Customizing financial approaches to meet client needs

Mark Zawasky • South Park, PA
Zawasky Advisors • Questar Asset Management (QAM)
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Proactive Advisor Magazine: Mark, how do you begin your investment planning process with a client?

I have been in the financial-services industry for close to three decades and believe that creating a solid personal relationship is critically important to working successfully with clients. Like most advisors, I initially take clients through a discovery process, but I believe that needs to go deeper than just the facts and figures. I am interested in knowing all about what makes them tick as people, what they consider to be the important priorities in their lives, their family dynamics, and their past experiences—good and bad—with their finances and their investments.

While I consider myself primarily to be an investment advisor affiliate, I think it is important that I first delve into more basic financial issues with a client or client couple. Personally, I find it very helpful to have initial meetings with clients at their home, as that helps me to get to know them better as individuals. One of the most important and sensitive issues we might discuss is debt management. That is an area that many people might be uncomfortable speaking about at first, but I try to create an open atmosphere where we can get all of the issues out on the table. Helping people attack any serious debt issues, especially high-interest-rate debt, is an important first step before thinking seriously about investment approaches.

Some other factors we usually discuss relate to their relationships with other trusted advisors and family members. Do they have an existing relationship in place with another advisor? Are they looking for a second opinion, or is this the first time they have worked with an advisor? Do they have key relationships with an attorney or CPA I should be aware of? What is their family situation, in terms of children, parents, or other relatives that may impact their planning objectives? What is their broad outlook on legacy planning? By the time we work through these types of questions, I will be more fully prepared to help them begin assessing an overall investment planning approach.

“When a client can envision achieving long-term competitive returns with a quantitatively lower exposure to risk, it makes a pretty persuasive case for actively managed strategies.”

What is the mindset of your typical client related to their finances and investing? How do you approach education?

That is a difficult question since I build a customized approach for each and every client that fits their financial needs, their objectives, and their outlook on risk. To generalize, most of my clients are approaching or are in retirement, they have worked hard their entire lives, they have been savers, and they are generally conservative in money matters. Most of my clients are very content with their current lifestyle, and their objective is to maintain a healthy financial picture throughout the rest of their lives. They are not investors who are looking to take great risks or to put their life’s savings in jeopardy.

Some clients are more sophisticated than others, but I think virtually all clients respond well to some basic education about investment concepts that are important in the current financial environment. I like to explain the recent history of the markets, risk management, diversification, and issues related to the sequence of returns. I take clients through some broad trends of the S&P 500 over the past 15 to 20 years, showing the volatility, drawdowns, and roller-coaster ride the index has experienced. While everyone is aware of the market crashes that have occurred, very few of my clients have really looked hard at market cycles and the length of time it takes the market to get back to a former high or breakeven level. This type of discussion sets the stage nicely for when we get to the point of discussing specific investment alternatives.

 

Explain the role of actively managed strategies in portfolio allocation.

Actively managed strategies, whether they are for equities or bonds, offer an additional layer of diversification and risk management for my clients. As I mentioned, our clients tend to be more on the conservative side and are typically middle- to upper-middle-income families. When I describe to them the performance characteristics of actively managed strategies, and how they are designed to smooth out long-term volatility, it becomes a very good match for what they are generally trying to achieve. They want to see steady growth in their portfolios, with drawdowns minimized to the degree possible. They are not looking to “beat the market” or take on unnecessary risk. When I explain this conceptually, it is usually quite a bit different from what people are used to hearing, but it is almost always received as a very positive message.

I would estimate that about 30% of our clients’ assets under management are now in active equity and bond strategies, and that percentage keeps growing each year. I tell clients that even though the stock market continues to perform fairly well since the credit crisis, it is only a matter of time until we see the next market dislocation. I do not profess to be able to say when or why that will occur, but history tells us it will happen again.

This idea is especially important for retirees who need their portfolios to provide retirement income over the long term. When withdrawals have to be made during periods of steep portfolio drawdowns, it is far from an ideal investment planning situation. We are trying to help them avoid that kind of scenario through the combination of a sound asset-allocation strategy; making sure a retiree’s other sources of income are well-coordinated with their broad investment portfolio construction; applying several different elements of diversification; and utilizing active, risk-managed investment strategies where they make sense. I firmly believe that this sort of approach can produce a higher probability of competitive returns, with a significantly lower level of risk.

How do clients react to the performance of risk-managed strategies during a strong bull market?

It is clearly a matter of setting up mutually shared expectations throughout the investment planning process. I explain clearly that these types of managed strategies can deliver competitive returns with lower levels of risk exposure, but that there can be a trade-off. When equity markets are on a very strong bull run, it is not likely that managed strategies will capture all of the gains of a broad market index. But on the flip side, these strategies are also not going to see the devastating losses that accompany the kinds of markets we saw in the early 2000s or in 2008 and 2009.

I tell clients that this is the reality of the situation—if you want to achieve the very best years of S&P 500 Index returns, you also have to be prepared to accept the worst years. That means drawdowns of 30%, 40%, or even over 50%. Very few people, when it is explained this way, see that as their preferred investment strategy. We can, of course, get as aggressive as any individual would like to, but that is not something I would generally recommend. When a client can envision achieving long-term competitive returns with a quantitatively lower exposure to risk, it makes a pretty persuasive case for actively managed strategies.

How do you follow up with clients on their progress toward objectives?

I schedule regular review sessions with all clients, where we can both see how they are tracking toward their investment goals; explore whether their family, business, or employment situation has changed; and make adjustments where appropriate. One of our third-party money managers also offers a goals-based tracking methodology that is applicable for client portfolios that they directly manage. While the technology behind it is pretty sophisticated, the information is presented in a way that is very easy for clients to understand, showing how their portfolios are doing within a range of expected return outcomes. Clients have responded very well to that.

Overall, it is a real plus to have the ability to combine a quantitative assessment of a client’s investment progress with our softer discussion of how they feel they are doing overall in their personal and financial lives. I think this helps build a strong relationship and enables us to work closely together toward making their financial goals become a reality.