Blue-ribbon portfolios for ‘Main Street’ clients

K.C. Crahan • Shelbyville, KY
Crahan Wealth Management • LPL Financial
Read full biography below

Proactive Advisor Magazine: K.C., what is important to you regarding investments for clients?

Despite having seen all types of market environments over the years, my investment philosophy really has not changed much at all. That is because I have always believed that you take what the market gives you in terms of what is performing relatively well at any given point in time.

When I present recommendations, I tell clients that it is probably not what I would have recommended a few years ago and probably not what I will recommend several years from now. This helps them understand that markets constantly change, and their investment plan and portfolio need to be flexible. We want the opportunities that are presenting favorable outlooks now, while avoiding weaker-performing areas.

How do you implement that basic philosophy?

It really depends entirely on the client—their goals and objectives, their financial-planning requirements, their outlook on investments, and their risk profile. I tend to be more hands-on with client investment portfolios than the typical financial advisor. I have a real passion for and interest in the financial markets, and I also enjoy working with clients who share that passion.

I’ve always designed portfolios with the client in mind first and use a number of resources to help them meet their specific needs. I have three distinct ways I might approach a client portfolio and will use any or all three in combination.

First, I conduct a lot of fundamental and analytical research and have some excellent research services that I consult. With some clients who wish to be very involved and who might have their own strong thoughts on investment ideas, I strive to work with them on a customized approach. This might involve individual stocks, or it might be broader sector investment approaches, for example. I tend to be conservative by nature, so I am often the one who has to rein in a more aggressive client. But, frankly, I enjoy the give-and-take and conducting research for my own use and for my clients.

“I use a more holistic, third-party-manager approach—strategies using a variety of asset classes and multi-strategies within a portfolio.”

Second, our broker-dealer offers a fairly extensive array of sophisticated portfolio-planning and asset-allocation options based on client suitability and risk parameters. I use some high-quality portfolios such as aggressive growth or growth with income or other suitable options for a specific client. These work well for clients who might want to be very involved with the core decision-making upfront but then prefer to let those portfolios work for them over time.

Finally, I use third-party money managers who offer active strategies that I cannot replicate on my own. These might be highly complex tactical strategies based on algorithmic models. Or they might have tactics, like portfolio hedging, or taking inverse positions in a down market, that I just do not feel qualified or comfortable doing myself. These are very viable strategic alternatives, and outside managers have the ability and tools to do that well.

I also use what I call a more holistic, third-party-manager approach. These strategies use a variety of asset classes and multi-strategies within a portfolio. They can basically go to any kind of fund or ETF, commodities, currencies, or more global investments. They tend to be momentum- or trend-based and can vary their allocations and exposure according to how their models view market conditions.

How do you position the benefits of active portfolio management to clients?

It is all about setting realistic and mutual expectations. Even though I am willing to consider a wide range of investment alternatives, risk management and capital preservation are at the core. I explain to clients, for example, that if we are able to achieve about 75% of market gains in a bull market but manage our way around the big losses in a bear market, their portfolio will be far better off in the long run.

I demonstrate this by showing actual returns over a lengthy time period, and it makes the case very strongly. It’s pretty much there in black and white that active strategies have underperformed to some degree in bull markets but performed exceptionally well in bear markets. As long as clients understand those types of performance expectations and are comfortable with them, we are on the same page and in good shape moving forward.

Is there a specific type of client you tend to target?

I love working in a small-town atmosphere, getting to know as many people as possible. There really is no one demographic or occupation that I am focused on. I work with clients who have many years of working and accumulation left to go and retirees well into their 80s or even 90s. Over my 25 years in the business, I have worked with clients who came to me with very little in terms of assets and others who ended up leaving millions to charities and their families.

I have found as an advisor that the single most important thing in a client relationship is making sure there is a comfort level on both sides of the table. I am going to be a straight shooter with clients, no matter their financial situation, and I expect the same in return.

Building that comfort level works best when there is something of a shared philosophical outlook. I describe myself as conservative and risk averse, but with very high aspirations and goals. If a client shares that type of mindset, it sets a strong foundation for an excellent relationship. It has been very gratifying over the years to build those relationships on both a professional and personal level.