An Interview by Tony Mulkern
Editors Note: From time to time, we publish profiles of selected, long-standing clients of Mulkern Associates. The featured entrepreneur this month is John Frederich, ChFC®, CLU®, CIMA®, and a Private Wealth Advisor in Pasadena, California with Ameriprise Financial. John has been a member of the Ameriprise President’s Advisory Committee since 1998, which is reserved for the top 1% among 12,000 advisors. In this very personal interview, he shares the values and approach to doing business and life in general that have contributed to his outstanding success and amazing client loyalty in tough economic times.
In today’s volatile markets, it sometimes seems that the only available investment alternatives are to stuff all your savings in a mattress or to risk losing them all. Is there such a thing today as an investment portfolio with prudent growth potential?
I grew up in the school of “buy and hold” strategic allocation. In other words, determine an efficient portfolio with a fixed percentage in various, low correlating investments and hold that allocation until you get to your goal, with periodic rebalancing to the pre-determined allocation. This was fine in “normal” markets, but the markets have not been “normal” for at least 15 years! In abnormal markets, there are often opportunities that involve overweighting portions of the portfolio. One recent example is high yield bonds. By December 2008, as the Lehman default destroyed liquidity, prices dropped on investment grade bonds, raising their yield to maturity to over 25%. This price reflected a dubious expectation of a 60% default rate, which turned out to be less than 10%! These bonds rebounded in value about 50% in 2009, while building an income stream for my clients you could not buy today.
In 2009 many advisors lost 50% of their clients, while you experienced a 3% gain and grew Assets under Management. What’s your secret?
It’s no secret—I tailor the plan to the person. This means planning comprehensively, for a lifetime, not a year. Are the dividends adequate to meet cash flow needs? Is there enough appreciation potential to provide adequate growth for their lifetime? What are the tax consequences and best strategies? Without an individualized, comprehensive approach, investment planning is like borrowing your neighbor’s suit. Chances are it won’t fit very well. We act decisively based on the client’s needs in the macro-economic conditions. We communicate continually and don’t leave clients wondering if the captain has left the bridge. The past couple of years have been the financial hurricane an advisors spends a lifetime planning for. I have never felt so vital to my clients’ well-being.
“We communicate continually and don’t leave clients wondering if the captain has left the bridge.”
Some advisors are not interested in accounts of less than $250,000. Is this the kind of advisor I should be looking for to build real financial security?
I’d be careful. While larger clients are usually more profitable for the advisor, small clients’ money is very important to them. Additionally, most of my high net worth clients didn’t start out big. I think of Paul Brosche, author of the book Take this Job and Love it. He has been a dear friend and client for over 20 years. I remember well the late nights we spent over his kitchen table working on strategies to manage his small IRA as well as the debt he had taken on to build his business. He grew it into the largest practitioner based marketing agency in the country, and when he sold it for an eight digit sum, he became one of my largest clients. It is important to build lives, not just maintain them.
What do all the initials after your name mean and how important are they to someone who is seeking an advisor?
CIMA®—Certified Investment Management Analyst—awarded through Wharton business school and no more than 2% of advisors hold it. It prepares one to quantitatively analyze investment portfolios and significantly increases the ability to pick portfolio managers for sections of a client’s portfolio.
ChFC® —Chartered Financial Consultant—requires a multi-year study in comprehensive financial planning. It is critical to integrating the various facets of financial planning, not only the client’s future, but also for his or her legacy.
CLU® —Chartered Life Underwriter—entails a multi-year study in business tax consulting, charitable and legacy planning. This is especially important when working with businesses and large estates, as it helps me to work creatively with my clients’ accountants, attorneys, and other advisors.
How important is it that my advisor be local?
A face to face, heart to heart relationship with your advisor is important. You need to meet with your advisor, both on their turf and yours (home and office) before beginning a relationship and periodically throughout. Obviously, this is easier if the advisor is local. I have clients in over 30 states, some of whom spend many months a year on four continents. We have regular communication and video web meetings. Also I travel to see them. Many became clients before moving, and we get together when they are back in town. But I wouldn’t advise anyone to work with someone they can’t look in the eye.
Is it better to work with an independent advisor that gives more personal attention, or with a large financial firm that has clout and power?
Both! I have a franchise with Ameriprise. They are a global S&P 500 company. They audit me continually for compliance with regulations and excellence of advice and carry my bond. However, as a franchisee, I and my team are independent. By contrast with an investment bank or wire-house, we have no quotas or pushed products. I have been offered seven digit signing bonuses to join wire houses and investment banks, but would never make the change. I would have to choose between serving the investment bank or the client. My allegiance is to my clients, and since Ameriprise is not an investment bank, it does not interfere with that. Furthermore, as the business owner, I know my clients must be content for me to stay in business and build the value of my franchise.
How did you end up in this business?
