For after-tax wealth, build portfolios with downside risk management, says Frank Pape, director of strategies at Frontier Asset Management, in an interview with ThinkAdvisor.
"If advisors aren't focusing on after-tax returns, they're missing the boat in doing the right thing for their clients," said Pape, a CPA and chartered financial analyst who won a 2023 ThinkAdvisor LUMINARIES award in the category of thought leadership.
Frontier, based in Sheridan, Wyoming, manages risk-management strategies for financial advisors' clients nationwide.
In the interview, Pape explains some of his tax strategies that go into building portfolios, including one, just launched, aimed at high-net-worth investors.
Not the least point he makes is Frontier's clear way of defining risk: "risk of loss."
Lose the "standard deviation" version, Pape recommends, adding that clients "don't know what standard deviation means."
In the interview, he also unpacks Frontier's method of managing risk through "Dynamic Downside" and "FundFusion" for maximizing returns.
Here are highlights of our conversation:
THINKADVISOR: Have tax and estate planning become more important to the wealth management industry?
FRANK PAPE: Without a doubt. Think of all the assets out there in motion, [especially] those that are being passed between families.
What's critical for advisors to know?
If advisors aren't focusing on after-tax returns, they're missing the boat in doing the right thing for their clients.
What's the main goal at your firm, Frontier Asset Management?
To help advisors focus on how to define success.
Often I see advisors always focusing on pretax returns. If you have a taxable account, by definition you're paying taxes on that, and you should try to look at the after-tax return strategy.
Financial advisors usually don't do tax return preparation or give specific tax advice. Right?
Most advisors don't, but a good advisor should have an investment process that's different for taxable and for non-taxable accounts.
Ten years ago that might have been switching taxable bonds for muni bonds. Today it's different. It can be [through] asset allocation. It can be tax-loss harvesting or different funds.
Frontier's website emphasizes: "Strategies designed to maximize after-tax return while minimizing downside risk." Is that the firm's focus?
Yes. It's for all our strategies. The starting point is downside risk management.
So do you build portfolios based on certain tax strategies?
Yes. If you say that you want to lose no more than 10% over a 12-month period, we design a strategy trying to protect the downside and maximizing return over those 12 months.
We don't have proprietary products. We put third-party products in our strategies.
Please explain what you call "Dynamic Downside" and "FundFusion."
Because we're trying to manage the risk, we'll dynamically change our asset allocation through time. For example, we might have more in equities or less in equities.
Many strategies out there are almost "set it, forget it," like it's always 60/40. We can do 50/50, 40/60, 60/40. We dynamically manage the downside target and seek to maximize returns from there.
Every month we update our cap market forecast and asset allocations.
What about FundFusion?
It's an optimization process we have that tries to pick a combination of active mutual funds, passive mutual funds, active ETFs, passive ETFs — whatever has our optimal return pattern — to give us that downside target and attractive returns.
