Nancy Daoud: The Changing Nature of Asset Allocation

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Welcome to Barron's The Way Forward. I'm Greg Bartolis, and my special guest is Nancy Daoud, the CEO of Opus AdviceFirst, a private wealth advisory practice of Ameriprise Financial Services. She's an accomplished advisor with more than 30 years experience who will today be discussing the changing nature of asset allocation. Welcome to the podcast.

Thank you.

I would love to hear how it's changing because we know on a, on a simple level, 60/40 is dead. We've been hearing that over and over. Um, we've heard about the rise of alts, um, people reducing allocations to bonds, et cetera. But, um, there's a lot more to unpack. And I think you can discuss also the behavioral aspect, which I think is especially interesting because it's not so simple that an advisor assigns a breakdown and then all is well. You know, it's, there are a lot of potential complications and a lot to unpack with each individual client. So I'd love to dig into that. Before we do that, tell us a little about yourself, your career, and then let's delve into the topic.

Well, I've been a financial advisor now for north of 4 decades, and clearly the industry and more specifically asset allocation has changed dramatically in that period of time. And the main Reason for that, of course, is technology. It's really changed and revolutionized the way we do everything. And in fact, made my business much more relevant over the years because my business was always— the business model was always based on relationship building. And now that's become pretty much everything. So going back to asset allocation with technology really being the biggest change. We used to have to construct portfolios manually, and now, of course, all of that can be done with technology, which is lovely. It saves a great deal of time. It's very efficient. But the reality is just because a client or a potential investor looks like one thing on paper, That doesn't mean that that's how they feel. And managing human behavior is predominantly about 95% of what we do every day because the scientific part of asset allocation is pretty much taken over by technology and algorithms. But determining someone's appetite for risk, that's a little trickier and not something that technology or AI or anybody can do.

Okay, so let's break that down a little more. I mean, when you onboard a client, you'll have discussions and people have questionnaires, et cetera. What's your risk tolerance for risk, et cetera? Tell me about the difference often between what people say and what you actually see.

Well, I don't necessarily believe what people say because they don't know what they don't know. And it really has to do with the experience that they go through in up and down markets. And so I, you know, I gave them the compliance questionnaire, which is somewhat helpful, but it still doesn't really give me a sense of how people will react and how they will feel in a period of fluctuations and extreme volatility, which is where our value shows up the biggest. So, you know, I try to use examples like, okay, you've got your monthly statement and it says $1 million, and then next month you get your monthly statement and it says $700,000. How do you feel? Are you now having a panic attack? Are you not sleeping at night? Or are you pretty much saying, well, it's, you know, it'll come back? You know, what is your reaction? These are all great questions to ask, until you actually have time with clients over a period of years, you don't necessarily get to know how they feel and what's really important to them. And that's where the biggest value in our business is today.

Okay. So I totally understand that each person is different and you really— there's no quick and easy way to anticipate how someone will react. It really takes the experience of going through whatever happens in a market. However, to the extent that you can kind of anticipate or mitigate what you might see telltale signs over the years, like you've been doing this for a while, are there patterns, any telltale signs that might give you clues?

Well, the biggest clue really is where are they invested now? You know, where am I bringing them in from? So if they've got all their money in CDs and money market funds, I think their appetite for risk or their experience in volatile markets is very limited. And we'd wanna go very slowly, you know, just go in one toe at a time, so to speak. However, if you've got millions of dollars invested in your 401k, you're buying company stock, you're buying, you have the experience of all of the ups and downs, then, it's a little bit different. So the biggest indicator is past experience. Where are they coming from? The other thing too is, of course, their values. We are big on establishing where their values are, what's really important to them. And part of that really has to do with what stage in life are they in, because values change, The experience changes. So if you're an accumulator and you're looking to build wealth, obviously we're going to recommend something that will be much longer term. But if you're in retirement already and you're receiving income or would like to receive income, that's a whole different approach. So it has to do with demographics, it has to do with what the timeframe is, and of course, the appetite for risk, always. I call that the stomach lining.

