When it comes to dealing with clients, Bob Owens, CEO and wealth-management advisor with Owens MacFadyen Group in Saint John, N.B., says his mantra is “planning first, product second.”

Although nobody can control investment returns in volatile markets, what clients can control are their own choices and behaviour. And having a well-designed road map will trigger signals when adjustments to the portfolio need to be made.

Over the years, Owens has learned the importance of planning in both helping his clients reach their goals and preparing them – psychologically and in their portfolios – for the market fluctuations that are bound to occur over the long term.

“For every 10 hours we spend with a client, nine of those are on planning-based issues,” Owen says. “Maybe the investment products are not working as hoped for a period of time. [If so,] we can work with the client to help them understand the implications of what is going on and what the plan will achieve in the long term.”

But, Owens adds, because life’s events are not always predictable, he and the client must frequently revisit the financial plan to accommodate unforeseen changes.

“We can plot where we are on the journey,” Owens says, “and if clients need to make adjustments, we can help them come up with alternatives, such as saving more, working a little longer or adjusting their lifestyle to spend less.”

For Owens, detailed planning also encompasses building wealth through efficient tax planning. A focus on dividend income or holding investment fund units within a tax-deferred corporate-class structure can boost income even in a low interest-rate environment.

Equity risk can be controlled through judicious selection of individual securities, prudent diversification and careful examination of the long-term results of professional fund managers and their risk profiles.

“We are concerned about downside protection, and it starts with asset allocation,” Owens says. “The fact that yields are low doesn’t mean you should avoid fixed-income securities. Our value is in helping clients maintain the discipline [and] keeping allocations in line.

Clients know what their money has to do in the long term, and what average annual rate of return they need. But, Owens points out, his clients also know that their portfolio is not going to achieve the same return every year.

Owens devotes a considerable amount of time and effort to educating his clients about market behaviour so that when downside volatility eats into returns, clients are prepared for it. Owens demonstrates graphically to clients what has happened to markets historically, showing that, based on long-term cycles, clients can expect to be up or down by as much as 40% in some years.

Clients who do not have a good understanding of market cycles tend to overreact to extreme ups and downs.

“Difficult times are like rainy summers,” Owens says. “They come along sometimes, but don’t last forever. When clients are fearful, all they can see is things getting worse. And when they’re euphoric, they think the good times will never end.

“People tend to think that whatever is going on in the moment is likely to continue,” he adds. “But that’s seldom the case. New challenges come along and we adapt.”

Owens explains to his clients how markets swing from greed to fear as they move in cycles, and that valuations move to extremes. For example, he says, in the late 1990s, technology companies with no revenue were soaring in value, trading on nothing but ideas. These kinds of value distortions cannot last; nor will good companies with growing profits remain permanently undervalued.

“People who were not disproportionately invested in technology in 2000 were not devastated by the tech crash,” Owens says. “If you get slaughtered in a meltdown, it’s difficult to come back. It comes down to risk management. An asset mix is designed for, and must be maintained in, difficult times – and also for times of euphoria.”

Owens points to extreme periods, such as 1981-82, when mortgage rates were in the 20% range and people thought they would go even higher; or Black Monday in October 1987, when the stock market crashed and some market-watchers thought it was the demise of capitalism.

Because clients are strongly affected by the emotions of fear and greed, financial advisors must be the calming force that will keep clients on track, Owens says. It’s not enough to be calm; the plan has to be in place and, if problems crop up, then solutions can be devised.

A client’s spending habits would be more likely to cause Owens concern than what might be happening in the stock market at any given time. But, he adds, spending is usually an issue in which the client has more control than the advisor.

“We build our own charts, and illustrate in advance what can happen,” Owens says. “Based on history, we expect volatility, and see no reason for that to change. We spend an inordinate amount of time in the first year with a client, establishing the principles and setting goals. It’s labour-intensive, but when something happens like the financial crisis of 2008, if you’ve done the groundwork ahead of time, there is no reason to panic. We remind clients that a well-thought-out plan has been established, that we knew this could happen – everything is in order and we’re relaxed.”

Owens believes it is paramount for advisors to develop their skills in discussing human issues. That means encouraging your clients to talk freely and honestly to you about such personal matters as debt, spending and supporting children. To help your client fully, Owens says, you must know your client’s real picture and, ideally, should be handling all of your client’s investments as well.

Owens avoids clients who are dividing a nest egg among a number of financial advisors. That, he says, would, in effect, put him in a race against other professionals in which the focus is usually on short-term performance.

Owens’ roots are in the insurance business. After graduating from college, he sold life insurance, which usually led to financial planning. He later ran an insurance agency and set up his own company in 1995, offering insurance and comprehensive wealth planning, including investment management, income planning, estate planning and business-succession planning.

Among Owens MacFadyen’s clients are 500 business owners, and Owens helps to set up benefits plans for business-owner clients’ employees. Owen’s firm has its own legal and accounting specialists.

“Clients’ needs are diverse,” Owens says, “and our firm can help in more than one area. We are not totally exposed to market conditions. From our perspective, that’s diversification.”

This is the third instalment in a three-part series on the strategies of veteran financial advisors.

© 2012 Investment Executive. All rights reserved.