Tips for your Financial Future

Retirement might be years away for some of us, but it’s never too early to begin planning. LEAD sat down with Kim Sherwood of Lang Financial to gain some insight on how to build a stable portfolio from the many investment options out there.

LEAD Magazine: What lessons have been learned from financial crises of the past decade and what has been put in place to protect clients?

Kim Sherwood: I’ve been advising for over 20 years and have witnessed several market downturns. This latest financial crisis happened so fast and was hard to predict – and harder to react to – even knowing that history has taught us to stay the course as markets rebound over time.

The 2008 financial crisis was an emotional one that created a lot of anxiety. To keep investors from making decisions based on temporary emotion, insurance companies created products to protect people from falling markets or guaranteed income streams for retirement.

The financial crisis made me evaluate the way I manage my clients’ portfolios by using methods to help protect profits while limiting loss. One way I do this is by using products with trading strategies like stop-limit orders that are automatically executed when the product falls to a certain price. This, too, helps take some of the emotion out of the decision-making process.

Another change I’ve made is choosing products that have greater transparency and allow me to view holdings individually so I can see the makeup of each holding. It provides me with more detail to construct a portfolio that can limit overlap and provide a more concise allocation.

LM: When it comes to investments, how does your decision-making process and risk analysis set you apart from other firms?

KS: Most people see risk as losing money where I believe the greatest risk of any financial plan is actually running out of money. Having to change your lifestyle due to an exhaustion of funds is much more detrimental than   short-term fluctuations.

I see many portfolios that follow the old formula subtracting your age from 100 to come up with the percentage of bonds that should be in your portfolio. This method, on top of our currently low interest rate environment, can bring such a low rate of return that it might not even keep up with inflation.

Retirement has changed a lot over the years and is no longer the gift of a gold watch and comfortable pension. Today, most companies put the burden of retirement on the employee who must not only plan up until retirement, but must also plan through retirement. Longer life expectancies and rising healthcare costs put added pressures on portfolios to perform.

When it comes to evaluating portfolios, I see each household as a four-legged table. The first leg represents cash reserves or emergency funding. The second represents debt management. The third leg represents risk management tools like life insurance, disability and long-term care options. And the last leg represents investments.

The table risks not being stable if one leg is shortened due to an unexpected life event such as medical expenses or expensive car repairs. These events cause the other legs to become weaker by possibly exhausting the emergency funds, increasing debt or putting retirement assets at risk for unnecessary taxes and penalties for early withdrawal.

I work to determine the probability of clients running out of money based on their expected financial goals. We can look at what changes can be made to increase the probability of a successful financial plan. Some considerations may be to include more portfolio risk by allocation changes, increase contributions to retirement vehicles or lower retirement income expectations.

Showing a client that running out of money might be their biggest risk can open them to changing their current investment risk and protection paradigm.

LM: If a person is considering a new investment firm, what should they be wary of?

KS: There are two types of securities registrations that dominate the investment industry – Series 6 and Series 7. A Series 6 representative is only able to sell variable annuities, variable life, unit investment funds and mutual funds. In addition to everything a Series 6 representative can sell, a Series 7 representative can also sell ETFs, common and preferred stock, stock options and individual bonds.

If a client has a large position of company stock or a portfolio of individual stocks, a Series 6 representative is not allowed to advise a client on these positions. Therefore, an investor may not receive the same guidance from a Series 6 representative that a Series 7 representative can provide.

Another type of professional an investor may encounter is an Investment Advisor Representative (IAR). Depending on the state, someone may become an IAR by passing only one of the many financial examinations, and may not require any previous industry experience. An IAR has a fiduciary responsibility to their client to put the investors needs ahead of all others, and usually work on a fee only basis, whereas a Series 6/7 representatives need to recommend a suitable product. This definition is the focus of the new Department of Labor rule that was recently finalized to address conflicts of interest. 

Compliance oversight should also be a concern for any investor. Who is watching and supervising the representative or advisor? Series 6 and 7 representatives are ultimately supervised by a Broker/Dealer. This is the firm that conducts product due diligence and compliance systems and oversight, providing ongoing efforts to safeguard clients and attempt to address compliance issues quickly. The IAR, depending on the amount of assets the advisor is managing, is either supervised by the state, or the Securities Exchange Committee (SEC), but daily compliance is the responsibility of the advisor. This means the IAR must establish and maintain their own systems to stay compliant. This may cause compliance issues to be discovered only during an audit by the state or SEC, which may occur once every couple of years. 

It is always important to check the representative’s industry background. An easy way is to visit FINRA’s BrokerCheck online that will also show you an advisor’s registration and complaint history along with any other outside business activities.

When investors look into a new investment opportunity, it’s very important to fully understand any product you are investing in or service you are receiving. You will also want to be aware of any fees or commissions involved. This means that you may pay something to put your money into the product or pay something to get it out over a certain period of time – which may negatively affect future liquidity needs.

Because of the general overall needs of client, and the highly regulatory nature of the industry, I have created my own Registered Investment Advisory firm, LFG Advisory Services, LLC, but am also dually registered with my

Broker/Dealer as a Series 7 representative and an IAR. This allows me to broaden the scope of my services and provide products that help me to put the needs of my clients in front of anything else. 

Finally, everyone deserves to have their financial affairs handled in their best interest. An advisor should provide products, services and conversations to help a work toward their financial goals. Commissions and the interest of the advisor should never come before the client.

Lang Financial Group is located at 4225 Malsbary Road, Blue Ash, OH 45242. For more information, call 513.699.2946 or visit www.LangInvestments.com. Securities and some advisory services are offered through Cetera Advisor Networks LLC. Member FINRA/SIPC. Cetera is under separate ownership from any other named entity. Additional advisory services are offered through LFG Advisory Services, LLC.

FINRA’s BrokerCheck can be found at www.FINRA.org.