Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

2nd Quarter | 2021

Market insights and analysis

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Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

By Jerry Wagner

As humans, we love to mark special events. They’re an opportunity to come together and celebrate with our friends and relatives from near and far.

This year we have been blessed with a number of these occasions.

Of course, the major celebration that everyone in my family has been looking forward to occurred on July 4 when my mom achieved the 100-year mark. Check out her smiling face on the commemorative Smucker’s jar! I marvel that she has lived through the administrations of 18 different presidents since her birth in 1921, while many of us have been challenged living through just one. 

Family from Florida, Texas, and California flew in to join those of us in Michigan for the festivities. Not only did we all have fun seeing each other, but Mom really enjoyed it too! It was a new event for me—I’ve never been to a 100-year-old’s birthday party.

That wasn’t the end of the special events. In June, we had a firmwide party outside at my house honoring the retirement of Peter Mauthe as our vice president of business development. Peter has given over 40 years to being a leader in the active management industry. It was our firm’s first live, maskless event since COVID struck! It was like a reunion after being apart and operating virtually for so long. As you can tell from the following photo, Peter (left) and I had a great time.

July also brought the ninth anniversary of the start of our FPI subadvised Quantified family of mutual funds, which began with the introduction of the nation’s only fund designed to track the daily price change in gold—The Gold Bullion Strategy Fund (QGLDX). That year, we also introduced the Quantified Market Leaders, STF, Managed Income, and Alternative Investment Funds. Today, the fund family has grown in size to 12 funds and manages $1.25 billion in assets.

And the celebrations won’t stop there. In August, we will have an anniversary celebration for our executive vice president, Renee Toth. By that month’s end, Renee will have become the first FPI employee to reach the 30-year mark (besides me, that is).

We started the year off with the announcement that February 1 would mark the 40th anniversary of Flexible Plan Investments, Ltd. (FPI). To celebrate, we kicked off a charitable giving campaign.

I’m happy to report that our goal to provide $40,000 in matching donations to charitable organizations across the nation is nearing its objective. As of July 14, we have matched $38,645, generating total contributions of $77,290 to 69 charities nationwide. We’re still seeking nominations and contributors to reach the $40,000 mark.

With the anniversary, our marketing department dubbed 2021 the culmination of our “40 Years of Innovation.” Many of our firsts in the financial advisory industry are detailed here.

Rethinking investor risk profiles

This theme of innovation was brought home once again as I read of some new ideas in our industry.

Last week, one of my favorite financial commentators, Michael Kitces, conducted a webinar on “Rethinking Risk Tolerance.” As discussed in the financial press, the seminar made some very important points.

According to Kitces, financial advisers need to make use of suitability questionnaires in working with their clients. And these questionnaires must assess not only the risk capacity of clients but also their risk tolerances or attitudes toward risk.

The former is necessary to conduct the traditional financial-planning process and focuses on the amount and liquidity of client assets, income needs, and time horizons. It is essential to determine how much risk a client can absorb given the volatility of the financial markets.

Equally important, and not always measured, are their clients’ risk tolerances and attitudes toward risk. Attitude toward risk can determine whether a client can stick with the financial plan once it is developed and deployed.

Back at the turn of this century, during our 40 years of innovation, FPI developed a suitability questionnaire that addressed both of these important measures. It is still in use today.

Kitces also pointed out that even having those measures is not enough. Both of these factors can change over time, and opportunities should be available to remeasure them. At FPI, we provide clients with the continuous ability to resubmit their questionnaires on the OnTarget website. We also send them quarterly reminders to review their posted suitability information and make any needed changes.

If clients are struggling with understanding or tolerating their returns, advisers have the ability to look first at the client’s suitability profile and to ask their client to retake the questionnaire at any time to see if any changes have occurred. Furthermore, when a client strategy change is requested by an adviser or client, a new suitability questionnaire accompanies that request.

Additionally, Kitces noted that a conflict between the risk capacity and the risk tolerance measures can exist. For example, two clients with conservative risk tolerances may have different risk capacities: One may have a limited capacity for risk that is aligned with his or her assessed tolerance, and the other may have a much higher risk capacity.

Kitces seemed to be saying that to deal with this mismatch, advisers have to help clients “reset” their goals. The problem is, that really means those clients must reset their risk tolerance.

This is not an easy task, but traditional advisers try to tackle it by educating clients about long-term market returns and the need to “grin and bear it” through fleeting bouts of volatility. Experienced advisers will testify to the fact that a successful adviser will need to combine that with a lot of hand-holding.

Undiscussed was another possible solution: Change the makeup of the portfolio rather than the client. The investment need not be limited to static, single-strategy portfolios. These portfolios can only provide a single level of risk management—diversification among assets.

In contrast, a portfolio of actively managed strategies provides a multi-layered defense against market volatility. The “multiple strategies” provide diversification of both assets as well as their effectiveness in different market environments. The “active” nature of the strategies means that the mix of aggressive and defensive asset classes and/or strategies is constantly changing and reacting with the vicissitudes of the market environment.

A portfolio’s risk should be less than the sum of all its parts

A consequence of this is that it is often possible to deliver a portfolio more capable of bridging the gap between mismatched risk capacity and risk tolerance. The interaction of the many moving parts of a dynamically risk-managed portfolio of active strategies creates more risk-reduction opportunities.

The dissimilarities of the strategies and assets working together can help to offset the risk of each. This can lower the risk measure of the portfolio as a whole while preserving some of the higher-return opportunities of many of the more aggressive portfolio components.

Our turnkey strategies—QFC Multi-Strategy Core, QFC Multi-Strategy Explore, and QFC Fusion 2.0—are designed to provide an easy path to these advantages.

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Like in most aspects of modern life, the financial-services industry is continually delivering innovations to try to rethink a problem or develop a solution. Sometimes these are game changers and other times just improvements. Sometimes they are new to the industry and other times they are just new to a participant in the industry.

After more than 40 years, we consider innovation part of our DNA—not just a special event. After all, at Flexible Plan Investments, the non-traditional is our tradition.



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