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EverydayCPA Podcast | Strategy | Tax | Accounting | Risk Management

Aug 11, 2019

Date:      August 9, 2019

Attendee and Guest:   Kelly Coughlin, CEO, EveryDay CPA – Kirk Chisholm, President – Innovative Wealth &                                                                     InnovativeAdvisory Group  

Good morning everybody, this is Kelly Coughlin, CEO and CPA of EveryDay CPA, providing star services of strategy, tax, accounting and risk management services to businesses and business owners.

 Today I am going to interview the CEO of a very interesting wealth management firm.  He specializes in two primary areas, using alternative investments like real estate to complement a traditional portfolio of stocks, bonds, and cash, and the second is creating a traditional portfolio of stocks, bonds, and cash, but complementing that portfolio with what we call inverse correlated assets.  An inverse correlation, also known as negative correlation, is a contrary relationship between two variables, so they move in opposite directions.  Or, to put it simply, when one bucket of assets goes up in value the other doesn’t go up or doesn’t go down.  And when taken in combination, they together produce a good and reasonable rate of return. The popularity of this type of strategy has been growing substantially in the past four or five years and used by institutional investors for many, many years.  But on T.V. you could see ads like crash proof retirement, which at their core simply used insurance annuities to offload the risk to insurance companies.  But then you will also see guys like Ken Fisher saying, Never ever hold an annuity.   It’s no wonder the people are confused, but in steps, my guess today, Kirk Chisholm, President of Innovative Wealth and Innovative Advisory Group.  Kirk, how are you today?

 Kirk:     I am doing great Kelly.    I am doing awesome on this wonderful Sunday morning.

 Kelly:   Great.  And we already discussed, your kids are going to the water park?

 Kirk:     Yes, yeah.

 Kelly:   I have been to Kirk’s swimming club in the Boston area and - he has to pay a membership for that, and now his kids want to go out and spend another 50 bucks today, right?

 Kirk:     Fifty bucks, Kelly, you don’t live in the Boston area, do you?  That would be nice if it was only 50.  The cost of happy three kids.

 Kelly:   Kirk has a lovely wife that I have met, and I am sure there is, “Can’t we just go to the club, and it is right around the street”, and you lose that argument, right?

 Kirk:     Yeah, every single time.

 Kelly:   Great. Well, I have known Kirk for many years, folks, and his firm.  And in fact, we have liked each other so much we decided to start working together.  You might ask, why would an accounting firm do work with a wealth management firm?  Sometimes people pit the two as arch enemies.  Well, Kirk and I certainly are not.  But here is how it fits into my company, EveryDay CPA, we do four primary things here, we call it our Star services, S T A R, Strategy, namely business strategy, Tax, Accounting and Risk Management.  And this work with Kirk and Innovate Wealth is the key element of the R component, the risk component of the STAR system.  And the reason I am doing this podcast now, today, at this moment is because it is especially important.  There are two things going on. Number one, we are at some point in the continuum of the Trump Rally and two, we have a presidential election coming up next year.

First, the Trump Rally.  The market is up about 37% since Trump’s election.  Now, note that at this point in Obama’s presidency, that is, at this point in the number of days of his presidency the market was up 52%.  And ultimately, by the time he was out of office the market was up 147%.  Now, we all know the reason those numbers are so high for Obama.  By the time Bush, number two left office the market had lost 26%.  So, he was at the very bottom of the market trough that he was able to creep or wade out of.  And of course, Bush suffered such poor performance because 911 occurred shortly after his election, we had wars in Afghanistan and Iraq. So, anytime you have significant increases in the market, you also have an increased perception of risk that the market would give back some of those increases. So, today, up 37%, some of the fears justified, some of it is manufactured by annuity and insurance salespeople trying to use fear as a motivator to sell insurance products. These are the ads you see on T.V. and Kirk and I, he doesn’t know this yet, but we are going to have another podcast in a couple of weeks where we are going to talk about these Crash Proof Retirement Solutions.  Because I will go on record right now, that will be the next shoe to drop in the investment world.  All of this nonsense that has been peddled on Crash Proof, using annuities etcetera, shoe is going to drop.

