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Portfolio Management Playbook

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Nitrogen Customer Care
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Investors are fearful of change in volatile and difficult times; status quo is easy. Here’s how top-tier advisors guide their investors through it all.

IN THIS ARTICLE

Introduction

This guide is for advisors who want to improve their process to serve their clients more effectively. We'll cover how advisors use Nitrogen to build and fine-tune portfolios to up their game—model and client portfolios alike.

It's often a struggle to find tried-and-true methods to hone portfolio creation and refinement sufficient to demonstrate to prospects and clients the switch is worth it. Whether your investment approach is passive or active, Nitrogen is built for both.
In this guide, we’ll walk through constructing, reviewing, and calibrating portfolios to prepare for market fluctuations and environment changes.
 

First Steps…

To begin, advisors import several existing portfolios into Nitrogen for analysis, highlighting insights into their portfolio construction method. Looking at the existing through a new lens rekindles ideas and satisfaction in the process. The results are clear: top producers use the Nitrogen lens to stay ahead of the curve.

To get a jumpstart on the math behind Nitrogen, see our Calculating the Historical Range guide.
With Nitrogen, advisors use multiple accounts to set the client’s global objective and sub-objectives for each account.
For example, John and Debbie have five accounts. Using Nitrogen, their advisor would first ensure they are within their overall Risk Number, say a 54. Next, they would analyze each account’s goal. Within the portfolio are five accounts, two may be for retirement; one for a grandchild’s 529 accounts; and the other two for shorter-term purposes.
Each account may need to be at a different Risk Number: the 529 accounts might be a Risk Number 86, the retirement accounts in the 60s, and the other two in the 30s and 40s, together, we achieve the Risk Number of 62—matching the client’s objectives and tolerance for risk.
The goal is to demonstrate your client's aggregate Risk Number while aligning each of their goals to accounts within the portfolio. The aggregate Risk Number is not simply an average of all accounts’ Risk Numbers—it's analyzing the past performance and correlations of every security as a holistic total.
Nitrogen assists advisors in building out the roadmap for clients to achieve their goals—short and long term.
 

The Risk Number and 95% Historical Range

To apply Nitrogen to your context, it’s best to first sketch out your portfolio structure to ensure portfolios are aligned with your clients.
For example, many advisors build a sequential range of model portfolios from, say, a Risk Number 15 to a Risk Number 95. This creates a very simple, straightforward method for a portfolio to fit any of your clients and prospects.
Other advisors will use these as idea templates where they craft and customize them further for each prospect or new account from clients. Say an advisor wants to create a Risk Number 38 for a client, they can take a Risk Number 45 portfolio and adjust it accordingly.

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The Six Month 95% Historical Range gives you the information you need to carefully act on serving your client. Are they going to be more focused on the upside or downside? What value adds can I create for them?

 

Managing Portfolios

Determining a Client's Desired Risk Number

To find a client's Risk Number, advisors balance the Risk Assessment with the client’s needs derived from their goals. Advisors can use a combination of:

  1. Finding their Risk Number via a Risk Questionnaire or Risk Targets.
  2. Using Retirement Maps to determine how much risk is needed.
Oftentimes advisors need to weigh the risk a customer wants with their long-term goals. Using a Risk Assessment with Retirement Maps helps weigh the needs with wants.
Once complete, you're ready to construct the portfolio based on the Risk Number you've arrived at.
 

Constrain and Construct

When preparing a proposal, create a proposed portfolio by pulling in a model portfolio or copying the current portfolio to review and recalibrate.

Advisors often wrestle with questions such as what portfolio constraints, such as minimum equity exposure, do we need? Do we need to set aside any cash? Are there any tax implications I need to think through, such as realized gains?  

Most advisors review portfolios at the household level. This grants the flexibility of navigating a 401(k) account with limited options. Overall, they achieve their objective: diversification at the household level—rather than the account level—that fits the client's Risk Number and long-term goals.

Some advisors will customize the portfolio for each client; others will start from a base recipe and mix it up depending on the client; others use a set range of model portfolios. Whatever your firm’s strategy, Nitrogen is flexible for these and more.

