CEO Roundtable: Financial Advisers

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Springfield Business Journal Executive Editor Christine Temple discusses financial planning and wealth management with Shawn Gallagher, associate adviser at Piatchek & Associates; Dave Richards, senior vice president and wealth management portfolio manager at Guaranty Bank; and Ben Newhouse, CEO of Vineyard Asset Management LLC.

Christine Temple: Let’s start with the recession: Will it or won’t it? Predictions have changed so much. Now this concept of a soft landing is maybe sticking more. I’m curious how that’s affected conversations with your clients and investments.
Dave Richards: I would argue that even over the last couple days it’s migrated even to no landing. But you’re absolutely right. We started with the end of last year; I think everybody was anticipating a hard landing and migrated to a soft landing, and now there’s speculation there will be no landing, meaning we will not experience a recession. Labor market is still extremely tight. Corporations have begun to announce that they’re seeing weakness in consumer demand. So, the (Federal Reserve) is doing their job raising interest rates, but how hard or how fast will the economy come back into normal levels, if we can?
Temple: How is that impacting your clients’ portfolios?
Richards: As interest rates have come up, it makes fixed income much more attractive, of course, than what it was 12, 18, 24 months ago. You’re able to buy 5.5%, 6% fixed income that’s very stable, and that’s a nice diversifier in an equity portfolio.
Shawn Gallagher: I always tell our clients there is always going to be a recession on the horizon. As financial planners, that’s where the planning becomes more important. What are your needs? How is this recession going to affect you individually? We did have a recession (in 2022) that nobody talks about, and for some reason that wasn’t labeled a recession, but it was a textbook recession. The stock market didn’t really read it that way, but now I would say the economy seems to be dragging but the stock market’s done really well this year. The fixed-income side is phenomenal right now. There are annuity products out there that didn’t exist a year ago that you can lock in for seven, 10 years to really help with your management of your portfolio.
Ben Newhouse: Shawn brings up a great point from a planning standpoint, and that is you always have to be planning for a recession to occur. One interesting aspect might be that we may have already had a recession; first quarter of last year and second quarter of last year were actually negative on (gross domestic product) and, by definition, a recession is two consecutive negative quarters. The National Bureau of Economic Research did not declare a recession as having occurred. One reason why they may not have is that the labor market has just been so incredibly strong. That said, we may have already had a recession in place, and if that’s the case, then we kind of had a phantom recession back in 2022 and we could very well be turning the corner right now on the next bull market to come.
Temple: The stock market had some gains March through July, but then August has shown some shifts to perhaps a weaker market. The 10-year yield is the highest level since the last technical recession, 2007, 2008. What are strategies to reduce loss? Financial planning is a long game, but people are concerned and maybe they’re checking their stocks a little too often.
Gallagher: Clients are impulsive. I read this statistic that it’s $6 trillion right now held in money markets. Our money market, it’ll pay you 4.5%. So, if you are a bond investor right now, that’s a pretty good alternative. That doesn’t include (certificates of deposit). Every conversation, I’m sure you all have the same thing, is you can go down to the bank and get a CD for 5.5%. I would say there’s a lot of short-term money that’s gone into one-year CDs, so that’s just not going into the stock market right now. People are looking at alternatives to get safe money. If you only need 5%, 6% growth for your portfolio to live the life you want, they’re going to go get it that way.
Temple: I think I just saw the highest CD rate yesterday, 6% at TelComm Credit Union.
Newhouse: It’s getting up there.
Gallagher: We can get a 9% locked annuity rate for seven years as a cap, which that’ll probably average a little over 6% over that seven-year period. You’re not going to lose any money. It doesn’t go down.
Newhouse: Oftentimes, whether we’re trained by the media to do this or not, clients will get fixated on trying to always outperform the market. Really, the first thing that we ought to be addressing is reducing a client’s risk of financial loss. The down days in a market can be so much more destructive on a client’s portfolio than the up days are positive. Last year, the S&P 500 was down 18%. Just to get back up to even, just to where you can start making money again, a client has to make 21.95% this year. If they were really aggressive last year and were in the Nasdaq, which was down 32%, they’d have to get a 48% return this year. That forces a person to have to take a lot of extra risk just to get back to even when they don’t protect their backside. Some of the strategies that we really work on in our firm to reduce that potential loss is we’ll do a lot of dynamic hedging against the market, which proved very effective last year. Another is using noncorrelated assets in the stock market. You mentioned some annuities, other insurance products that don’t rise and fall with the stock market, that big area that we get into is securitized real estate. They have their own unique set of risks and rewards, but they don’t march in tandem with the stock market. Collectively, all these things can be used to help reduce the risk of a major loss.
Richards: Ben, what I heard you say is your asset allocation. Generally, when you sit down and do financial planning with a client, you establish an asset allocation based on their expected returns and their risk tolerance. If you have a disciplined rebalance strategy, it forces you to reduce those equities, those asset classes that have appreciated, and it also forces you to reallocate to those that have underperformed. And so, 60/40 is a typical stock/bond portfolio. If you rebalanced that at the end of 2020, you added to your stock position a whole lot. If you rebalanced that at mid-year this year, you ended up harvesting some of those losses from equities and rebalanced it and hopefully prevented as much downturn as we’ve seen in the first few weeks of August. Very basic, but it forces you to harvest some of those gains and to reallocate back to things that are underperforming even when it doesn’t feel right or feel comfortable.
Temple: In this market, how often should you be analyzing that balance?
Richards: Daily. No, you know, it depends on the client, it depends on the portfolio. They ought to be heavily reviewed on a monthly basis and then set deviations. If we begin to exceed by 5% or 10% in this asset class, that’s when it’s worth recognizing that capital gain in order to rebalance

Excerpts by Executive Editor Christine Temple, ctemple@sbj.net.