Business Innovators Radio - Interview with Fred Cook Partner & Wealth Advisor w/CAVU Financial Discussing Portfolio Preservation

Episode Date: September 14, 2023

In the Financial Services Business for almost 40 years, Fred has spent his career in Banking, Insurance, Investments, Financial Planning and Wealth Management. While most institutions look at these disciplines as competing, Fred has a deep understanding they all need to work together in his client’s financial lives.In order to have the independence needed, and the resources clients demand, he has aligned himself with CAVU Financial. What brought him to the team is their mission. Managing Partner, Blake Rawson, states the mission consists of “partnering with clients to create and deliver the best, objective, independent recommendations for their financial success”. This allows Fred to focus his talents and experience on providing holistic advice, within a “concierge sized” practice.Throughout his career, Fred has developed a style that puts the client first. He listens to their concerns, goals, and hopes, as he attempts to understand where they are today and where they want to be tomorrow. This empathetic approach has allowed him to develop deep bonds with his clients and their families. Advice is then driven by a planning and service model that identifies issues, aligns recommendations, and delivers strategies tailored to each of his clients. Fred strives to be the first person clients call when life changes happen.In addition to his experience, Fred has a Bachelor of Science in Business Administration, Finance, and an MBA, both from the University of Akron.Over the years, Fred has taught University level courses at the University of Akron, was a speaker at many local organizations and radio on the topics of investments, the economy, and planning, and was the featured speaker at a large financial services firm on the topic of financial planning for individuals.Because of his loyal clients, Fred’s practice has grown over the years due to their enthusiastic introductions to friends, family and associates.Fred is past Chair of The University of Akron, College of Business, Department of Finance, Advisory Board. He has also been involved with several charitable organizations such as the YMCA, Boy Scouts, Rotary, Hudson High School Music Association and others.A lifetime resident of Summit County, Fred and his wife, Arlene, live in Hudson, Ohio with their daughter, Allison. He enjoys his family, reading, and traveling.Learn More:https://www.cavufinancial.comSecurities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, LTD and CAVU Financial LLC are separate entities from LPL Financial. Any comments made here are general and not intended to provide ERISA, tax, legal or investment advice.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-fred-cook-partner-wealth-advisor-w-cavu-financial-discussing-portfolio-preservation

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of Influential Entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have with us Fred Cook, who's partner and wealth advisor with Caboo Financial, and we'll be talking about portfolio preservation. Brad, welcome to the program.

Good morning, Mike. Welcome. Nice to be a board here. Thanks for inviting me. You are welcome. I'm looking forward to talking with you. And I always love kind of like, you know, what do you think first when you hear this word? So when I hear portfolio preservation, it makes me think about all the time that it takes to build and grow a portfolio of investments.

Well, now you better put that blockade around it and preserve it. So I'm excited to learn from you, but let's first jump in with, give us a little bit of your background and story. And how did you get into the financial services industry? Well, Mike, I've been in the business of financial services, basically my whole career. So, you know, we're talking 40 plus years, three different organizations, et cetera. And it was really in the banking world that I got started. And eventually, I was actually with an insurance company for a while. And about 10 years ago, I retired and joined a firm called Caboo Financial.

And I have two partners and decided to go independent and basically work with my clients that I accumulated over all those years. And that's kind of how I got in the business and kind of where I'm at right now. I did want to make, before we get too far along here, I wanted to keep our lawyers happy. But really, it's important. You know, our firm, Cavoo Financial, LLC, offers securities through LPL Financial, which is a member of FNRA, SIPC. Our investment advice is offered through Stratus Wealth Partners Limited, which is a registered investment advisor. Stratus Wealth Partners Limited and Caval Financial LLC are separate entities from LPL Financial. Also, it's important to realize that anything that we talk about today and any comments that I

make are general in nature and really not intended to provide specific advice or any kind of recommendations for any individual. Sounds good. You know, one thing that I was thinking when you mentioned you came out of banking and then created your own firm with partners and as an independent. So the word independent jumps out of me because I know that working for a large institution and you didn't mention the name of the bank and it doesn't matter. But typically, you kind of trying to fit square pegs in around hole.

and like you can only offer certain products. And there might have come a time where you're like, wow, Mr. or Mrs. Client, I wish that I could, it's almost like you're thinking this. You'd never say it, but I wish I could offer you something better because I'm limited to this. And is that kind of one of the impetises that you've found when you wanted to break out on

your own to say, wow, look at this plethora of opportunities and options I have to now bring to my clients to serve them best. You know, you zeroed right in on why I left of the bank. retired. But I was sitting in front of a client and the portfolio manager. I was a private banking officer and the portfolio manager and I were sitting with this client who had really gotten beat up in the 2000,

2001 tech bubble and just finally got back to zero in 2007 just in time to get beat up in the 2000, 2008. And so he was, we kind of got involved with him after those two things had happened to him. and I had been using a system, and we'll talk a little bit about it later, but where we really work to avoid those types of things with our clients, and I was doing it personally for myself. I couldn't do it in the bank. And the client asked, hey, if we go through another 2007, how much money am I going to lose?

