Welcome everyone! Welcome to the 411th episode of the Financial Advisor Success Podcast!
My guest on today’s podcast is Larry Kriesmer. Larry is the Chairman of Measured Risk Portfolios, an RIA based in San Diego, California, that oversees $350 million in assets under management for a combination of internal retail clients and external financial advisor clients.
What’s unique about Larry, though, is how he is able to get clients comfortable with taking equity market risk using an approach that actually puts 85% or more of client funds in Treasuries (effectively creating a floor on potential losses) while investing the rest into options on equity indexes to offer potential upside that still can approximate the returns of a conservative, moderate, or even aggressive balanced portfolio that might have otherwise simply allocated directly to the S&P 500.
In this episode, we talk in-depth about how Larry implements his measured risk strategy, by allowing clients to select a downside floor that determines just how much is invested into short-term Treasuries (and how much is remaining to invest into options to generate equity upside), how Larry’s approach differs from fixed index annuities and buffered ETF products by not setting a fixed cap on potential upside returns (and not needing an additional cost for those vehicles as a ‘wrapper’), and how clients varying view Larry’s measured risk strategy as either a way to have equity exposure with less downside risk… or as a substitute for a portion of a bond allocation by offering the dampened volatility bonds provide with potential greater upside from the options sleeve.
We also talk about how Larry has found that his investment approach seems to provide a certain peace of mind to clients who might be willing to stomach some certain percentage loss in their portfolio but really struggle with the uncertainty that comes during a market downturn where there’s otherwise no way to know how much further the decline could go, how Larry’s way of implementing Treasuries directly into client portfolios has enabled him to further calm clients during times of market volatility by being able to point directly to the specific line-item allocations to individual Treasuries with defined maturity dates, and why Larry does still have to prepare clients in advance for the possibility that the stability of their Treasuries will be offset by the sheer volatility of a small allocation to individual options contracts that could near zero dollars in value (a potential total loss on the option) as they approach expiration if the market has declined, given that clients typically are not used to seeing individual line items of their portfolio experience such a level of losses (even if the allocation is small).
And, be certain to listen to the end, where Larry shares the special tax benefits of implementing an options-based strategy on not just index-tracking ETFs but on the market index itself, including the potential to realize a mix of long- and short-term capital gains even on options contracts sold within 1 year (and the potential for losses in the current year to be used retroactively against gains from the previous 3 tax years), why Larry recommends that financial advisors considering using an options-based strategy be cautious to ensure they really have both the time and assets needed to implement it effectively (given the sometimes very rapid changes in options pricing), and why Larry has reinvested much of his own firm’s profits back into the business, not only because doing so can provide a better return than simply taking cash profits out of the business to reinvest into a traditional portfolio, but also because it’s allowing him to build a business that he hopes can endure long after he retires.
So, whether you’re interested in learning about managing risk with an options-based investment strategy, how to prepare clients for the potential benefits and risks of such a strategy, or the commitment needed to execute an options strategy successfully, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Larry Kriesmer.