That's a good term, memorable one. How do you account also for increased longevity? Because it's an X factor that you have people living longer, but of course, anyone can die literally at any time. So how do you reconcile that?

Well, this is where my longevity in the industry kind of comes into play because I remember, you know, in my first 5 years being a financial advisor, people used to retire at 65. They had a pension plus Social Security and maybe a portfolio which we would build to last perhaps maybe 10 years, and then they just drop dead, you know. Well, that's just no longer the case. Now people retire sooner and live longer. And so building portfolios that need to last for 40 to 50 years is a whole different dynamic. Not to mention that pensions are extinct for the most part. And Social Security is not something that anyone can rely on 100% for their retirement income anymore. It's become sort of a teaser or something that adds to your income, but certainly not the main portion of it. So that whole dynamic has changed. Dramatically. And now we have to build portfolios that will last forever.

Yeah. And I think there's another layer. So we talked about increased longevity. There are also, in terms of retirement, it's not that two-phase approach that we've had historically necessarily. It's still obviously quite common, retire at 60, 65, whatever the age is. But a lot of people might need a sabbatical or a timeout or tend to health, family, or what have you, and, or intentionally take it. I'm going to take a year or two off and then I'm going to get back. So That's just another wrinkle where I'd imagine financial planning is very much—

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Helpful.

Yes. And looking at the individual situation obviously makes all the difference.

Yeah.

But the longevity is one of the biggest fears for most people on the verge of retirement because their only concern is, will my money last? Will I outlive my money? You know, and that's, that's one of the biggest fears. That people have pre-retirement.

So, yes, so you have that, that's a constant concern. You have increased longevity, which in a way raises the bars. You probably have to invest more aggressively. The third thing I would say is, of course, we always have X amount of inflation, but in recent years, we've had material inflation, and it doesn't look as if it's gonna vanish anytime soon. Chances are we're gonna at least bounce around where we are at an elevated area. In terms of nitty-gritty and talking about the portfolio construction and, and, and assets, share some thoughts about stocks, bonds, real estate, commodities, et cetera. Like how do you unpack all that?

Well, when, when somebody's on the verge of retirement and we're looking for income, it's, it's really essential to take the entire asset base and break it up into 3 parts. There's a myth out there that, oh, I'm on the verge of retirement and I'm older, therefore I need to be more conservative. And basically that's just so wrong because of longevity. Historically, even prior to the pandemic, we had very low inflation for a couple of decades. But with that, we still lost at least a third of our purchasing power every decade.

That's right.

And the things that go up the most are what I consider to be the non-negotiable expenses. And those are food, gas, electricity, and heat. Regardless of what these things cost, I don't see anyone ever giving those things up. You will kind of have to pay for these no matter what. So we have to build portfolios to at least meet those essentials in addition to all the luxuries, of course. But when we break up assets into 3 parts, there's always, and this is very scientific, of course, there's now money, later money, and much later money. So now money is obviously the portion that has to be very, very stable. So for example, this year it's been a stellar year in the market. I would recommend if you're on an income portfolio or you're receiving income, you take some money off the table, take the money and run like I call it, and make sure you are solid for at least the next 3 years. Because then regardless of what happens in the world, you basically don't care.

Yeah.

Now the later money is really more of a 3 to 7 year timeframe where it's comprised of more growth and income type vehicles, you know, like value stocks, like bonds and perhaps annuities or real estate. So we've got some growth there and the income is being used to replenish what's being depleted, depleted in the now bucket. But really, the bulk of the assets are in the much later category, which is 7 to 10 years or longer. And that's where we have to be a great deal more opportunistic and perhaps a little more aggressive and have to be able to weather storms, you know, and a lot of volatility. And the reason for that, of course, is because it's the only hope that we can keep up with purchasing power of the dollar.