And without blinking an eye, the portfolio manager said a million dollars. And the client was like, you've got to be kidding. I just got done telling you, I can't afford it. I'm older now. I'm getting closer to retirement. I can't go through that again. And, you know, we had them in pretty much the standard 60, 40 portfolio. Now, I was sitting there at the table knowing that I had the cookie, you know, I knew. And I couldn't bring that to the table because I wasn't independent. I couldn't bring solutions to the table. My partner, who spent 24 years with another large broker dealer, had the same issues. He was being told by the broker dealer what mutual funds he could sell and go out and push these things and push those things. And we both kind of determined, you know, it was time to get out there and

be independent of all of that and really just work on behalf of what our clients want as opposed to what our firms want us to do. Well, that sounds amazing. It sounds very different. So talk a little bit more about what's different about your approach to investment portfolio risk. Is diversification the answer? Well, you know, Michael, when you asked me to join you today on this podcast to discuss what kind of risk people take inside their portfolios, you asked me to think about some questions that I get in my practice. And I thought about it. And, you know, I've been doing this as I mentioned for a long time and have received a lot of questions about risk within inside a portfolio. And I end up sort of being like a human Google when discussing portfolio risk with my clients. So after I thought about it,

I realized that people really ask the wrong questions. You know, if you want, I can share some with you, but what I hope to accomplish today is helping your listeners determine what should they be thinking about as it relates to risk and what questions should they be asking themselves and their advisors. The biggest mistake that investors make, and I think I heard you mentioned this on a podcast of yours, but not knowing what they don't know. Ignorance is bliss and people aren't even really aware of what risks they actually have within a portfolio. so they don't even know what questions to ask. That's a pretty big point because a lot of times I say to people in financial services, you know, hey, you're sitting with clients talking about their retirement. But in reality, before you get into the numbers, you've got to find out what retirement means to them.

What are they planning? What are they thinking? Are you going to start another business, consulting firm, non-profit, are you going to travel more so that you know what gap that there is? So I always say, you almost become a life coach of sorts. Well, that means that you need to ask the right questions. And that's exactly what you're saying there. Know the right questions because if you don't know those questions to ask, you might be going down one path and you should be going down another. Correct. You know, when a client and advisor sit down, for example, to talk about risk. And, you know, I'm talking about risk within an investment portfolio.

You know, there are all types of risk. But let's focus on the investment risk that a client takes. You know, as an advisor, I know that within investment risk, there's market risk, interest rate risk. I read an interesting book called The Seven Faces of Risk, actually conquering the Seven Faces of Risk by Scott Judds. And he points out, in addition to the ones we think about, several other unique types of risks that are hidden within a client's portfolio. But more often than not, when the advisor talks with a client about the risk, they're really thinking the advisor, risk of volatility. You know, how volatile will the portfolio be? Think of it as a staircase.

Generally, it's, you know, heading up or down, but there are stairs which are zigzagging up and down. The bigger the zigs and the zags, the more volatile or, quote, risky a portfolio is. Interestingly, a portfolio that's considered less risky, which has small zigs and zags, even if the staircase is heading down will lose money. What is the client thinking when you say risk?

Pretty simple, isn't it? Not losing money. So right out of the box, there's a disconnect where clients think they are safe, quotes, because their advisor told himself, but in reality, they have the potential to lose money. And historically, as advisors, we made this worse by trying to determine how much risk our clients were willing to take. Now remember, there's a disconnect. I'm thinking as the advisor volatility, clients thinking not lose money. So we ask all kinds of questions around their thoughts about

losing money and what will money be used for. You just mentioned it for retirement, that type of thing. When will they need it, et cetera? And then we would add it all up and we'd come up with a score based upon how they answer these questions. And we would determine their, quote, risk tolerance, right? And then we would come up with terms like conservative, moderate, aggressive. You're a moderate investor, Mike. You're invited. And everybody sat around the desk. Like, yeah, what does that mean?

Yeah, we're all, this is great. We dot our heads like a kumbaya moment. Everybody's like, well, feeling pretty good, you know. And the client would say things like, yeah, I feel like a moderate investor. That's great, you know, or aggressive, whatever it was. And at this point, the client advisor, you just mentioned it, have no idea what the expectations for losing money or making money are. In general, again, the client was thinking,

I can take some risk, lose a little money from time to time, so I can make some money. But you know what, Fred, not too much. The advisor was thinking, well, they can accept their moderate amount, whatever that meant, of zigzagging in their portfolio. And that was the problem. There were no expectations. But as a consumer, we need to rethink the questions.

