Author: Leighton Langan

Nitrogen Welcomes Redwood Investment Management to the Partner Store

We’re thrilled to welcome Redwood Investment Management into the Nitrogen Partner Store, your one-stop collection of world-class models available right in your Nitrogen account. Advisors can now access 15 unique Redwood Engineered Risk-Budgeted Models at no cost, drop them right into their accounts, and customize them with just a few clicks.

Redwood Investment Management is an institutional boutique money manager that partners with financial planning and retirement planning advisors by providing customized turnkey investment model solutions including private label marketing and client service materials that lead to enhanced client experiences and accelerated advisor growth.

Redwood’s research and experience demonstrate that by quantifying and managing Risk First, investment success follows. This RiskFirst™? philosophy is the foundation for managing our Engineered Risk Budget Models, which combine the benefits of low-cost passive beta with active, tactically risk managed, alpha pursuit to produce next generation multi-asset class, multi-strategy investment solutions. Defining the Maximum Drawdown (peak to trough loss) as the primary objective and then constructing efficient portfolios that stay within their defined Risk Budgets facilitates advisor-client relationships focused on controllable and achievable objectives. No one can control portfolio returns, but Redwood can manage portfolio risk.

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Podcast: How Nina O’Neal Wins Hearts with Nitrogen

We were thrilled to hear a Nitrogen client and power user, Nina O’Neal of Archer Investment Management, make an appearance on Michael Kitces’ Financial Advisor Success podcast.

In addition to her insights about what it takes to run a successful advisory firm over the long term, Nina dove into best practices with Nitrogen around the twelve-minute mark and shared how her technology toolkit helps her deliver better advice to her clients.

Great stuff, right? Here are the three main observations we took away from listening to Nina’s interview.

Risk, Front and Center
During the interview, Michael Kitces commented on how historically, identifying a client’s risk tolerance has been seen as something to be checked off a list, so as not to incur issues during an exam, rather than an integral step in building the advisor-client relationship.

But Nina sees risk differently. Though there’s nothing better than Nitrogen for best-interest documentation, Nina “does risk right” by making it a central part of setting expectations from day one with a client.

When positioned at the beginning of a relationship, the Risk Number® becomes a key part of how Nina shows a prospect that her recommended portfolio is going to help them achieve a “comfort zone” with their investments.

A Language Everyone Understands
A conservative investment portfolio may mean something different to everyone. As Nina points out, her 91-year-old grandfather owns 100% equities, but he considers himself to be a conservative investor.

The Risk Number makes conversations easier for Nina, because it gives her a clear reference point that everyone understands. 

When risk is level-set on an objective scale, it gives Nina a clear definition and room to explain how a client’s previous portfolio and their new recommended portfolio compare to each other, and how that difference affects their perception of what their investments should do.

The Behavioral Side of Risk
Nina uses Risk Assessments in-person with prospective clients so she can read body language and get a deeper understanding of how each person feels about the emotional side of investing.

This tactic is especially useful with couples, who may not always see eye-to-eye on how they want to invest. 

As she observes the conversation dynamics between couples, Nina not only gets clarity on their individual and shared Risk Numbers, she also gets an early heads up on how to tailor the expert financial advice they need to receive from her.

These are only three takeaways from the podcast, and you can learn much more about deepening client relationships during the full one-hour and fifty-three minute recording.

Listen to the podcast or read the interview transcription here on Kitces.com.

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How to Reduce Your Firm’s Risk in an SEC Examination

The SEC’s Office of Compliance Inspections and Exams recent report outlining their 2019 examination priorities has some interesting statistics and insights for financial advisors to consider.

Chief among them: A few years ago, the examination rate of RIA firms was under 10%, and now it’s closer to 20%.

So with your chance of being audited going up by double in about five years, you have to understand how to limit your firm’s risk. The risk a firm poses to the investing public is one of the primary factors the OCIE uses to determine who to evaluate first, and how often.

In our new whitepaper on the OCIE’s 2019 exam priorities, we go deep into what firms everywhere should be concerned about and how to make positive changes before an examination occurs.