 And the second factor that’s occurring here is the presidential election. There is no doubt in my mind that business owners, across the board, are fearful and nervous that if the Trump culture of reduced regulation, reduced taxes, pro-business mission and vision for America came to a screeching halt, during election, that nervousness and perception of risk would increase dramatically by business owners.  And nervousness means business slowdown in capital investments, slowdown in new hires, slowdown in new product innovation, and this means decline in markets.  Because the market is always about three-quarters forward-looking.  Now, would this perception of increased risk in the change in leadership at the White House be justified or not?  It’s a whole lot of questions, I personally think it is because I don’t see any of Trump's competitors being pro-business.   In fact, I see nothing but anti-business sentiment.  So, Kirk, that’s the background into which I am going to launch our discussion today.  Kirk Chisholm, President of Innovative Wealth Management and Innovative Advisory Group, I gave you a lot to think about in that intro, and here is where I would like to start out.

 You have been doing this risk-managed portfolio stuff for many, many years, why does your strategy work?  Does it work, and what does the portfolio look like when it does work?  What does it look like when it shines, that is, when the general markets are declining?

 Kirk:       Yeah, I mean, those are some great questions, Kelly, and I want to start by putting a little background for my history because I think that will be helpful.  So, when I started in the industry back in ’99, December of ‘99, which of course, was probably the worst time to start, right?  When you get off two decades of a bull market and then just started going through recession right away, so I learned risk management really quickly.   You know, when I everyone else was thinking the market was going to keep going up and I didn’t have that because I started with pretty much the market going down.  So, I learned real quick on how to manage money and how to manage risk in that kind of condition. For me, that’s why risk management has always been the top priority.  It is rule number one, don’t lose money, and I paraphrased Warren Buffet there.  So, we sailed through 2008 pretty easily, unscathed, because we had some understanding of what was going on, and since then we have built additional strategies to manage it even better.  One of the things that I think people in the industry get caught up on is, they come with a strategy and they feel like, this is it, I am going to do this and this is going to solve all my problems, it’s the best strategy I have ever seen, and it will never change.  The problem is, the market changes all the time. Every day, every second of the day it changes, and the more computerization that comes into the market the more rapidly that’s going to change.  So, if you don’t have the agility, if you don’t have the ability to change on a dime with your strategy then you are going to get run over.  I think this is one of the biggest challenges that we see, because when I got into the industry, you talked about, earlier, Kelly, with inverse correlation or negative correlation, one of the things I found was, initially, you could diversify properly and it would work, and generally speaking, you know, when the markets go up the diversified portfolio works as intended, typically. The market goes up about 66% of the time, when the market is going up diversified strategies work. In 2008, in that period, it stopped working.  It’s fascinating, because we did some research way back, to dig into this, and what we found was, if you look to 2008, almost every single asset class except for cash and gold, went down. When you study and say, how is that even possible?  So we did some digging and what we found was the net result was effectively that the institutions were causing a correlation, because all the big money was flooding into the market and making the same changes at the same time so it caused, effectively, this correlation of assets. So it became really challenging to create a diversified portfolio to reduce risks.  You used to be able to invest in things like timberland and manage futures and hedge funds.  That used to allow you to diversify properly and get inverse correlations.  The problem is because everyone was investing in the same thing it was no longer non-correlated, it became correlated.  Many people thought that they were diversifying and reducing the risk when essentially they weren’t.  And they didn’t realize it because they were just accepting this norm as given by just saying, oh, this is the way things always are, they will always be this way.   And it’s not, things change all the time, and if you are not assessing your assumptions, at any given time, then you are going to get run over in this market because things change so rapidly.  So, that’s kind of how I look at risk management.  That’s my background on it, why I look at things the way I do, which is a really important context, I think, of this conversation.

 Kelly:     I gave a talk in London about one year before the Madoff Hedge Fund nightmare.  I think that was in 2007, I was CEO of a financial technology investment firm.  And the title of my talk was Hedge Fund Needs TLC, Transparency, Liquidity, and Custody.  And I’m not bragging here, but - I guess I kind of am - that talk foreshadowed.  I predicted this, it foreshadowed the issue that was highlighted by Madoff, specifically, and Hedge Funds in general.  I think you would agree that Transparency, Liquidity and the issue with Custody were core and critical to the problems Madoff scandal highlighted.  Do you agree with that?