And here's where we get into the questions. we need to be asking ourselves and our advisors. And this would be something like, how much money can I lose without it affecting my future lifestyle? Now, this is difficult for people to get their heads around. So I like to simplify it. Ask yourself, how much money can I lose before I fire my advisor? For example, yeah, for example, six months from now,

your $100,000 portfolio at the beginning of the year, okay, or now, you look at it six months from now, lost $25,000. Is it time to find a new advisor? Once you determine how much you can lose without affecting it your future lifestyle, we call that your capacity for risk. What is your capacity for losing money? That's really what's important when you think about risk. The next question would be,

does your portfolio that you currently have match that newly discovered capacity for risk? put it in simple terms, Mike. Say you would be okay with losing $10,000 in six months. Now, you're not happy, but it's not life altering and you're and or is it getting to the level of firing your advisor. Now, under certain historical situation, how would your portfolio perform? We call these stress tests and look at the financial meltdown of 2007 and 2008 or March of 2020. Or how about, and this is important more recently, January, 1st of 2022 through September 30th of 2020.

I think we're, 2020, I'm sorry, this year, January 1st of 2020, no, 2022, I'm right. January 1st of 2022 through September 30th of 2022. Most folks would be shocked to learn that that while they would be okay with a $10,000 loss on their $100,000 portfolio, the portfolio had a potential for a six-month loss of $20,000. So it can be, you know, it's, it's that sock in the, it's, it's almost like that sock in the gut when you're, when you're reading the news and hearing, oh, the market, this,

that and the other and all these things. And you're like, what does that mean? And I really like your, your analysis or your questioning about what's your capacity for risk, you know, like I think that sounds like, you know, a nice flowy term, what's your capacity for risk. But when you actually say, at what point. would you say to your financial advisor, you're fired, that kind of brings it home, right? So once you determine that capacity, what are your next steps?

Well, you've guessed it, Mike. We're going to ask more questions. Okay. Yeah. In the example we just discussed, the strategy often provided, and this is probably the standard strategy that is used almost universally is a 60-40 balance of stocks and bonds, where you have 60% in stocks and 40% in. in bonds and that's sort of a first level of diversification.

And then we take, and within each of those, we have a diversity of what types of stocks and we have diversity of what types of bonds. In other words, don't put all your eggs in one basket. We've all heard that. But did you know,

I'm going to go back to my January 1st of 2022 to September 30th of 2022, all diversified portfolio of 60% stocks and 40% bonds was down almost 20% and how happy do you think a client would have been looking at their statement that was $100,000 and it's now valued at $80,000? How much does that portfolio have to gain to get back to $100,000? If you said 20%, you'd be wrong. It has to go up 25%.

And how long will that take to happen? And that's just to get back to even. What that presupposes as well is we need to live. layer and even more risk to get that 25 plus percent to get back to ground zero. And then when you have more risk, then you have more chance for more volatility. So yes, it's just like that, you know, a vicious cycle. It's exactly what it is. Right. And so, you know, what we do at that point when we have these discussions with client is we try to make sure that we stress test the portfolio so that it does align with their expectations. It's not going to be down.

25% or 20 when they were expecting 10. And usually, historically, this meant to further diversify, just the opposite of what you said. In other words, you know, oh, yeah, we don't want 25 or 20. So we're going to even, we're going to go even, you know, less equities and more bonds, that type of thing to be even more diversified. Okay. And that does, and it may work to lessen volatility. In other words, the zigs and the zags.

but it oftentimes results in severely limiting the overall growth of the portfolio. Think of it as wearing an all-weather outfit. On the right side of your body, you wear a short, t-shirt, and a sandal. On the left side of your body, you wear long pants, a parka, and a boot. This way, you're diversified, right? You can survive the weather no matter what it is. But if you think about it, you will always have the wrong outfit on for half of your body, creating an uncomfortable situation, no matter what the way.

weather. And so that's some of the issues that we have with the diversification is the answer. So here are some questions that I think you should ask yourself or your advisor some more. You know, what happens to my portfolio if we have another 2007 to 2009 bear market? And on the flip side, what happens to the portfolio if we have another 2009 to 2021 bull market? And then what would be the overall return from 2007 to 2021 on that portfolio? And then this is important. How long would it take for the portfolio to recover from losses incurred in the 2007 and 2009 bear market? And then I like this one because it's more recent.

It's fresh in people's memory. How would your portfolio perform from January 1st of 2022 through September 30th of 2022 when both stocks and bonds went down. I think with all those dates and what ifs, it makes me think of something. You ever heard of that book called The Blue Ocean Strategy? I've heard of it, yes. The concept is, you know, in anything, business-wise, you don't want to be over in the red ocean where all the chum and the sharks are fighting for, you know, scraps of fish.

