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Managing the risks of market exposure

by | Sep 25, 2014 | Advisor Interviews

Managing the risks of market exposure

by | Sep 25, 2014 | Advisor Interviews |

Nancy Hairsine, CFP, RFC • Pittsburg, CA
Lifetime Planning • Foresters Equity Services, Inc.

Anticipating conditions that could threaten livestock and crops, farmers must plan for the worst and protect for the future. Nancy Hairsine’s father was a farmer, and like him, she uses a variety of financial tools in her efforts to mitigate market risk and preserve capital.
Proactive Advisor Magazine: Nancy, how did you enter the advisory business?

I am a farm girl, growing up on a small farm in Minnesota where my father raised a variety of livestock and crops. We all knew what it meant to work hard—preserving what we had and making sure we had enough to live on from year to year. We were always taught to plan for the unexpected, because in farming you always had to manage the risks.

I started in the financial-services industry after getting married and moving to California, where I worked for a real estate firm that was well-diversified with many different types of real estate investments. I eventually went to work for a financial advisor and received my CFP designation through a program run jointly by USC and the College of Financial Planning. The rest is history, as I eventually started my own firm and have grown that practice ever since.

What have you learned through that journey?

I am passionate about working with clients from all walks of life, especially middle Americans. I think they—more than anyone—have been underserved by the industry and perhaps need strong financial education and guidance. But, many times they do not think they really qualify to work with a financial advisor or are misinformed about how much it might cost. They have worked hard all of their lives, which I can relate to, and need to preserve, protect, and grow their assets.

From my upbringing on a farm, I often use analogies in talking to clients.

Interesting. Can you share some of those?

I think it starts with managing risk. Farmers are exposed to all kinds of conditions outside of their control, most importantly the weather. But there are lots of very sophisticated tools they can use today to manage risk, including financial instruments such as futures hedges and vast improvements in farming technology.

This, to my mind, is directly analogous to managing within today’s financial environment. You cannot control what is going to happen in the economy or within specific markets, but you need to use the most advanced and modern tools to manage risk.

How does that translate into your planning process with clients?

I have a specific discovery process for clients that I have refined over the years. Within this, a step I call the “R Factor” is one of the most important, and it helps identify risks and opportunities for an individual or couple as I review their total financial picture and long-term planning. This includes developing a comprehensive and realistic risk profile.

While managing risk comes into play in every area of a financial plan, it is especially pronounced on the investment side. My goal is to focus on the investment strategy that has the highest probability of achieving the desired results while understanding and mitigating the associated risks.

How do you do that?

It really goes back to my farming analogy, and the use of the most modern techniques. The advancements in portfolio management through third-party active managers has been remarkable. They use technology to identify the most appropriate strategy combinations for a wide variety of risk profiles. They also use models and algorithms to guide decision making on when to be in or out of the markets, when to use leverage, and when to emphasize or de-emphasize certain asset classes or sectors. All of this helps my clients to achieve the goals we have set up for the long term and provides a great deal of peace of mind—they do not have to worry about every little wiggle in the markets.

How important is the client’s understanding of active management?

It is very important. Not in the sense that they have to understand every nuance of a strategy or what is behind the technology, but in a broad sense of what it is expected to do. First, it provides a solution to worst-case scenarios like we saw in 2008. That is really critical to being comfortable with exposure to equities, as a good portion of my client base is in or near retirement.

Second, for my average client with a conservative risk profile, they understand that we are looking to put together a well-diversified approach with lower volatility. This may not mean they are getting the returns their neighbor is bragging about in a roaring bull market, but it does mean they can sleep at night. And that is what our planning process is all about—identifying the needs and goals of clients and putting together risk-managed strategies that are well-matched to their specific objectives.

Where does education play a role for clients?

It comes throughout the planning process, but it is probably most important in developing risk profiles. What people may believe about their comfort level with portfolio drawdowns can be very different than the actuality if markets were to go down fast and hard. So there are really two parts to the equation: (a) helping clients to identify a risk assessment they can comfortably live with and (b) using active management to stay as true as possible to that profile in terms of risk within a portfolio.

Overall, this approach has worked well for my practice. I seldom receive any sort of panicky phone call questioning what the markets are doing and the short-term impact that may have. In our quarterly review sessions, we do get very granular on performance and, if the education was conducted and absorbed properly, these tend to be very satisfactory meetings. Some clients will still try, on occasion, to compare performance to the S&P 500, but I always point out that they then also would have to accept the 30%-50% drawdowns of the past two market crashes. That usually provides the proper perspective.

It is really all about long-term positive growth of assets, managing risk along the way. A lot of my clients have more or less grown up with me and they depend on me to stay abreast of the latest tools and strategies. The evolution of actively managed strategies and data-driven decision-making really helps meet that objective for my practice and my clients.

Disclosure: Nancy Hairsine is an investment advisor representative offering securities and advisory services through Foresters Equity Services, Inc., a registered investment advisor and member FINRA/SIPC. Lifetime Planning and Foresters Equity Services are separate, unaffiliated entities.

Photography by Saul Bromberger and Sandra Hoover