 Kirk:       Yeah, I do. You weren’t alone in your kind of assessment, I mean, our very own Perry Mecarpolis who was kind of one to find Bernie Madoff.  He wasn’t the only one, there were more, but no one listened because when times are going well no one wants to pay attention to that stuff. They are not worried about it, only when times get bad that people worry.  Well it’s too late, right?  You have to, like you did, like you talked about it before the problem, and that’s you need to have those kind of resources because when times go bad it’s too late, everyone else is running to the door and it’s a lot harder to get out.  


Kelly:     Yeah, this was at a Hedge Fund conference and it was like nobody wanted to talk to me at the cocktail hour after I said this.  It’s like, okay guys, I’m sorry, I didn’t want to ruin the punch bowl but transparency and liquidity and custody,  it’s just I  want to clarify so listeners know why those are critical, because it’s still true now, more than ever, investor on the transparency side. Investors need to see the underlying assets in the portfolio, and that’s why I don’t like annuities, you can’t see anything.  And then number two, investors need to be able to convert those assets that they do see for whatever reason, if they don’t like what they see, they need to be able to convert them to cash or another asset. That’s the liquidity portion.   That’s another reason why I don’t like annuities.  And then the third is custody.  Ultimately, if you see something and you don’t like it you want to be able to access it, and if you have got some custodian that is nonexistent like we had with Madoff where he was just fabricating third party custody, you are going to have a problem. The reason I put custody at the end is because I like the TLC thing but custody in my mind is kind of at the top of the list because you need to be able to see the assets at a qualified bank or broker, not in the file cabinet of some Hedge fund manager that’s acting as custody.  I am assuming you are going to agree with all that stuff.  I know you do because you operate your company with TLC.  Tell me, how would you score you and your portfolio strategy in the TLC paradigm there?


Kirk:       Yeah,  and you raise a great point, Kelly, because I think that each one of those components has an issue attributed to it, in the markets in general and some of that field that we can kind of touch on here.  But, you know, with my portfolio that’s exactly what we designed it around, transparency, liquidity.  Possessions we have, have to be liquid because if something happens and you need to get out, you need to get out right away.   Actually, it should be on custody first because that actually will start us off.  So, we don’t custody assets, we custody at one of the bigger custodians which is TD Ameritrade.   A firm like ours, we don’t want custody. I don’t want that liability.  I would rather find a top-notch firm that does it really, really well and use them, and for us, TD Ameritrade was that good fit. So, the transparency aspect goes along with that custody because we are not custody-ing it, the transparency is, our client can easily go to the custodian.  Like they get statements from the custodian, it doesn’t come from us.  You know, they can always go on their account and see their investments in any given time.  It’s totally transparent, there is nothing hidden whatsoever about it. The liquidity of our possessions is very important too. You look at 2008, for example, and actually, 2015 was another example of this.  So, in 2008 in certain markets there was a lack of liquidity.  In the institutional markets, there were a lot of these vehicles that were created where there was a lack of liquidity at the time when people needed it most.    So if I am managing a portfolio, for example, and let’s say I have 80% of my portfolio in the S&P 500, so a very liquid bunch of investments, let’s say 20% in some sort of an illiquid vehicle, some sort of an institutional vehicle, and I want to liquidate that but there is no liquidity all of a sudden I have to search down in my S & P shares because I need liquidity, I need to free up capital to either pay back investors or whatever it might be. So, instead of selling the thing that I want to sell, I’m selling things I don’t want to sell. But the problem is, it’s not just me, it’s the entire market doing the same thing.  So, if you want to know why the assets correlate, it’s because all these institutions own the same things.  So, look at 2015 as an example, we started to see this idea which I call contagion, which is, effectively, the oil prices started to plummet. Well, if you owned oil assets, you couldn’t sell them because, you know, no one wanted to buy them because they kept going down so in order to have liquidity in your portfolio you sold something that wasn’t oil.  You know, maybe it was Apple stock, maybe it was real estate, maybe it was, in some cases, oil companies.  The challenge is when everyone trying to do the same thing at the same time everything correlates and liquidity dries up.  Now, for us, when we manage money, I mean, we do a lot with alternatives but it’s a very separate part of what we do. The traditional portfolio, which is kind of really what we are talking about here today, the traditional portfolio is fully liquid.  We have set this up specifically for the fact that if people need liquidity they can get it.  Call me up tomorrow and say, hey, I need my money, I can just sell it and it’s done.  Everything that we do is highly liquid.  We only deal with the most liquid securities because of this very issue.  When things go bad liquidity dries up.  You don’t want to be on the other end of that. So that for us is extremely important. 