You want to be way out of the horizon where the blue ocean is where it's nice. smooth. Well, guess what? In investments and portfolios and all of these things we're talking about, it's probably pretty rare that we have Blue Ocean all the time. We know that there's going to be volatility, maybe bear market, bull market, maybe a mix of two. And I think that's the whole point is you need to have a little game plan playbook for each time if it's fully on bare, fully on bowl or a little bit of both. So when we are talking about now this investment risk and all of this volatility. How do you take all of that that we've now uncovered? Because some of this, you just didn't know what you didn't know until now. How do you take all this and apply it to

portfolios of investment for your clients? What are you doing? And then how are they experiencing good results? Well, we follow the principles of what we call dynamic risk management. And it's a tactical approach. In our business, you can have more of a strategic approach or a static approach, you just sort of buy and hold, and then once a quarter, you kind of rebalance it back to the 60, 40, or whatever. But we would rather use a tactical approach, which combines the theories of relative strength and momentum. You know, we don't base our decisions for what we do for our clients and what we think the future will be. We look at what it is today, what it is and where it is today. The market tells us where it is today.

And momentum gives us the guidance that the situation that we're, we're in should exist somewhat into the future, days, weeks, months, whatever. Think of it, Mike, as a tug of war. You've got equities on one side, bonds on the other. Who's winning? That's relative strength. We have a way of analyzing that to see who's winning. And we can do it not only with all stocks and all bonds.

We can do it within like its growth versus value. We can do a relative strength. Who's winning that tug of war? And we try to strive. we actually strive to position our portfolios on the winning side, knowing that it has an historical probability. It doesn't always work, but it has an historical probability of continuing to win,

and that's momentum. In the end, we win by not losing. That's how our customers have done. If we're wrong, let's say we get in and we think we should be out of the market because, you know,

the bonds are winning that tug of war and we shouldn't be in equities, right? Well, if we're wrong, we tend to be on the wrong side for just a short time. And that allows us to take potentially smaller losses than we would if we just sort of bought and held. And our clients actually, over the years, and we have historical numbers and proof, we can show everybody how this is all worked out. But yes, we've been able to avoid in the past, we've been able to avoid some of these big drawdowns that we've all had to experience that I've sort of mentioned prior. Well, Fred, these have been some super powerful questions that you've brought up. I really love how you've positioned that because when we ask the right questions, we get to the best answer.

So let's wrap up with many final questions that we should be asking about volatility and risk. Sure. The first thing that you should do is what is your plan? Do you have a plan for your investment portfolio during the next bear market or recession? you know, we all think they're coming, right? The recession is going to be here, blah, blah, blah. We might be in a bear market now. You know, who knows?

But what's your plan? What are you going to do? You're going to just sit there and hope for the best. The second question would be, how much risk do you need to take to get where you want to go? And that's a loaded question. You mentioned it earlier. You've got to figure out where you want to go first. But, and then the third one was, and this is one that everybody knows, this is one I've been getting forever.

Well, I run out of money after. I retire. People worry about that and you know, you're not making any money and you're going to run out. And that's probably one of the first most important things we look at with clients. So. Yeah, that's huge. Yeah. So at this point, once people have listened to some of these questions and maybe answered them in their mind, I think that they're going to have even more questions. So what are some of the best ways that people can learn more and reach out and connect with you? Well, if your listeners want a free risk capacity analysis, all they have to do is go to my website, cavoofinancial.com. Cavoo stands for sealing and visibility unlimited. So cavoofinancial.com. And on that website, there's a button there called, What's Your Risk Number? And when you click that button, they'll ask you, there'll be a questionnaire that'll come up.

Now, that questionnaire is based on a process that we put together built on decades of behavior. behavioral economic work, behavioral economic work, and not limited to, but including a framework called prospect theory that won a Nobel Prize for economics back in 2002. But anyway, complete that questionnaire and I'll email them their results and what those results mean in actual dollars. So, you know, percentages don't mean a lot, but when you see in dollars what you have the potential, what your risk capacity is, by going through that process, you'll have a good idea. of what your risk capacity is. And then finally, as a way of thanking you, Mike, for allowing me to share my thoughts today on your podcast. If your listeners mention the podcast,

I will be more than happy to provide them a complimentary report, which analyzes their current portfolio to see if it matches their risk capacity. Now, think about it, Mike. If you're armed with your risk capacity and the risk within your portfolio, you'll be well prepared to have a meaningful discussion with your advisors.

And once that is done, that brings up a potential gap of I'm here. I think I should be there, but I'm not. So what should I do? So I think that opens up a great opportunity for even more questions there. So Fred, thank you so much for coming on today. It's been a real pleasure talking with you. Thank you for having me, Mike. You've been listening to Influential Entrepreneurs with Mike Saunders.

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