A variety of domestic and foreign factors are driving some of the Memphis area's largest financial planning professionals toward stocks and bonds in their investment portfolios.
Overall, those professionals, who combined have an estimated $1.6 billion under management, say they feel fairly confident about the current investment climate despite the uncertainty of interest rates and the effects of terrorism and civil unrest on world markets and petroleum prices. There is also uncertainty about the future of corporate earnings, which have been at historical highs the last couple of years.
Memphis Business Journal this week spoke with the heads of five independent financial planning firms: Legacy Wealth Management, Brandon Financial Planning, Shoemaker Financial, Sovereign Wealth Management and Waddell & Associates. Each was asked the same set of questions regarding their firm's investment philosophy and current, mid-year investment strategies.
Universally, the biggest concern is inflation and the Federal Reserve's actions in raising interest rates to try and contain inflation without throwing the economy into a recession. Several suspect the Fed will follow a historical path and overshoot by raising rates once too often.
To better illustrate the sometimes-complex process of financial planning, often done with a mix of economic and historical data and experience, each of the firms was presented with an investment scenario involving a fictitious 45-year-old single woman seeking to invest a recently inherited $100,000 for 20 years.
While each firm agreed to participate in the exercise, they did so with several caveats: primarily, that they would normally begin the process of investing a client's money with extensive interviews to determine the client's long-term goals and tolerance for risk and, secondly, they typically don't work with clients who have manageable assets of less than $500,000.
One firm, Sovereign Wealth Management, said it preferred clients with $750,000 to $1 million in manageable assets, although $500,000 was a "soft" minimum.
The 20-year investment period was seen by most as a suitable time frame.
"It gives you more flexibility and choices when you have a 20-year time horizon and it gets rid of short term problems," says Sovereign's chairman, president and CEO Lane Carrick.
Ray Brandon, president and CFO of Brandon Financial Planning, says it's not uncommon for a client to plan on not touching an investment for an extended period, but inevitably situations arise that change that strategy. The other issue that planners are having to consider, he says, are clients living into their mid-90s and hoping to live on their investments for several decades.
"Being old and broke is bad," he says. "There's just no nice way to put it."
When choosing their allocations, all five chose strategies that were largely weighted to U.S. and international stocks, with a mix of fixed income alternatives, mostly bonds and U.S. treasuries (see chart).
Three of the five say they would divide the investment among four broad areas.
Only Legacy Wealth Management took a three-pronged approach with a significant allocation to fixed income.
"We're not like a brokerage firm that has a flavor of the day," says Legacy president John Ueleke. "Our strategy is to determine good asset allocation suitable to the client and manage around that with variance over time, but not significant variance."
Sovereign's Carrick was the lone adviser who suggested some exposure to alternative investments like real estate, capital venture or hedge funds, if applicable to the client's larger portfolio. While he suggested it as a part of the fictitious client's portfolio, he says most investors need manageable assets of several million to consider investing in capital ventures.
Ueleke, on the other hand, says he is currently nervous about hedge funds.
"We think the expenses and risk outweigh the returns," he says, adding he also tends to stay away from insurance products like annuities.
Of the five, only Jim Shoemaker, with Shoemaker Financial, chose to put a small portion of the funds in cash.
"I believe in a balanced portfolio," he says. "We run the models based on that mix and their risk tolerance and manage to quality."
Waddell & Associates took the most straightforward approach, choosing to put the entire balance of the investment in U.S. and international stocks.
Waddell president and CEO David Waddell says that decision was influenced by the historical annualized returns of the stock market based on a rolling 20-year annualized return. He says using that analysis there has never been a negative holding year for 100% stocks. The worst return in the 20-year period was 3.1% annualized and the best return was 18%; the average is 11.4%.