Managing risk is something Wells Fargo Advisor Michael Riherd often finds himself explaining to clients.
The situation is particularly acute in technology centric Northern California where many business owners and top executives have most their net worth tied up in the stock of one company.
“They might have $20 million or even $100 million in the appreciated stock of one company,” Riherd said. “This stock was paid to them over time and they figure that if a stock has been good, then why sell it.”
Riherd said he and his partner, Christopher West, run into this problem all the time. They are co-managing directors of Riherd-West Financial Group in Walnut Creek, California. The two men oversee a 6-person team that manages $3.6 billion in assets.
“I have to work to try and convince clients to change their thinking,” said Riherd, who has spent the past 31 years working in the wealth management industry. “It is an ongoing struggle.”
Riherd came up with an idea while on vacation.
He visited the Seven Sacred Pools, a natural phenomenon on the Island of Maui. The pools are formed by a series of cascading waterfalls located on a mountain side. When one pool fills, the water majestically runs downhill, filling the lower pool below. The process repeats itself. Riherd saw the pools as a metaphor for how he could explain the concept of diversification to clients.
“I thought if we created pools this would be a good way to limit risks and show clients how they could diversify their money,” Riherd said.
The process is easy to explain, Riherd said. There are three pools. Each pool has a prescribed purpose. Current expenses and debt repayment, a future lifestyle pool, and finally, a higher risk investment pool.
“The higher risk pool is funded only if there is money left over after funding the first two pools. A lot of these people have an entrepreneurial itch so this approach satisfies that urge.”
The future lifestyle pool is for retirement. It has to beat inflation and maintain purchase power, Riherd said. “The idea here is you are going to use standard investment classes (stocks and bonds) where the range of potential outcomes is already known.”
By taking this approach, Riherd said he is controlling investment risk and diversifying clients’ holdings. The money used to fund the pools comes from company stock holdings. This is done after consulting with clients.
Riherd and his team were picked as winners at a recent Forbes | SHOOK Best Idea competition. Judges included representatives from First Eagle and PIMCO, which sponsored the contest.
Riherd, the son of two school teachers, grew up in Pasedena, California and ended up getting the teaching bug early in life. “My parents had a massive influence on me and I love teaching people,” he said.
“I built my career educating attorneys and accountants about simple concepts like bond duration. A lot of people don’t understand how this is key to understanding the risk in a bond portfolio.”
Riherd said he was surprised to learn that basic financial literacy, despite its importance to life, is not taught in most schools – even at the college level. “Professors teach philosophy, but don’t give students enough knowledge to apply what they are learning in a practical way.”
Riherd added: “I think in my life and when someone took the time to teach me something, I felt very indebted to them. I felt they were looking after me rather than just trying to sell me something.”
