Interview: The Planner
In this issue Allan Cohen, CFP, and his partner, Jan Butensky share their philosophy and concepts of financial planning with THE PLANNER. Both earned accounting degrees at Jacksonvile University and after practicing their accounting discipline, joined Prudential Securities. They moved from retail to portfolio management with Prudential and after working together a short ten years, moved from Prudential to the formation of Butensky & Cohen Financial Security, Inc. Outside the office, Allan cycles, in fact, competes every year in the MS 150. Jan confesses that he gets his money's worth, in terms of strokes, on the golf course.
The Planner: Gentlemen, tell us about your clients. Who comes to you for financial advice and why?
B&C: Our typical client has a high net worth and comes to us for conventional financial planning. We do offer a range of services, estate planning for example, and will craft an insurance trust by coordinating our work with the client's attorney and CPA. But the real focus of our work is money management on a fee basis. Usually our client is not attuned to the stock market and is seeking expert money management. Their main interest is in preserving wealth.
The Planner: How do you strive to set yourself apart from the crowd?
B&C: What differentiates our firm is trust and confidence. One can get investment products anywhere... and there is plenty of thoughtful, good advice out there... but total trust and confidence is in short supply. Our many referrals evidences the trust and confidence our clientele feels. Our best source of business is our clients.
The Planner: How do you make an equity allocation with someone who has never invested directly in the market, who is in the third financial stage... and focused on conserving and preserving wealth?
B&C: Well... we have several models ranging from 80 percent equities and 20 percent fixed income... to a model that has no exposure to stocks. We base the allocation on the client's objectives, but most important on their risk tolerance. This decision comes after hours of conversation with the client. We often say to the client "what we offer you is a good night's sleep." We work to get the portfolio to a comfortable mix. We must be certain the client feels comfortable and we stress the negatives much more than the positives. By negatives, we mean volatility. We spend a tremendous amount of time with a client making it clear that a portion of their portfolio is going to fluctuate, and emphasize a long term view.
The Planner: With the allocation settled, how do you go about selecting the stocks?
B&C: We use a top down approach. We begin by breaking up the equity world into ten different macro groups. Groups such as Basic Industry, Utilities, Financial Services, etc. We make sure every macro group is covered. We also make a judgment on the weight of each group... we don't simply divide by 10... it could be 5 percent in one, perhaps as much as 15 percent in another. We then decide which industry within the macro group is appropriate. Let's say we recommend steel, paper, and railroads within the Basic Industry group. The last selection is the company... for example if we go with railroads, there are a number of good railroads to choose from. We are not out to get the best numbers on the street, but the best numbers for the risk exposure. Typically, we buy 12 to 15 stocks for a client.
The Planner: Allan, you have said that an investor with several hundred thousand dollars of investable funds should avoid mutual funds and hold stocks directly. Could you elaborate a little on this strategy?
B&C: First understand we are not opposed to mutual funds, it's just that if you have the net worth, you can adequately diversify investing directly. You gain better control from a tax, timing, and asset allocation viewpoint. The investor in for the long haul can be damaged by unplanned redemptions of a fund.
The Planner: How about from the fixed income side?
B&C: We rarely sell a bond, and if we do it's because of a rating change. We stagger maturities... our duration is about six years and maturity seven or eight years. We are not being paid to bet on a change in rates or to time the bond market. We do a full range of corporate, munis, and treasuries. We don't like the GNMA's or mortgage funds because of the unpredictable principle returns... especially when reinvestment opportunities are likely to be limited by falling or lower rates. I might add we recommend some precious metals and REIT's, depending on the inflation outlook.
The Planner: You probably duplicate some holdings for many of your clients...
B&C: We do. Ninety percent of our portfolio is common to all our clients. This gives us economies of scale, particularly on the fixed income side. We general buy one-half to one million dollars in bonds at a time and of course all players benefit from the lower costs.