Yeah, I mean, it's in terms of purchasing power, you know, then over the last century, I mean, the dollar has lost, I think, well over 90% of its purchasing power. And a really interesting eye-opening stat to bring things much more recent is that in 1997, if you had $1 million, it would provide the purchasing power equivalent of $2 million today. That's less than 30 years. And it's something that's so powerful and profound and yet so misunderstood by people. Like, they intuitively understand it directionally. Gee, that candy bar now is $2.50, you know, gum's $3. I mean, those are low-dollar amounts, but it holds true across the board. I mean, you're getting— people are getting sticker shock over and over. And I think, and I wonder, I mean, it's just a little personal thing I wonder about. I mean, in terms of compounding, you could have a when you get to a certain dollar amount, a 5% increase can more like, will more likely result in sticker shock, all things considered, because people often react to an absolute number. They don't have a clear sense necessarily of the actual percentage increase. And it feels like in addition to what the data is showing that there is, I don't know if it's a reckoning of sorts, but it's definitely resonating. And given our national, where our debt is, Doesn't seem like this is going to vanish anytime soon. But sorry, we're getting on my soapbox there, but just sharing that. Yeah.

So one of the things that really is helpful for people to relate and get some perspective is I always share, you know, when I first arrived in the United States in 1970, gas was 25 cents a gallon. You could buy a loaf of bread for 99 cents. You know, is that Sunbeam bread? I know now I'm really I'm aging myself here. And you could go to McDonald's and get a hamburger, french fries, and a Coke for under a dollar. That was the commercial. But of course, it was $0.99. So, and look at where we are today. It's quite a drastic difference. And the other one that I give a great deal— that gives a great deal of perspective is in my first full year as a financial advisor, I started in late 1981, but I remember in November 1981, the Dow Jones was at 721. And we are what, north of 47,000, you know, 4 decades later. So if you are going to live another 30 to 40 years, that's what can change.

Yes, yes. Stocks are definitely a good way to beat inflation. Absolutely. Perhaps one of the best. But you know, just to be fair, and I wanna back up because I'd be remiss if I did not point out the following. When we talk about the loss of purchasing power, everything we just talked about is true. However, in all fairness, salaries also have marched higher. So it's really, to be intellectually honest, we'd have to look at both, both in tandem. And yeah, and you know that, of course, but I just want to put that out there. It's not as black and white as you're making 90% less than long ago, et cetera. Yeah.

Well, I think where it shows up the most is in college tuition.

Yes.

Because, you know, when I went to university, the cost per year was after the cost of the 4-year education really was essentially my first year salary. Even though you couldn't pay it all back in 1 year. But the reality was the numbers were equal. Now, you know, you pay $80,000, $90,000 a year for some of these private institutions.. And if you have a job even after the 4 years, you're not making $400,000 right off the bat. Exactly. I mean, that's just not happening. And I think this is where it shows up the most.

I agree. I think the value proposition has totally changed and the rate of inflation for tuition has dramatically outpaced the actual rate of inflation. And there's another place I think it's shown up is in housing. A lot of people will historically look at the ratio of what it, you know, you take your average salary to house price and whatever the ratio is now, it requires a lot more income on balance to, to buy housing as well.

Well, I agree with the housing part, but it's actually more magnified in the parts of the country where I do the most business. And that's location, you know, with real estate, it's all about location. So in Connecticut, New York, Massachusetts, and California is where predominantly I do all my business. And this is where real estate has been the, you know, it has skyrocketed the most.

Yeah. So let's go back to the original idea of the changing nature of asset allocation. Tell me just a little more about what you're recommending for clients, what you're hearing from clients, which way you think the wind's blowing in terms of which assets may gain prominence or lose prominence. I'm just curious what you're thinking on that level.

Well, once we've determined The timeframe, obviously, which is the most important, and that's easier to determine than appetite for risk because it's more fact-based versus emotion-based. Yeah. Then we construct portfolios based on the tailor-made portfolio based on the individual. But one of the most important things that has really changed now is we put in what I call guardrails, you know, or buffers. And that's the alternative investments. By definition, alternative investments are uncorrelated assets. You know, they don't correlate to stocks and bonds. So when all hell breaks loose, so to speak, hopefully you have something to land on there. So that's been one of the most important components of portfolios in more recent years, probably in the last 8 to 10 years. And it could be anywhere from 5% all the way up to 20% of someone's portfolio, depending again on the appetite for risk and the time frame.

