All right, so in this segment we're going to be continuing on the topic of risk management. And with me here today, I've brought in a few professionals who work in financial services to provide their perspective on the topic of risk management. First, I'd like to introduce Mark Walters. Mark has 25 years experience working in financial services. In terms of his educational background, he has an undergraduate degree in Economics from the University of Illinois where he also minored in Finance. As I said, he does have 25 years experience working in the industry. He spent some time in banking as well as an investment broker. And for the past 10 years, he has worked as an independent insurance broker as the owner of the Illini Insurance here in Champagne, Illinois. I'd also like to introduce Scott Cline. Scott, in terms of his educational background, also has a Bachelors Degree from the University of Illinois in Agricultural Economics. And then Scott went on to complete a Masters degree in Personal Financial Planning from the University of Missouri at Columbia. Roughly 10 years ago, Scott began his own company based out of East Central Illinois here in the Champagne area. His own company called Cline Financial Concepts where he is a registered investment advisor in the state of Illinois and he works as a fee-only financial planner with his clients. So thank you both for being here. Again, just wanting to get your perspective on risk management and how you approach that in working with individuals or the clients that you work with. And why don't we just maybe start off with Scott as the Registered Investment Advisor and get kind of your perspective on that, and how you approach risk management. Maybe the first time you even meet or sit down with a client. >> One of the issues, the interesting things about risk management is, is that people really don't understand what their risk really is. And so when they first come into the office, they really try to comprehend or try to get a better feel for what they really want to risk in the market itself. And they need to really take some time and really think about that aspect of it. The other thing that when we think about risk, risk is really just volatility in the market, the movement up and down of the market. You think about Caterpillar stock, for example, that in the past ten years has been up about 69%, 67%. And in the past ten years, it's also been down 38%. So many times clients need to understand that or try to figure that out when they first start in the process of understanding their own risk tolerance. >> Okay, and as I understand it, when you do sit down with clients, you have a conversation about risk and specifically how much risk they're willing to take on. And maybe talk a little bit about that process, figuring out what a client's risk tolerance level is? >> We typically use a what we call a risk questionnaire, risk tolerance survey. And the survey is actually very extensive because we want to get the idea of not only how they can deal with volatility, but also their emotions with regards to the market itself from that standpoint. So when we think about risk from that standpoint, it gives us a better understanding of who they are. A lot of clients, when they first take the survey, they don't really see the risk or understand the risk from that standpoint. But if you explain it to them in terms of a highway, an expressway, where if you're driving 65 miles an hour, and you see other people going 75, 80, and others going very slowly. They can understand that concept of risk, and that's kind of the same premise that it is in the marketplace itself. >> So what you find, in working with people, the level of risk tolerance that any individual have is going to vary from person to person. And then what types of strategies, we've talked a little bit about in this module and some of our lecture segments about things like diversification or building an emergency fund. You want to maybe talk about how you approach those things and maybe how you approach them differently for different individuals. >> Well, if we think in terms of emergency fund, that's also a part of your asset allocation itself is the diversification. It's the liquidity part of it. The problem is is nowadays we're having where the defined benefit plans are going away, one a day, in fact, every day. So everybody's going to the defined contribution plan. So it's important for that individual that has a defined contribution plan like a 401K or a 403B to have some liquidity set aside for themselves in case of an emergency situation. It's really important that they have an aspect of it. And then when we think about diversification, it's really important when you have a good diversification or a good diversified portfolio to really be spread out among many different asset classes. You'll think globally in bonds and in equities and then you kind of break it down from there and the bonds would be domestic or foreign, those types of bonds, high yield bonds, those sorts of things. And you think about the equity part of it, a portion of it's international equities, other parts are small cap value type of domestic stocks, large cap value stocks, and so forth, as well as like your REITs where your alternatives like gold and silver and those sorts of thing. >> Okay, so obviously diversification, the emergency fund, we're talking about portfolios. Most of the time, we're talking about people maybe looking towards retirement and setting themselves up for retirement. But there's also some risk that we face that maybe we have to bring in some outside tools, some other tools. And specifically insurance is another topic that we're covering in this section of the class. Do you want to talk a little bit about some of those insurance products that you sit down and talk with individuals about. And how you maybe view them as being part of an individual's portfolios as well. >> When I think about insurance, I think about insurance for death. Somebody dies, they need to have insurance to cover that death, to cover those expenses, like college expenses for their kids, to take care of their significant other or their spouse, those sorts of things. There are many times that the insurance, and some of the insurance is being used for as far as an investment product, which really becomes more costly for the individual because they tend to spend more money to gain that piece of investment insurance, like a UAL, that sort of thing. But also the cost is they had to give up a lot of flexibility with regards to their portfolio itself. So from that standpoint, I tend to steer them away from those types of products. It just really depends upon their needs and so forth from that standpoint. Then also you have the annuity side of it, which there's also pieces of the annuity that you can use within it. But there are variable annuities now that are actually becoming less expensive, much easier for those high net worth type of clients from that standpoint. >> Okay, and if we are talking about insurance products, someone like yourself oftentimes will maybe sit down and talk with individuals you're working with. And then pass them off to an independent insurance broker, like Mark, so maybe Mark, you'd like to talk a little bit about maybe the first time you meet a new perspective client. What are some of the processes you go through in terms of identifying different insurance needs for an individual? >> Well, I think it's very important you get to know your customer. [COUGH] Insurance is very subjective, life insurance especially, their