Optimizing Portfolios and Reimagining Risk
Investing and managing a portfolio is like riding a wave with high highs and low lows. Depending on where you, your business, and your family are in that rhythm, your perspective can easily shift. To weather economic storms, one needs a steady ship and a steadfast captain to keep your portfolio on course and heading for your goals on the horizon.
How should a family optimize their portfolio and manage risk in these tumultuous times? Client Relationship Managers and seasoned professionals, Karen Sankhi and Richard Leon of Richter Family Office (RFO), give their perspective on how to not only stay the course in an unstable economic climate, but also how to discover hidden opportunities.
Times are crazy and this feels like possibly the biggest crisis of our lifetime. What should we keep in mind when managing portfolios during unstable economic times?
Richard Leon (RL): True. Times are crazy. While every crisis is different, in a way, reactions to them are all similar – speaking broadly. The first reaction is usually panic, because the chaos can cause a lot of stress. And while stress is a normal reaction, it shouldn’t be leading your financial decisions. Crises will always come and go. But having a structured approach to your portfolio from the beginning can lead to optimized results in the long run, even if there is economic instability. Three things to keep in mind when general economic instability is prevalent are: financial planning, good portfolio diversification and seeking out opportunities. At RFO, we advise our clients to always consider the diversification of investments in a portfolio – specifically diversification into asset classes that have an ability to be less dependent on economic growth. This allows us to choose funds that could potentially be more secure and provide income and growth in an environment where more sensitive funds, such as equity, would suffer. The current crisis hit certain sectors fast and hard, which can have an impact on investments. When assessing our clients’ portfolios, we look for the weaknesses, and how to counter them, but we also look at opportunities and how to leverage these as they present themselves. Not many people equate economic instability with opportunity, but there are many ways to seek returns from the market’s current state. In times like these, we investigate managers that are performing well or even seek out new managers making headway.
While stress is a normal reaction, it shouldn’t be leading your financial decisions.
Karen Sankhi (KS): Agreed. While the times are certainly surreal, Richter’s experience in helping our clients navigate through crises is very well developed. After all, we have been doing just that for close to 95 years. We see these economic shifts as a great way to seek out opportunities for our clients to develop their portfolios. And as we maintain a completely open-architecture model, we can source best-in-class investment solutions from around the globe. Markets react differently at different times, so there is usually opportunity to uncover. Beyond our history of experience and helping business families weather many a crisis, is our client approach. When assisting clients with financial planning we consider every aspect – going above the numbers. We know each client’s portfolio is unique, but so too is their situation, family dynamics, and lifestyle needs. It’s about more than just returns, it’s also about family, lifestyle and the next generation. We know that it’s important for clients to ensure their objectives are aligned, and their portfolio supports their current lifestyle, so crisis or not, we ensure opportunities fit their needs and always round out their financial picture.
What is the benefit of portfolio diversification?
KS: In short, having different investments in varied asset classes can help maintain financial goals during unstable economic times. Selecting diversified investments for a portfolio is intricate. When meeting with clients and setting up their portfolio we consider many aspects: short-term goals, long-term goals, lifestyle, family dynamics and values, to name a few. Depending on their story and their goals, we then search for investments and managers best suited for that specific client. When it comes to putting together a diversified portfolio, there really isn’t a pre-packaged option, it’s all about customization. This is where RFO really helps families thrive. As an agnostic platform, we have access to the best managers and solutions from all over the world. Furthermore, we also have the valuable help of a wide range of experts from other Richter teams that can offer advice and contacts to our clients. We evaluate each opportunity from an after-tax perspective and ensure it fits well within existing investments. And because we do not manage any solutions internally or have strategic relationships with financial providers, the families with whom we work can feel confident that we are always acting solely in their best interests.
Further touching on the unique aspect – all the families we work with are different. Each is on their own path. We may make investment recommendations to one family that we wouldn’t suggest to another. Simply because we know their portfolios and needs are different. There is no one-size-fits-all solution here, and the families we work with are not beholden to invest only in products available from one financial institution or firm.
How has risk evolved and what can families do to adapt?
RL: The real question here is: what is considered a ‘risk’ for our families? For some, risk is about losing capital, for others, risk is about the inability to fund their lifestyle, risk could also be about estate planning and the transfer of wealth to the next generation – or the sense of uncertainty in doing so. Each risk depends on the family. Therefore, different elements of risk will have varying responses. It’s not so much adapting as it is in defining and assessing the types of risks for each of our clients. This is something we encourage when engaging with our families. Working closely with the families we assist enables us to start a dialogue and understand all the risks as defined by the family members, and their comfort level with each. In turn, this allows us to structure a portfolio with those risks and with their goals in mind – a portfolio with their long-term and short-term goals in mind that considers risk allocation.
How does RFO help investors mitigate the risks associated with an investment?
KS: As family advisors, we encourage an open dialogue with our clients in order to assess their specific goals and ensure that their investment structure provides them with the greatest odds of long-term success. Our approach considers multiple risks and objectives involved in the process so that our families may have the capacity to take advantage of investment opportunities. Our approach enables us to stay ahead of the game and away from a more reactionary approach to portfolio management. By creating a space for understanding the lifestyle, the needs and the goals of our families, we encourage an open dialogue which we believe is an essential aspect of being a trusted advisor to our clients. Another way we can help to mitigate risks is to educate the next generation. It’s something that often goes under the radar when families think of “risk”. Is the next generation prepared to manage? Will the wealth be squandered, or will the children or grandchildren be empowered to become wealth creators in their own right? We have a Financial Literacy Program which is curated to enable participants to learn from our finest resources and experts in a non-solicitation environment. Educational modules bring awareness to the opportunities, issues and challenges of managing a family enterprise or significant wealth – and the risks and responsibilities which accompany it all. When the next generation feels empowered and excited about the responsibilities ahead, the risk of them making more questionable choices or investment decisions is lessened.
It’s about more than just returns, it’s also about family, lifestyle and the next generation.
RL: We can help mitigate the risks associated with investments because our approach is also flexible and thoughtful. Each family portfolio is built with the family’s specific needs and goals in mind. Above all, we acknowledge that in our capacity as advisors we have the responsibility to defer to our client’s judgment, so we always seek out their input. As trusted advisors our role is to be transparent and encourage dialogue so that each and every investment decision is made with our client’s approval. We work closely with families to incorporate existing investments into the plan, and we ensure that all changes make sense strategically and result in minimal tax consequences. New investments are presented to families only after extensive research and due diligence on our part is done. And, in the end, the investments are only acted upon based on client feedback, because we believe in empowering our clients to understand and have control over their financial picture.