On balance— and I acknowledge that every client's different— are there certain alts that you favor or lean on more than others?

Well, we always have some component of commodities and, and real estate, but really most of the time we use structured products, uh, because we feel like we can tailor-make them more, and you've got some upside still but you've got a great deal of protection on the downside. So we really like those.

Tell me a little about the emotional dimension, the behavioral dimension, because you earlier alluded to how important that is. It's the proverbial talking clients off the cliff, et cetera. I don't know, tell me a little about what you're— have people gotten better on that account? I'm curious about, like, because over time there's so much information and education at people's fingertips. To what extent maybe can people, are people self-educating and learning Or perhaps not. And I'm curious also, because in the grand scheme of things, the market's near record high, but there are so many things to worry about. It's climbed the proverbial wall of worry.

So predominantly what we do is education and managing human behavior in making life decisions, important life decisions. The whole financial piece of our business is the easier part, quite frankly. So the education process is very, very important because the more people are informed about what's going on and being proactive about informing clients about what's going on, then they feel a lot more comfortable. But clearly experience is the best because once they've experienced both ups and downs, they recognize that this stuff happens and it's gonna be okay. So it's managing the behavior has been so, so interesting. But we use examples, we use analogy. I mean, when I explain asset allocation to a brand new client who really doesn't understand any of it, I always use the whole recipe approach, which every financial advisor knows about this. You know, if you do any cooking, you have to have the right amount of ingredients— I'm sorry, the right ingredients, the right amount of each ingredient, and they have to work well together. Mm-hmm. And if you don't have all those 3 components, you don't come out with the same thing.

Yeah.

In fact, in fact, it could make you sick. Exactly. And so will investments. So when somebody forgets that part and they call up and say, you know, well, this part of my portfolio is doing really well, but that's really tanking. Can we just change that? And I was like, nope, you're messing with the recipe now. And, and it's not going to taste the same because everything has its day in the sun and you have to just stick to the recipe. You go too far off the mark and you will not achieve the desired target that we set out to achieve.

I like that example. And that actually partly anticipates a question I was going to ask you, which is when you're walking, when you're trying to reassure clients that things will be okay, not to worry, I was going to ask you if stories or anecdotes or examples like this are more effective in terms of assuaging their concerns or if raw data works. Just curious, what have you found tends to resonate with your clients?

Raw data definitely does not work. Interesting. Yeah, nobody cares about charts or graphs or, you know, it's all about everyday living. Everybody eats, everybody cooks, so they understand the recipe approach very well. Sometimes I will even try to relate it to that person's profession. Or something that they— and this is where getting to know the individual and the family becomes so important because you could relate everything to something that they feel deep down in their heart, in their everyday life.

That's a great point to keep in mind. What matters most, what motivates them, and try to align your advice with that. Yes. That's great. That's great. Is there any area in terms of asset allocation where you think conventional wisdom might be wrong?

Well, you know, I am consistently surprised, even north of 4 decades later, because life just keeps changing and we have to anticipate every possible thing that could happen. And my motto has always been, you know, hope for the best, but always prepare for the worst, because anything can change overnight and we can never really anticipate it. We don't predict outcomes. We only control direction. And it's very, very important to keep repeating that over and over and over again. And I think most people understand this very well.

Yeah. And I think COVID was a great example to remind people how literally things can change like that. So, yes.

Yeah.

Well, thanks so much for joining us.

Thank you for having me.

Oh, my pleasure. My guest has been Nancy Dowd. For more podcasts and the latest wealth management news, visit barons.com/advisor. You can also listen to this podcast on iTunes, Spotify, and Amazon. For The Way Forward, I'm Greg Bartolis.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.