PUTTING RISK FIRST
Firm’s proprietary approach to financial planning
The average portfolio leaves investors vulnerable to a number of hidden risks that few understand and even fewer are prepared to handle. “I’m a big believer – everybody should be a big believer – in making sure that you have multiple kinds of risks in a portfolio,” said Ed Butowsky, managing partner of Chapwood Investments, LLC, and a frequent commentator for national media outlets. “If you have just one risk, a slow economy for example, then everything would be down if there was in fact a slow economy.”
Chapwood, based in Plano, Texas, provides financial planning and investment management services to high net worth clients. Butowsky also has become known as an advisor to professional athletes and celebrities, handling issues such as contract negotiation and agent disputes. Despite the high-level clientele, Chapwood refrains from requiring a firm minimum from prospective clients, Butowsky said.
Chapwood takes a risk-first approach to financial planning that delves into the multiple market forces that can pummel an unprepared portfolio. To measure and manage risk, Chapwood makes use of “non-correlated” assets – which change value independently of the core financial markets, such as real estate, precious metals, and private equity ventures – and takes stock investors’ unique financial situations using eight metrics. The metrics include correlation to the S&P 500, rate of return, money at risk during the next 12 months and potential for loss in the next year, standard deviation, the Sharpe Ratio, upper and lower return, and the variance drag phantom tax (the proportion of rate of return to standard deviation). Assessing investors’ financial situation using these eight metrics allows Butowsky to effectively pinpoint risk areas and prepare clients for what could go wrong.
These factors comprise the CHIP score, one of Butowsky’s creations. The CHIP score is designed to properly and effectively measure a portfolio’s strength based on the eight factors. Using this score, investors can see a realistic, yet easy to understand,
snapshot of where their portfolio stands today, he said. Chapwood uses powerful analytics to calculate the CHIP score and track it over time for clients. The firm’s website even presents prospective investors with a “calculator” they can enter information into such as their current management fees, hard assets, and much more.
Inflation also poses a major threat to standard portfolios. The firm uses eight separate metrics to measure risk and also has its own tool, the “Chapwood Index” to gauge what Butowsky describes as the “real rate of inflation,” as opposed to the commonly used
Consumer Price Index. The CPI, an industry standard tool, downplays the real inflation rate, Butowsky says, often undershooting it by two full percentage points. Chapwood combines the CHIP score and the Chapwood Index, and together those two tools offer a better, more in-depth financial picture for clients than standard industry tools, Butowsky said.
“The real cost-of-living increase in this country is 8 or 9 percent per year. It’s significant just to stay even with the year before, and we have to make sure we’re building portfolios that can handle the cost-of-living increase,” Butowsky told “Advisors Magazine” during a recent interview. “We help people determine what they need in order to not go broke – we get right into the nuts and bolts of portfolio management by doing this.”
The CHIP score and Chapwood Index allow Butowsky to speak to clients about their financial situations with everyone on the same page. The analytics package allows for fast, accurate data tracking and for clients to view a snapshot of where they stand at any given time. That means clients are armed with the information they need to make better decisions.
And for risk discussions, Butowsky
strips industry jargon and beating around the bush and gets straight to the point with clients.
“We ask them how much downside can they handle in a portfolio before they throw up, before they get sick to their stomach,” he said. “Once I get that answer, then I can fill in the rest of the answers with my metrics.”
Client education remains key when it comes to managing risk. Investors often focus on their expected returns, but rarely consider the downsides or do not fully understand how the market can alter their plans. Butowsky works with his clients to develop a full understanding of how their money works and how risk plays a role in their financial plans.
“We talk often about, ‘How much do you want to make?’ but at the same time people really don’t know what they need to make,” Butowsky said. “If you’re up 25 percent then we’ve got a problem because that means I didn’t manage your risk very well.”
Butowsky has more than 29 years in the financial services industry, and was the first Morgan Stanley advisor to top $1 billion in assets under management. Media firms often ask Butowsky to comment on financial issues and he has appeared on The Blaze TV, the PBS Frontline piece “To Catch a Trader,” “Mad Dog Radio,” and “Bloomberg Radio.” Butowsky also was one of seven financial coaches in the web series “The Invested Life,” a nine-month series billed as featuring “real people” as they worked through everyday investment issues and attempted to take control of their financial futures.
Butowsky also frequently writes op-eds for a diversity of online media outlets such as “The Blaze,” FoxNews.com, FoxBusiness.com, Breitbart.com, and the National Center for Policy Analysis, among others. Additionally, Butowsky’s views on the financial industry have landed him speaking and lecture slots at the Private Wealth Texas Forum, T3 Conference, Yale, New York University’s Stern School of Business, and elsewhere.
Butowsky’s insider perspective of the financial services industry informed his book, “Wealth Mismanagement,” which laid out just how much risk investors likely missed when building their portfolios. The book was his effort to reach more people than he can through Chapwood as an advisor and includes his thoughts on wealth protection.
“I truly believe that every person on this side of the grass should be a client of mine, and I’d like to meet them all,” he said.
Chapwood sees risk mitigation as key to enjoying a happy, fulfilling retirement – something many never get.
“You don’t see a lot of really happy older people and that’s because their financial advisors targeted the CPI instead of the true cost of living increase,” Butowsky said. “The truth is, their cost of living is going up 8 percent and if they’re at 6 then they’re losing 2 percent of purchasing power a year.”
The longevity risk has been cited by many financial advisors as one of the most pressing concerns facing investors today. Whereas pensions once supported retirees and self-invested funds only had to last a decade, if not less, today’s retirement landscape presents a much more complex set of challenges. A strong client-advisor relationship is needed to have the honest conversations and effective planning required for a happy, healthy retirement that could last decades.
The retirement landscape also includes more products and services than ever before as well, and finding the right advisor can be a challenge. Butowsky tells prospective clients that he acts in their best interests, not his own. That means clients can and should hold him accountable for the advice he gives. Not only that, but clients should feel free to ask questions until they are sure they understand where their money is, what it is doing, and what it can do for them in the future.
“If I can’t be held accountable or you can’t hold me accountable for what I do then you should fire me,” Butowsky said. “I should be able to stand up to everything I do, everything I say, every minute of the day, and if I can’t do that then you shouldn’t have your money with me.”
For more information on Chapwood Investments LLC, visit: chapwoodinvestments.com