I loved to build businesses as a kid (lawn mowing, snow shoveling, growing my paper route), and I started investing when I was in high school. More importantly, I have always loved people and God. With an undergraduate psychology degree, I went to work at a social work office. After a couple of years of working with behaviorally disabled kids, I saw that the main change agent in their lives was God. With that observation, I decided to go into the pastorate and went to Fuller Theological Seminary to get my master’s.
During this time, I interned at various churches, while providing for my family by working nights at UPS unloading trucks. Most of the church work, I found, was about budgets and attendance, (nickels and noses!). Meanwhile, I was really able to impact people’s lives in the UPS break room or the back of the truck we were unloading. I found that what I preached in the church was discounted about 30% because it was an expected part of the job description. When I was at work there was a 30% premium on what I said about God, because they also appreciated what I said about stocks, and I earned credibility by living my words in front of them. I decided I could do more good for God outside the church than in it, and I felt called to put together my pastoral heart with my capitalist head. When I looked around, financial planning seemed like a great place to do it.
That was 21 years ago. I find it important that I practice what I preach. I encourage clients to live integrated lives of integrity, and I want to make sure I do the same.
“I decided I could do more for God outside the church than in it, and I felt called to put together my pastoral heart and my capitalist head.”
Statistics show that most people within 10 years of normal retirement age do not have the financial resources needed to comfortably retire. What would be your advice for them?
Well, fortunately, they aren’t at retirement. There is time, but they need to plan and the sooner the better. Sit down with a competent advisor who will not only help you determine what you need, and the most efficient way to acquire this via comprehensive planning, but will also hold you accountable by tracking your progress and adjusting for changes in life as well as macro and personal economics.
At what age do you think that someone should retire?
There is no “should” about retirement age. Some clients want to quit working as soon as possible. Others tried retirement, failed miserably at it and are happily back at work. Some have retired to become missionaries or raise grandchildren. Retirement is a very personal decision, and usually not age based.
I encourage clients to attain financial independence as soon as possible, either by controlling cash flow and life style, or acquiring an income stream from a pension or other assets. Then they can do what they have always wanted. Interestingly, for many clients once they are financially independent, and they pursue their dreams, they make a boat load of money, though that was not their primary goal. This then leads to philanthropic opportunities and legacy planning, since this money is not necessary for their own needs. That gets really fun and interesting!
“Interestingly, for many clients once they are financially independent, and they pursue their dreams, they make a boat load of money….”
What is your outlook for the U.S. economy over the next two to three years?
I am neither doom predictor nor raging bull. I think the US is likely to maintain slow growth in the short term and be fine over the long haul. Last summer I heard former Secretary of State Condoleezza Rice at the Ameriprise National Conference. She explained that notwithstanding all the talk about China and Iran, our biggest threat is not another country. It is the U.S.—done badly! Republicans and Democrats share blame for the challenges we face. Our sense of entitlement, dependence on social programs and government spending, paid for by confiscatory taxation are killing self-motivation and the American dream. Our education system, now built on teaching to standardized tests, with no room for original thought, and no accountability for unionized teachers, is squelching creativity and the desire to think and learn. These are the biggest dangers to our future.
However, the American people, derived from immigration from around the world, are bigger than any issue or program. Ingenuity, self-motivation, boot-strapping and never say “can’t” have been our traditional ways of life. We will likely break out of this morass and create the next wave. I look forward to what’s next.
What is the key to obtaining security?
Certainly not the economy! I have found over the last twenty years that money never has been or ever will be the source of security. You can have all the money in the world, and be struck down by accident or illness. Frankly, the only security I have found is in God. Everything else can change. To be secure you need to hold on loosely to what you can’t keep, and hold on like crazy to the one thing you can. Then stay agile and flexible to roll with and prosper from what comes.
Many of your clients are business owners. What is your advice on how to build financial security with their business, especially if they want to pass it on to their children?
My advice is to build financial security through the business while also building financial security outside the business. It is tempting to invest all assets back into the business, but this is a very risky strategy. First, it means putting “all your eggs in one basket.” Second, small business capital is venture capital and inherently volatile. Changes in regulations or business models can dramatically impact the profitability and equity of the business.
This is especially problematic if you want to pass the business to your children. Your financial needs can become an unbearable weight on the business your children are running, and they will likely be unable to provide you with the equity value of the business.
Therefore, we figure out what is needed for the business owner’s minimum financial independence. We then determine the most efficient ways to acquire those assets outside the business, usually in a tax advantaged manner using defined contribution or benefit plans, Rabbi’s trusts, ESOP’s etc. I then help them remain disciplined at building this foundation.
TV ads for do-it-yourself on-line trading services imply that financial advisors are a waste of money. How would you respond to this implied claim?
The ads are right—many are a waste of money! As in other professions, there is a surplus of practitioners but a shortage of good ones. My advice is that if you do it yourself, make sure you know what you are doing, and do it comprehensively and actively. However, this is much like building your own house, and not many of us are equipped and trained to do that well. I would end up living in a shack if I tried.