In today’s blog, we’ll carve out just a small piece of information from that larger report.

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How Nitrogen Retirement Solutions Works

According to a recent study by the Department of Labor, 88% of all 401(k) plans have fewer than 100 participants, totaling more than $600 billion in assets. The emerging corporate market is ripe with opportunity: startups and growing companies want to attract good talent and having a solid retirement plan offering is a key part of their strategy. Few of them know where to start when it comes to setting up a plan for their company.

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Enhancing Our Market Assumptions and Young Investment Analysis

By Mike McDaniel
Chief Investment Officer at Nitrogen

Today I’m incredibly excited to share about two meaningful enhancements to our calculation methodology that will take effect on January 7th, 2019. We’re updating our “Long Term Consensus” capital market assumptions and improving the way Nitrogen approaches young investments, and I’d love the opportunity to fill you in.

Putting the “Long” in Long Term Consensus

Since we rolled out “Advanced Risk Modeling” back in 2016 we’ve seen thousands of advisors take advantage of the feature, incorporating a six-month outlook for the US Equity and US Bond markets into the calculation of the Risk Number® and 95% Historical Range™ of their portfolios. With Advanced Risk Modeling, we’ve equipped advisors with the ability to completely customize these market risk assumptions.

In the last two years, though, we’ve found that over 60% of advisors have opted to use our default “Long Term Consensus” capital market assumptions instead of using custom inputs. Now, it’s time to enhance our default marketing assumptions.

The original Long Term Consensus inputs were established based on a 30-year historical dataset, but we’re often asked to take that a step further.

So now, based on 827 months of data from 1950 to present, our US equity assumption will decrease from a modeled return of 5.20% to 3.75%. The US Bond market input will remain unchanged at 0 bps, based on US bond market return data going back to 1962.

Advisors using our Long Term Consensus capital market assumptions may see a meaningful shift in Risk Numbers and GPAs™ (for example, the lower return outlook of an equity-rich portfolio will likely produce a higher Risk Number).

Moving forward, our team will recalculate these values on a bi-annual basis and make changes if a material difference to either US Equity or US Bond market emerges. We define “material” as a change in the US Equity Market value of at least 25 bps or a change in the 10-year Treasury value of at least 5 bps.

Upgrading Young Investment Extrapolation

We’re often asked about our analysis of investments with a limited history and we believe that having a “lucky” inception date (not existing during a bear market) shouldn’t benefit the analysis of a new investment over others.

We refer to those with an inception date more recent than January 1, 2008 as “young investments.”

Our objective is to empower you to set realistic expectations with robust analysis. With that in mind, we use our existing extrapolation methodology to adjust volatility, and an updated annual return ratio to adjust the stated probable annual return on young investments.

For advisors using Average Return mode, we’ll now adjust the potential annual return of young investments commensurate with the return of the US stock market. We’ll use a ratio that compares the return of each young investment to the return of the US stock market (as measured by the S&P 500 index) and we’ll adjust the displayed potential annual return accordingly.

Consider two investments that both track the S&P 500 index but have wildly different inception dates. One has a lucky inception date in September 2010 (no bear market data) and has an annual average return of 14.14%. The S&P 500, with a full data set (as measured from June 1, 2004), has an annual average return of 8.62%. Allowing the inception date to promote the less-seasoned investment as superior is counterintuitive. We’re addressing this with a simple ratio adjustment.

Since the inception date of the young investment, the S&P 500 measures an annual average return of 14.44%. By dividing these values (14.14% ÷ 14.44%), we end up with a ratio of 0.98. Then we’ll adjust the returns proportionally to generate an adjusted average return number for our young investment. In this case, its annual average return would be 8.44% (8.62% * 0.98).

This updated methodology will even the playing field between young investments and investments with the full data set. This change will only affect the analysis for investments in Average Return mode, so advisors using this mode may notice Risk Number and/or GPA changes as a result of this update.

We remain committed to measuring investment risk objectively, and as always, we’re thankful that you’re empowering the world to invest fearlessly. We love being a small part of your success. Any questions? The industry’s best support team would love to help at support@nitrogenwealth.com.