 Kelly:     Kirk, I know you like to work with CPAs and help them with their clients, just like you are helping me with my clients. Let’s say I have some tax and accounting clients that need what I think is a risk-managed portfolio, and the profile for that type of client is typically this, they have made their money; they have created their wealth; they don’t need to hit any home runs; they don’t even need to hit a triple, maybe a double, a single, they don’t need to strike out, and they sure as hell don’t need to be hit by the pitch,. That’s the typical client that many of us see.  

 Kirk:       I like the analogy, Kelly.

 Kelly:     Thanks.  Number one, preserve what they have, and number two, grow it.  In that order, and what’s the best way for these clients to work with you, whether it be a CPA or one of my clients, how are we going to work together on this?  They are located in say, Minneapolis and Kansas City, how do we work together?

 Kirk:       First of all, a location I don’t find is all that important.  I have been doing this for 20 years, most of my career I thought that I need to see somebody to work with them but in the last three years, I have kind of changed that kind of mindset around myself, because what I realize was, clients don’t want to see me.  They don’t want to drive an hour or a half-hour to my office and then drive an hour or a half an hour back.  Like, it is much more efficient use of their time to just get on a call and talk about these things.  You and I are in different states and we work together just well. But the other part of what you were saying is very important, where you were talking about not hitting home run in triples. There are many types of clients. There are clients who are trying to build and grow their wealth and there are clients who are not, right? They just trying to maintain and to sustain their wealth.  You know, it is funny, no one sends you a letter and says, hey, you are rich, right? There is no letter that the IRS sends you that says, hey you are rich, like, now you are going to start paying the rich person’s taxes.    It doesn’t happen that way.  There is kind of this grey area, depending on the amount of wealth that you have, you have enough but you feel like you don’t have enough.  And it is weird, I have talked to people who are worth couple hundred thousand, tens of millions, I have talked to people who are worth billions, and they all have the same mindset, which is I need another 30% to feel comfortable.  It’s a weird human psyche that people can’t be comfortable with the fact that the money they have is enough. So, whatever we do with our clients is deep conversations, what I call the emotional side of money, which is, you know, it’s really important.  Because let me give you an example, there is a woman I worked with, my entire career, a wonderful woman and she worked really hard, saving and recently she got to a point where she wants to retire.  So, she is going from this aspect of working hard and saving to no longer working and spending.  That is a huge mental shift that people have to make, and it’s really hard, right?  You have spent 40 years working and saving and now you just have to flip the switch and do the opposite. That is very uncomfortable for people.  It’s not an easy transition to make.  So, a lot of what we do is helping people with, I guess, what I would call retirement lifestyle planning, which is helping them make that transition.  So, it’s not just that they’ll have enough money but it is that they are comfortable with the money that they have and they are comfortable spending it.   Because I have worked with a lot of people who have way more than they need and they feel like they don’t have enough.  This woman, for example, she was actually spending less than she was making in social security and she is worth seven figures easy.  There is no way she would ever run out of money at that spend rate.  And what I was helping her to do is to be comfortable with the fact that she had enough money and be comfortable with spending that money.  You spend your whole life saving this money, like, you need to enjoy it.