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If you already have a portfolio outside of Nitrogen, you can get started through a few options, such as the spreadsheet importer.

Other advisors start from scratch and, as part of their vetting process, run securities through Nitrogen to find the best of the breed. A popular option is to select similar asset securities (i.e., US large-cap growth funds) and drop them into the Optimizer to filter the top 2-3 securities.

After coming up with several favorite funds and securities, they construct a few draft models with their best ideas, effectively creating a sandbox to experiment with new and different ideas.

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With this, advisors build portfolios that are defined, suitable, and presentable.

Review, Rebalance, and Recalibrate

At this point, we know where the client wants to go, where the goalposts are and have constructed strong, durable accounts.

During a periodic review, advisors often run through a checklist similar to below:

  • Are our current investments still top of the line? Should we make any changes to the allocations? 
  • Is there a more efficient portfolio that we can construct? 
  • What accounts do we need to rebalance and how can we use the models in Nitrogen to ensure we're within the Risk Number range?

Everyone is different as most firms often review their portfolios on a monthly, quarterly, or semi-annual basis. In that review they run through a series of questions:

  1. Vetting new funds: have I run them through Nitrogen? Have I examined them through the Optimizer and the Stress Tests?
  2. Alignment: are my portfolios aligned with their original intent? Do I need to make any adjustments?
  3. Rebalancing: do I need to rebalance my portfolios?
  4. Diversification: does the portfolio retain sufficient diversification?
  5. Goal-oriented: is the portfolio sufficient to achieve the long term goals of clients?
Advisors use the tooling below—such as the Stress Tests, Risk/Reward Heatmap, and Optimizer—to periodically reassess earlier outlooks and assessments to prepare for what’s coming. Curious what adding a 5% oil position would do to a portfolio? Drop it in and see. Look at it through the Risk/Reward Heatmap lens, or jump to a Stress Test. Ensure it’s within bounds.
We’ve talked with many advisors who love using Nitrogen to manage portfolios—it gets the job done, is fun to engage with, and tells the story to clients. As an advisor. one of the most important accomplishments is that you’ve done this before; you know the bumps and twists in the road. This is your turn, this is where you are the guide for your clients and come alongside them to build confidence in their roadmap.
 

Tooling

Thus far we've laid out the path for managing portfolios; now it's time to highlight the means and methods.

Advanced Risk Modeling

With Advanced Risk Modeling, advisors stress test portfolios under various scenarios, by adjusting the outlook of the S&P 500 and 10 Year Treasury. Thorough reviews significantly enhance portfolios for advisors by creating a rock-solid portfolio, capable of enduring various market elements.

Stress Tests

Similar to Advanced Risk Modeling, quickly flipping on the Stress Tests is a quick and straightforward way to double-check to ensure you’re on the path to success. Whether watching the downside of equities or bonds, or assessing the potential for gain in an up market, Stress Tests help advisors quickly address the burning question: "how will my portfolio perform in ______ scenario?"

Optimizer

The Optimizer is an excellent way to arrive at the most efficient account. Whether you want to see what the top 2-3 holdings are, or add in some constraints for a broader portfolio, the Optimizer serves advisors as a great start to confidently building the strongest portfolio.

Dividends and Expenses

Dividend Yield and Expense Ratios are helpful indicators to advisors to deliver helpful feedback in the portfolio building.

Looking to build a strong, low-risk portfolio with resilience in a rising interest rate environment? Perhaps dividends are the way to go. This is the way to confirm a sufficient Risk Number and dividend plan.

Security Analytics

The Risk/Return Scenario opens the advisor-client discussions to broader topics. Dive deeper into the return and standard deviation calculations. Use the extra information when deliberating the next step in the vetting process.

Flexibility is provided through making small tweaks to the portfolio while looking at the underlying analytics—change the holding’s percentage to increase/decrease risk/return exposure.

These are simply a few options; we see advisors every day applying Nitrogen in innovative and creative means. Find the method that works for you to delight and satisfy your clients.

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