needs are going to change over time. It's going to change depending on their assets, it's going to change depending on their goals, it's going to change depending on whether they're married, whether they have kids. So there's a lot of variables that will help determine what their death benefit will be and their needs will be. Two types of life insurance that we typically used term, which is simply that if it runs for a certain length, and then it expires. And there's a permanent product that will be there forever that you will, at some point, get that benefit. >> And the permanent product I think is what Scott was alluding to in terms of a product that, in addition to the death benefit, it also has an investment component to it, or it may be described in that way. >> It does, permanent bills of cash value, that's how you tell the difference between the two. It's typically not an investment of choice. You would want to maximize your 401ks where you can get a company match. You're always going to get a better return that way. Your IRAs, other deferred products, and then if you still got a lot of money you want to invest, you might think of a life insurance product that is deferred. But there's a lot of fees that eat away at cash value, so it's not your first investment of choice. >> Okay, so we've talked a lot about life insurance. Scott, you kind of talked about that maybe being the primary thing, covering expenses and then future expenses in the event of someone passing away before they expect to. So these are unanticipated expenses where we're insuring, providing some benefits for the family with life insurance policies. What are some of the other insurance products, kind of the main insurance products that you work with your clients, Mark? >> Well, obviously health insurance is very important with the new ACA that came around in 2010. It is the law now, so you have to have that coverage. There is no pre-existing that applies, so everybody can obtain coverage now. It's income qualified, so depending on where your at income-wise, you can get tax credits and subsidies to help pay for that. Auto and home insurance, everybody has that type of coverage. Commercial coverages for business. Disability income is a very important coverage, protect your income. A lot of people don't think about that, but that's another very important coverage. Those would be the most important ones I can think of off the top of my head. >> Okay, maybe just a question for both of you and I don't care who goes first. But, again, just a few thoughts, both of you have mentioned and I have tried to emphasize in this class, that financial planning is a very subjective area. Different people have different needs, different risk tolerances, different asset levels that varied the advice that you give clients and the products that you maybe suggest to them. So maybe just in the range of individuals you've worked with, is there any, specifically maybe talking about young people versus older people. Is there any advice or any words of wisdom that you want to give young adults that are looking at their futures or maybe even in working with your elder clients? Things that they had wished they had done when they were younger to better set them themselves up in a more comfortable position longer term. >> With regards to investments, what I find is is you have a range of older people that have investments, right? And some of them have done very well with them and some have not, or they waited way too long to start. So if anything for the younger investor, it's important to really get started in investments. The other thing that I see is a big problem is diversification. So a young investor will get started in investments, but will have maybe 1 asset class when there's 12 or 13 other asset classes. So it's really important for that investor to understand their risk tolerance, understand what their goals are for the future, and so forth. And to really to think about in terms of a timeline, of a longer timeline and time horizon for them to really get them to feel what that's like and to really just stick with their program itself. >> Okay, anything on the insurance side, Mark? I know as a formerly, at one point, a younger person, and myself viewing, I don't need life insurance, I'm young, I'm never going to die. >> Do you see that attitude as being a general attitude of young people? >> No doubt, I mean, I have two kids in their mid-20s now that don't think about insurance at all, but at some point, it will continue to escalate in price. As you get into your 30s, 40s, 50s, it starts going up considerably, so if you have the wherewithal to plan and fit that in your budget at an early age. You can get a 30-year term, $1 million for $20 a month. It's very cheap and inexpensive. But I'm all about, I always take the approach as a consumer advocate, I love people that self-insure, take higher deductibles, save as much money as they can, plant a lot of seeds on the investment side, grow it early, grow it often. And by the time you're 40, into your 50s, you're going to be happy you did that. >> Yeah, so I think a key message is your 20s is the time to think about this. It's not waiting until your mid-30s or your 40s to start worrying longer term issues like this. Okay, and maybe just for an insurance perspective, Mark, we talked about the main insurance categories. And I think because we live and work in the US, we've had a, not necessarily US bias, but talking about things in terms of requirements on auto insurance in the US and requirements on liability insurance and things like that. Maybe you speak little bit about is there differences in other parts of the world that you are aware of that would be different for people coming from other areas? >> I mean, I have a Korean couple that owns a nail salon that recently purchased health insurance and it was all about price for them. And the communication barriers were the biggest problem, trying to communicate what the coverages were or they could use it on those type of things. That's always the challenge when I have a foreigner that way, but it's not like a risk assessment for the market that I'd, just it's a little bit different there. Does that make sense? >> Yeah, yeah, yeah, yeah, it really is and it's really the communication and you think about international clients, there is a barrier there of communication. And so you have to be able to work with that, work through that barrier with communication. I mean, I don't know Chinese, they know English pretty well, but there are things that I say that we have to repeat. Or I have to, when we do Skype and we talk through the process, there are things that I got to show them physically. So they say, yeah, I understand that now from that standpoint. >> And for both of you working in a university community that has a relatively large international population, working with maybe a second language with your clients. That's just a challenge you have to work through and communication would be an issue even with domestic clients just because of the background and the expertise about financial issues, correct? >> Mm-hm, and so they're looking for that guidance from people and, I mean, I think they're looking at mature markets, like the United States market and so forth. They try to get that guidance from us from that standpoint. >> All right, so I would like to thank both Scott and Mark for sitting down and having this discussion with me and providing their perspectives as professionals working in the industry. >> Thank you very much. [MUSIC] [SOUND]