 Like, retirement is about, we call it phase two of your life because you have got another 30 to 40 years when you retire,  what are you going to do?  Sit around and golf all day and drink beers?  I mean, that’s fun but that’s not the purpose.  And a lot of people need to rediscover that purpose when they retire because they make such big shifts. Getting back to the point, when I work with clients I’ll tell them upfront, our job is not to hit your home runs, our job is not to be BS and T every year, our job is to hit the singles and doubles to get performance but the real key to what we do is not lose when the markets hit a recession.  That’s really the key because if you don’t lose when the big losses come then you are way ahead of the game. In 2008, from the pig to the trough, the markets went down over 50%.  If you didn’t lose 50% in those years and you were in cash you effectively made 100% return on your money because not only did you not lose money but you could have bought everything 50% cheaper.  So, effectively you just made 100% return on your money, and you didn’t have to do anything.  You didn’t have to outperform the index, you just had to sit on the sidelines and not lose money whenever everyone else was losing money. It’s a different perspective than I think most people would make but if you consider where we are in the economy right now, we have had 10 plus years of a bull market plus 11 years of a bull market.  We are getting to a point where a recession could come at some point in time soon.  It could happen next week, it could happen five years from now, right?  No one knows, no one can predict the future.  But I don’t need to predict the future to know how to handle this situation.  What I need to know is that there is a recession coming at some point, we all kind of feel that.  It feels like everything is really expensive, and it is, and at some point we are going to have a recession, that’s inevitable. That’s just the way that market cycles work.  My role is not to know when that’s going to happen.  My role is to predict that the market could continue to go up, and also, the market could easily go down.  So, we have built a strategy around that process that if the markets are going up you make money and if the markets melt down you are not losing money.  That’s really effectively what we have done.  We,  with our approach to investment management we look at the situation that we are in, which is, the markets could go up or they could go down, and we build a strategy around that.

 Kelly:     Kirk, here is how I see it, certainly, correct me if you find it flawed.  Historically, you have the CPA that’s more or less pitted against the financial advisor.  The advisor is always recommending more risk and the CPA is saying, less risk. And the CPA tends to say no to anything that is unpredictable or about which he or she is either not educated or experienced in, the advisor might say, I don’t know, for the last years, I think, many CPAs have decided that they are going to get into the advice business, they are going to open up an advisory practice and become financial advisors, become wealth managers.  I kind of fundamentally disagree with that because the objective supervisory role, to stick with the baseball metaphor, the manager role of the team is now merged with the player or merged as a player.  And I think the CPA is best sticking with the manager role but becoming a better manager so that he or she is a little more educated and experienced in it.  So it’s not no to everything but the CPA should stick with the manager role, the supervisory role, but review the performance of the players.  That could be a large cap player, it could be a wealth management player, it could be a small cap, it could be an alternative or it could be review the performance of a wealth management player, like yourself, who looks at all those underlying asset classes – small cap, large cap, alternatives.  Do you agree with that analysis?  Does that make sense to you?

 Kirk:   It makes total sense Kelly, and you are 100% right.  So, if you look at the traditional CPA role, it is accounting and tax, risk management strategy, tax planning, like, there is a lot of things that the accountants bring to the table.  And you actually pointed out, it seems as though a number of them will try to become wealth managers or financial advisors and they are putting themselves in a very precarious place. Because I have been doing this for 20 years, I am always wanting new things.  This is a profession in and of itself, for an accountant to all of a sudden start providing wealth management services or investment advice, all the things that we do, it would be like me going out and saying, I am going to be an attorney.  It’s a totally different profession and requires a lot of time, effort, study.  Like, it’s not just like, oh, I am just going to make money off mutual funds or provide them to clients. The CPAs are much more into risk management, which I think is a really good position to be because you are one of the most trusted people in the clients’ lives for anything that affects them financially.  You need to have that oversight and guidance.   You need to have that supervisory or managerial control to continue the analogy.  You know, you need to have that oversight because the clients want that, the clients are asking for that, and you would be in a much better place providing that position than actually doing the investments yourself, because you are taking a step back and you are being an unbiased third party and saying, here is what I think we should do.  As you mention, I do work with a number of CPAs, our strategy is more tactical and we have done this specifically because of the nature of what you are saying which is, as a CPA, this is your job to provide oversight and guidance, and you don’t want the clients to lose money.  So, the strategy, in many ways, to develop around that philosophy which happens to coincide with my philosophy anyway which is, rule number one, don’t lose money; rule number two, pay attention to rule number one. Like, making money is the easy part, that’s going to happen, it’s the risk management that’s the hard part.  And that’s the thing, if you don’t get it right you can really screw up your portfolio.  So, it’s really important to get the risk management right, first.  It’s your obligation as the supervisory role it is very important to take care of this for your clients because they look to you, as somebody in this role.  And our society, we are lacking leadership, and our society and I really appreciate the fact that you have taken this role head-on and saying, I am going to do this for my clients because it’s really important to provide this service where all our people are not doing it.                                                      

