of Paragon Wealth Management. For managers who invest their client’s money in equities, the S&P 500 is the usual standard for measuring success. On that score, Young can point to a 10-year record of beating the S&P with compound annual 18 percent returns. But few advisors structure broad portfolios for all clients like Young does. More often, advisors design individualized portfolios tailored to the needs, expectations and risk tolerances of each client. At Ameriprise, John Holmgren uses Morningstar and Thompson Financial reports to pick what he calls the “best ingredients for the recipe.” He looks at funds with a minimum of three years of returns and preferably a five-year record. He selects funds from the top quartile of the group, and then monitors each fund, switching out of them if they drop from the top quartile. So if there is no objective standard by which to judge advisors, where do the well-heeled turn for advice on investing their assets? It’s a critical decision that will determine how closely their long-range goals mesh with the reality of the monthly statements. “Interview several,” Holmgren advises. “We all have different personalities but our companies have similar approaches.” He says the best way to decide whom to interview is by getting recommendations from friends who have experience with advisors. Also follow leads from others who have a piece of your financial life. Your CPA, tax attorney or banker may have relationships with advisors they know and trust. Look at the depth of the team each advisor can call on. Advisor relationships with tax and estate attorneys, insurance underwriters, CPA’s and other specialties can help integrate all facets of financial planning in one shop. The SEC regulates investment advisors. NASD regulates most brokers. States regulate insurance sales persons. But no one agency stays on top of financial advisors – an ill-defined profession virtually anyone can claim to be part of. Unless the day comes when standardized formulas can be applied to financial advice and you can print out a sheet of top performing advisors, the ability to pick the right advisor to nurture your nest egg will remain highly subjective. Use referrals from friends and mentors, interview several, find a comfort level with one and come up with a realistic level of risk. And watch your accumulated wealth grow long term while ignoring the inevitable downturns like we’re feeling now.
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