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Engineering Financial Advice

Brant Greene uses his training as an engineer to develop logical financial plans.

Will Lewis, 08/04/2008

Just as Brant Greene didn't rely on chance when he was designing torpedoes in a prior career as a government engineer, he doesn't roll the dice when it comes to clients' money.

"I try to ring out the luck factor by being smart and using engineering principles," says Greene, CFP, a senior financial advisor with Ameriprise Financial.

He can't engineer all the risks out of investing, but he emphasizes to clients the need to set realistic goals, invest conservatively, spend within their means, and save--in other words, to do the things they have the power to control, and not sweat the stuff they can't, such as short-term performance numbers. The key, Greene says, is for clients to keep their eyes on their long-term goals.

"If you have a poor financial plan," he says, "performance will not bail you out."

Clients Get the Plan
The foundation of a good financial plan, Greene says, is accuracy in measuring a client's risk tolerance. For this, he uses the Risk Assessment in Morningstar Advisor Workstation Enterprise Edition, which he uses through Ameriprise. Based on the results, he then establishes a benchmark of how much of a client's portfolio should be divided between equity and fixed income.

On the equity side, Greene likes to cover every area of the Morningstar Style Box in the portfolio, and he keeps the most aggressive categories, such as emerging markets and international bond, at less than 5% of a client's assets. Greene considers himself an index guy. To gain broad exposure to the market, he uses Vanguard index funds and is a big believer of ETFs for their low costs and tax efficiency.

For the bond portion of a portfolio, Greene says that he likes to have a little bit of everything. He uses Vanguard Total Bond Market Fund BND and other bond ETFs available through iShares. He also has clients in Fidelity Advisor Strategic Real Return FSRAX and Oppenheimer International Bond OIBAX.

Once the investment selections are in place, Greene uses Advisor Workstation to monitor and manage the portfolio. He generates more than 500 Portfolio Snapshot reports every year to help him determine where to dial- down or -up a client's portfolio.

Greene's planning techniques have paid off. Rare is the phone call from a panicky client when the market isn't doing well, he says. In the 2000-02 bear market, for example, his clients sat tight. This rocky period did make Greene realize that he needed to hold more face-to-face meetings with his clients and do a better job of explaining to them the downside risk of their portfolios. He now builds worst-case scenarios and meets with each client four times a year.PAGEBREAK

Greene also doesn't hear from clients clamoring to jump on a bandwagon. He says that his clients understood, for example, why he wasn't piling them into real estate during its huge runup earlier this decade. He wasn't comfortable with real estate's valuations at the time, for which his clients are now appreciative.

Time for a Change
In the early 1990s, Greene made two big moves in his life. He had spent a decade working as an electrical engineer with the government--in a "dead-end job," as he now puts it--when he helped his parents find a financial advisor in 1993. He says that he always had an interest in finance, but it wasn't until he saw firsthand the financial-planning process that he realized how he could apply his engineering knowledge to being an advisor.

"In my logical brain as an engineer," Greene says, "it made sense that you start with a process of working on someone's goals, gathering data, and reviewing the process. It seemed smart and was a good segue into a new career."

In 1995, Greene started a practice in Newport, R.I. A year later, he made another big switch. He relocated his business from one coast to the other, moving to Poulsbo, Wash., a scenic 20-minute ferry ride from Seattle, where his girlfriend (now wife) was living. Today, he has built what he calls a mom-and-pop business with two people on staff. He has pared his client base down to about 250 clients, mostly middle-income federal and hospital employees, and he has $35 million in assets under management. Greene says that he's working close to his capacity but that he is taking on selective new clients, mostly referrals from his "best" clients. "They must be goal-oriented, advisor-receptive, and willing to pay for advice," Greene says. Eventually, he'd like to pare the number of clients to below 200.

From One Engineer to Another
Greene believes that questioning the basic principles of financial planning makes him a better advisor. For that, he calls upon his engineering experience. Just as engineers have to plan for worst-case scenarios when building bridges and buildings, financial planners should also plan for the worst. Instead, Greene says, advisors too often smooth out numbers, focusing on the good and ignoring the bad. "Financial planners too often look at averages, and they can be too optimistic, which creates false dreams," he says. "Engineers, on the other hand, try to disprove everything. The engineering community is very distrustful, so you can't torture numbers into submission."PAGEBREAK

Greene is the first to admit that he's skeptical. But his questioning nature leads him to seek out new information and unconventional points of view and tackle tough issues. His latest focus is on retirement income. "Financial planners are experienced in the accumulation phase," he says, "but those techniques don't work for the distribution phase."

To learn what does work, Greene sought out Jim Otar, another engineer-turned-advisor. Otar, of Otar & Associates in Thornhill, Ontario, travels the country speaking to advisors about retirement income. Greene likes him because he has solutions that work in practice. "Otar has a game plan," Greene says. "He's not just an academic. He's an advisor."

One principle Greene adopted from Otar is what Otar calls the four-year test. Otar's research has found that if a portfolio four years into retirement is worth more than it was on the first day of retirement, the portfolio is likely to sustain the retiree's entire distribution period. If it's worth less, the risk of the portfolio falling short increases substantially, and portfolio and lifestyle adjustments will have to be made.

This test is an engineer's solution to ringing out the luck factor. If a client happens to retire into a bull market and sees four years of good returns, then lucky for him, but that is something no advisor can plan for. Instead, Greene plans for the client who may retire into a struggling market. He strives to offset any bad luck by choosing low-cost, conservative investments run by good money managers who can create some alpha.

Control for the things you can, and plan for the worst. These are sound engineering principles that Greene uses to become a better financial planner.

Will Lewis is a senior project manager in Morningstar's Advisor business unit.

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