Kelly:     Yeah, it is kind of like let’s say, CPAs, let’s say tax focus CPAs, we scratch and claw and fight to help clients get an extra $100 refund or minimize their tax by $200, that sort of thing. You know, maybe it is even in the thousands but it’s kind of like when we stay out of the wealth management area where we are not helping on the risk management part of their wealth, what are we doing, I mean, we are winning these tiny little, I wouldn’t even call them battles, I would call them skirmishes.  We are winning those little skirmishes but the entire war is being won and lost and fought and we are not even participating in it.  It’s almost like CPA’s are afraid to get into the arena, afraid to fight, afraid to get shot so they hide in their tent.  I don’t know.  I am mixing a whole bunch of metaphors.

 Kirk:    But yeah, and I think you, I mean, your point is valid because I think, the CPAs we work with, we tend to work with them on a collaborative basis.  And I think one of the challenges is, and this is not just CPAs and advisors this is all service professionals, when we work with our clients, we work with CPAs, we work with attorneys, we work with various different professionals and what I find is common in our industry is that, like, let’s just say, an advisor would say, hey, you should do some estate planning, and, you know, either the client has somebody they work with or the advisor finds them someone, and then they do the work and they put all this package together and they spend a few thousand dollars, and they have this package and their attorney is like, great, you are all set.  And the client is thinking, hey, I am all set and what he really meant is, here is your package you figure out the rest of it.  And the client thinks they are fine so they don’t say anything.  And, you know, they set up a trust or whatever they are doing and they don’t get funded, you know, get set up properly.  So all of a sudden you spend a lot of money for something that isn’t even implemented, and no one knows because it’s just like one hand doesn’t know what the other hand is doing.

 So, what I find is most effective is working with people on a collaborative basis.  So, for instance, you and I, you and I would talk about each client and say, alright, we are going to sit down and work with this client.  Like, we would figure out what kind of tax planning they need, you know, what kind of cash flow management they need.  What about their investments?  What about their estate?   And we look through each of these quadrants of the puzzle and say, what needs to be done, how can we coordinate this?  You know, because we do operate on different playing fields for that because we are doing different things.  So, it’s important that, you know, this kind of collaborative method works well so that the balls don’t get drop, things don’t slip through the cracks, and that everything is getting taken care of.  So, from a client perspective, you are getting a much more holistic perspective of oversight and guidance and you are really getting taken care of from different angles from people who have different expertise.  So, what I find is if people are trying to do everything themselves, it is said the player versus the supervisor, it’s really hard to do everything yourself well. It’s a challenge for any good professional that is collaborative, that want to work together and are not territorial so I think you kind of hit the nail on the head there and that’s one of the reasons why we work together, it’s because, you know, we both see that element of collaboration as being very important for the client, and really doing what’s in the client’s best interest, which I think is the top priority in any relationship.

  Kelly:     Yeah, I think this is a good model, I like it.  Anyway, we can terminate it now so you can get back to the going to the pool or you are using this podcast as an excuse to not have to go to the water park, the urine-filled water park?  

 Kirk:    Lots of chlorine Kelly, lots of chlorine.

 Kelly:   Alright Kirk, I enjoyed it.  Take care of yourself.  How should people get in touch with you if need be?

 Kirk:    Yeah, I’m pretty easy to find, you can find me at So, our website, you can come there, I have written pretty much everything on the website.  I have written myself a lot of the blog post, if you want to get to know about me you can find me on all the social media channels.  I am really pretty easy to find.  And, obviously, you can find me through Kelly because Kelly and I are working together.  So, you know, the path is, contact Kelly and, you know, I can coordinate working with you as well. 

 Kelly:     Okay kirk, enjoy the remainder of the weekend, take care of yourself.

 Kirk:       Alright, thanks.   Thanks a lot, Kelly, thanks for having me on.