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Portfolio > Mutual Funds

How to Get Clients Back on Track

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Martha J. Schilling; Schilling Group Advisors LLC; Dresher, Pa.

The clients are in their early 60s. The husband is self-employed, so his income is irregular, but in a good year they earn close to $100,000.

As they had accumulated savings over the years, their (now former) advisor seemed to use a cookie-cutter approach without doing a total portfolio analysis. Consequently, there was little diversification as each account and three annuities all held the same mutual funds.

More than 65 percent of the $400,000 portfolio’s choices had been replicated in 13 separate accounts and allocated to large-cap, growth-oriented funds.

Twelve percent was in mid-cap stock funds, less than 2 percent in fixed and the balance in cash earning less than 1 percent.

Not knowing how long ago this allocation had been set, I was alarmed it was so aggressive.

I understood then why they had lost better than $200,000 in the last downturn and had not recovered well. Although some funds were from different fund companies — 54 funds in all — the portfolio was not diversified.

Since they started working with our firm, we’ve taken steps to diversify, combine accounts of similar focus, and begin to develop a regular cash flow stream that they can harvest instead of redeeming shares every time they need a little cash throughout the year.

By building a dividend and interest component, they also eliminate the cost of selling mutual fund shares to provide the funds to cover a shortfall they could experience that Social Security and pensions do not cover.

To achieve this, the clients combined several IRAs, eliminating one institution, and increased their fixed-income allocation portion to 30 percent.

We increased yield from less than 1 percent to over 4 percent by putting a portion of the cash to work in ETFs, closed-end funds, REITs and TIPs. These changes provided an additional $600 in monthly cash flow.

The clients’ total portfolio in June 2009 was $417,000. By mid-2010 it had grown to $636,000 by adding small-cap stocks, international bonds and equities as well as increasing the fixed portion. Tax efficiency had not been addressed either, so that is being corrected as we review performance from the last six months and year to reallocate to the correct account. The clients are happy with performance and the improved cash flow has alleviated stress.

James Holtzman, CPA, CFP; Legend Financial Advisors; Pittsburgh, Pa.

The new client was around 50 years old and came on board with us when the crash had already started in September of 2008, but it was not yet in full swing yet versus the trough that the markets had in March of 2009.

Her portfolio of $1.2 million was approximately 80 percent equities and 20 percent cash.

She had a significant exposure to large-cap stocks but had not completed a risk tolerance assessment, so there was a major disconnect between her risk tolerance and portfolio.

We went through her risk tolerance, and the portfolio we put in is what we call a lower volatility portfolio — because it’s very low in terms of its volatility with about 70 percent fixed income and 30 percent equities.

That portfolio really was a very good fit for her and it was a good fit in that environment. On the equity side, the new allocation had two long-short funds, a fund with long-short characteristics, a short-only-fund, and a managed futures fund.

The portfolio held up well — from inception in December 2008 through March 31, 2009, it was up about 1.5 percent while the markets were down about 20 percent.

We’ve since modified the client’s specific holdings but it’s still a conservative mix of 80 percent fixed income and 20 percent equities.


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