Keeping Assets in the Family

When working with a client, you’re not just working with an individual: you’re working with everyone they depend on. Who will they pass their wealth to? Who is a partner in decision-making for the household? Wealth is generational and has far-reaching impacts beyond just one person.There are some surprising statistics that show what can happen when an advisor isn’t in touch with the people closest to their client.

It’s estimated that nearly 70% of women will leave their advisor within a year of being widowed. And with the greatest transfer of wealth in history happening right now, many young investors don’t plan to keep their parents’ advisor.

A holistic approach to client wealth can help advisors hold on to assets for the long term and increase the longevity of their business. The problem for some advisors is that it isn’t always economical to give the same service to a $5M client’s $25K child, but we believe there are solutions that make that issue a thing of the past.

An advisor needs the tools to give great service to a variety of clients with different needs and levels of care. “One-size-fits-all” doesn’t work for hats 100% of the time—it won’t work for investors either.

Keeping assets in the family is important for your client and for your firm. Developing a multi-generational wealth strategy is about building trust to manage those funds for any of your client’s beneficiaries, and making sure your client’s assets stay with you for the long haul.

We put together some ways to make that economically feasible.

The Kids Are Alright

The barrier for taking on these lower-net-worth clients is they don’t always meet your firm’s asset minimums.

Let’s talk about that.

Your asset minimum is a self-imposed rule—you can break it. They exist for a reason, of course, but if anybody understands the value of making an investment, it’s advisors. There are some young clients that have tremendous potential. Buy low and hang on for the long term.

For high-net-worth clients with adult children, offering to bring their child into the fold goes a long way in deepening those relationships. No, they may not have the assets of their more-established parents right now, but they will, and won’t you be glad you broke the rules down the road.

If your client’s children are already working with an advisor (or a self-directed robo like Wealthfront and Betterment), offer them a meeting to examine the risk in those portfolios. Oftentimes investors are confused and stereotyped with semantics like “conservative” or “moderately aggressive,” whatever that means. Whether you’re across the room or across the world, quantify the semantics with the Risk Number® so that you can set expectations for the long haul. The results of this initial meeting are usually eye-opening.

If your client’s adult children or spouse already have a relationship with another advisor, your efforts to keep them could be too little too late.

Get the Family Involved

For any new clients, emphasize your commitment to their family as well. When you think about wealth generationally, it’s their wealth too. Making them feel included doesn’t have to be complicated or take up too much time.

Some options for getting the family involved:

  • Invite all of them to a customer appreciation event
  • Send their spouse a risk questionnaire, and suggest a joint meeting to go over each partners’ Risk Numbers together.
  • Send over materials on 401(k)s and IRAs for one of their children leaving college/entering the workforce.

It’s all about building relationships, letting everyone know who you are, and offering help where you can. If they trust your judgment and see you as someone they can turn to from the beginning, keeping assets with you is easy.

For any existing clients, find ways to include their spouse or their adult children. For couples, retirement affects both of them. Retirement Maps are a great way to illustrate progress and open up the conversation for deeper discussions: what retirement accounts are missing from your map, how can you develop a “family” retirement plan, etc.

The Right Tech Makes It Easy

Let’s say that you do decide to take on your client’s lower-net-worth child, for the relationship and for the continuation of assets. How do you make that profitable? The key is implementing tech that cuts down on backend processes and creating channels in your business where you give your time and resources where they add the most value.

Technology enables advisors to automate tedious processes like filling out paperwork and taking payments, skyrocketing practice efficiency. Even a process like rebalancing portfolios doesn’t have to be manual. With new technology, the yellow legal pad becomes a thing of the past. For lower-income clients, the more automated the processes you use, the more cost-effective it is to bring them into the fold.

The consequences of not including the family in your practice can be grim. Advisors lose an average of 70% to 80% of a client’s assets following a client death. By making yourself an essential part of the family’s financial plans, and working with them as they build wealth themselves, you can avoid this loss and build deep relationships for years to come.

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