From the April 2009 issue of Investment Advisor • Subscribe!

April 1, 2009

The Long View

Debra Brede looks at how the market behaved in the past to help convince her clients that things will get better in the future--eventually

Debra Brede is working longer hours these days and devoting more of those hours to face time with clients than during any period in her more than quarter century in the business--even back in the days when she was a fledgling broker making cold calls in the 1980s. Like most of her peers, Brede finds that she's making less for those longer hours as the level of assets under management has declined.

"In the end, what you're trying to do is keep people from making bad decisions," she says of her current role. "They want to sell everything and get out and have you tell them when to get back in, when things are better. They don't understand that the green light doesn't come on. The best time to go is when the red light is on."

Among the bad decisions that Brede has helped clients avoid was getting involved with the world's grandest Ponzi scheme to date. "I had several people ask me about Madoff, and I said I wouldn't do it," she says. "One even came in right before Thanksgiving and had wanted to put money with Madoff, because his relative was with Madoff. I explained about how when I looked into Madoff I couldn't understand how they were getting these kinds of numbers." When the founder of Bernard L. Madoff Investment Securities and former Nasdaq chairman was arrested on December 11, Brede's perception was proven to be on the mark.

Brede is the president and sole owner of the eponymous D.K. Brede Investment Management in Needham, Massachusetts, a wealth management firm serving a base of 400 "active" clients out of 600 total, with AUM of $434 million as of the end of February 2009.

In the past, Brede says client meetings usually ran about 45 minutes long. These days the average is twice that and the conversations start to veer into the realm of psychology. "It's more than just hand-holding," she says, explaining that a lot of what she's doing is trying to help clients understand that they don't need to turn all of their assets into cash. "I try to make them understand that what you take out you can't recover."

Brede has always urged clients to keep five years worth of their estimated income needs in cash, bonds, or other liquid assets and is now suggesting that they adjust that figure to cover 10 years' needs (see Dealing With the Downturn sidebar).

Although she passed the certified financial planner course at Boston University and has been helping clients plan their financial futures for years, Brede feels that's not where she excels. The firm has a CFP on staff who draws up the actual financial plans for clients. "I will then take that information and build the investment portfolio around it," she says.

Brede personally constructs all client portfolios. "I like what is liquid," she says of her investment preferences. "So if I do real estate, for example, I'll do it under a [publicly traded] REIT investment."

Her range of investing vehicles tends to run the gamut of the traditional--blue chip stocks, mutual funds, institutional money managers, municipal bonds, corporate bonds, and Treasuries. For the most part she has avoided the alternative investment arena. Her aversion stems from her days as a broker in the 1980s when limited partnerships in oil and gas or real estate were all the rage. "I used to read the prospectuses and I just felt there was too much juice in it for the general partners and everyone involved, except the investors," she recalls. "A lot of these alternatives I see as partnership deals [that are] illiquid, whether it's private equity or hedge funds."

Looking at History

Although every prospectus will tell you that past performance is no guarantee of future results, Brede believes that history has some lessons to teach us. "People are not moving on fundamentals in this market, they're moving on fear," she observes. "I look at this market and say, 'What an opportunity!' This is a great time to keep adding to stocks, and to stock funds. I don't think these opportunities come up that often."

She notes that an individual who invested $100,000 in the stock market when she started in the industry in 1980 could have walked away with $500,000 a decade later. "And that was an ugly period of time," Brede says pointing to high levels of inflation and unemployment. Now, however, "We've got low interest rates, commodity prices are fairly low, oil is down . . . and when the fear subsides, this market is going to come back with a vengeance."

Brede is positioning clients for the eventual turnaround with intelligent stock purchases, looking at "great stocks," such as Microsoft, Johnson & Johnson, Coca-Cola, Procter & Gamble, Verizon, and 3M, which have been offering dividends above what 10-year Treasuries are paying. "Not only will we get paid with dividend yields--and increasing dividends--along the way, but we're also going to have a nice move in the market," she explains.

"These are companies that are going to be there. You don't need to have a bank on every corner, but you do need to have Band-Aids, diapers, soap powder, computers, phone service. If you look at a stock like Coca-Cola, it's off almost 39% from its price 10 years ago but the cash flow, the earnings, book value, and sales have all gone up. It's not like Coke is selling less Coca-Cola, it's just that the market is saying, 'All these stocks look bad here, let's get out of them.'"

A Full Suite of Services

Like many advisors who began to practice 20 or more years ago, Brede originally operated from a business model that was commission-based. In recent years, all her clients are fee-based and for 100 basis points receive a full suite of wealth management services including asset management, retirement planning, estate planning, charitable donations, tax planning, insurance, cash flow management, and education planning. "It's like an HMO--whatever they need, they get," she says.

"What I do with any client that comes in is to see what their goals are, what their objectives are, what they're trying to accomplish with their life, even what they want to do with their legacy, and then we build a tailored portfolio for them."

It's an approach that seems to be working because even in the market decline her business is growing. "My assets have dropped off, so I had [assets decline] 13.7% last year, but my revenue went up 2.7% because we did take on new clients."

While creating a financial plan, constructing a portfolio, and managing assets are all handled in-house, in some situations outside expertise is required. "It's more like a family office kind of thing. We don't give tax advice or law advice, but if we see a need we'll refer them to the right attorney or accountant," Brede explains, noting that when making such a referral it's important to make sure the relationship will be a good fit for the client.

The firm can also help clients with their insurance needs, usually through Commonwealth Financial Network, its broker/dealer. The firm does receive commissions on insurance, which Brede says usually entails long-term care and term life for younger clients who are still in their prime earning years. Among the insurance products that her clients have begun inquiring about recently are annuities.

"There's a lot of interest in them because people hear 'guarantee, guarantee,'" she observes. "But when you sit them down and say, okay 'AIG, the world largest insurance company, is in a mess. That's your guarantee. How safe is that?' I really make it clear that the guarantee is only as good as the insurance company. When you see the world's largest [insurer] being such a mess, we've got to worry about what could happen."

Brede is not opposed to clients using annuities, but she wants them to know what they're buying. She urges clients, if they are so inclined, to use only a portion of their portfolio, say 10%, to buy the annuity, and to treat it as a separate asset class.

Nothing to Fear but Fear Itself

Brede firmly believes in the resilience of the markets and the American economy and seems to subscribe to FDR's famous statement about fear. "I have clients who are afraid," she admits. "It's what's on the news and the news is on all the time. At least in 1987 you didn't have as many news channels. We have too much bad news information," she says. "There's always bad news out there, but there's more bad news today, because there's more channels showing it. That's the thing that's scary."

In her opinion, fueling the fear is an inability to grasp the size of the numbers being tossed around. When most people hear commentators talking about $1 trillion the number seems incomprehensible, but when they're told that in today's dollars World War II would have cost about $4 trillion, it doesn't seem so big.

"I don't like this deficit. I think it's horrible and I think that some of the spending is nonsense," she says, voicing a near universal sentiment. "But when you get down to it, we can overcome this. I think people need to be positive about it and say, 'We'll get through it and just go from there.'"

Dealing With the Downturn: In Her Own Words

Her Road to Independence

About the Planner


E-mail Managing Editor Robert F. Keane at bkeane@InvestmentAdvisor.com.

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