Money Advice for People in Boom-or-Bust Fields; Jay Reynolds borrowed heavily to buy the company in 1980. He then struggled for nearly two decades as demand suffered until the business finally revived

March 8, 2013

Money Advice for People in Boom-or-Bust Fields

By PAUL SULLIVAN

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Jay Reynolds, president and chief executive of Rod Ric Drilling in Midland, Tex., borrowed heavily to buy the company in 1980. He then struggled for nearly two decades as demand suffered until the business finally revived. 

MORE financial advisers are focusing on a single clientele, say, doctors or athletes. That would seem to make sense, since concentrating on a single group of people gives advisers greater insight into the needs of those people. And if the advisers do a good job, they will get that client’s colleagues as clients.

Advisers can, of course, organize their practices in other ways. Many focus on a dollar amount. They promise to give good advice to any client with more than $1 million, $5 million or more, regardless of where that money came from. By taking this tack, they are also eliminating the need to have more, less wealthy clients.

And some advisers organize a practice around a life event, like retirement or divorce. But what does a divorced woman with three young children and a deadbeat former husband have in common with Elaine Wynn, who received nearly $1 billion when she divorced Steve Wynn, the casino mogul?

Still, is managing money for a group of lawyers, say, any different from managing money for another high earner? A dollar is a dollar, after all. Or is it just a way for advisers to market themselves?

“To the adviser, the benefit is he is not having to continue to reinvent himself,” said Mindy Diamond, president and chief executive of Diamond Consultants, a firm that recruits advisers. “It creates economies of scale and a more effective deployment of resources when the adviser is focused. It also creates a steady stream of clients.”

Ms. Diamond said clients benefited as well. “You’re not paying for him to figure out a situation, because he’s done it before,” she said. “He has insights into your fears and challenges. It creates an atmosphere of customized service. Typically, they’ll have superior knowledge versus the generalist because they speak the language.”

While being comfortable with an adviser is important, what ultimately matters is the quality of advice. Is it true that different professions have certain tendencies as a group, both good and bad, that could benefit from being managed? It turns out that they do.

This week, I’m going to look at some highfliers whose income can rise to unbelievable levels one year and all but disappear the next — in this case, people in the oil and gas business and professional athletes. Next week, I’m planning to look at executives in Silicon Valley and in real estate whose wealth is predicated on a volatile asset: the company they are building and hope to sell before interest dries up. And last, I’ll look at the slow but steady earners: doctors and lawyers.

In all of them, I have found behavioral tendencies that may frustrate their advisers but that the rest of us can use to make better decisions.

RIDING OUT BOOMS AND BUSTS To say wealth in West Texas and other oil and gas regions is cyclical is putting it mildly. Booms and busts go with the business.

Jay Reynolds, president and chief executive of Rod Ric Drilling in Midland, Tex., followed his father into the oil and gas business. But when he struck out on his own, he got a lesson in the fickleness of the business. He borrowed heavily to buy Rod Ric Drilling in 1980 and then watched for nearly two decades as demand for drilling equipment for oil and gas fields fell or remained below what it had been. Over that time, the bank he borrowed from failed, and he worried that his loan would be called.

“We were able to get through those years by being very careful with what we did and how we did it,” Mr. Reynolds, 56, said. “These recent years have been a surprise. Hydraulic fracturing has brought these fields to life.”

What he learned from the experience was the need to manage cash and the benefit of diversifying sources of income as well as investments. He said he has been buying real estate recently with an eye toward mineral rights and royalties, which could be a source of income.

Mr. Reynolds said he had balanced the high risk in this business by taking less risk in his investment portfolio — an approach anyone with a volatile or lumpy income could benefit from.

“Our clients’ businesses are so capital-intensive that they could easily sink all their net worth into their business,” said Dane E. Crunk, co-founder and managing director of Syntal Capital Partners, which works primarily with oil and gas clients like Mr. Reynolds. “When they’re bringing capital to us, it’s not for rates of return. It’s seeking diversification away from their core business and preservation of capital.”

Mr. Crunk said his firm worked to keep some money safe, creating a modern rainy day fund. That idea is often overlooked in the oil and gas business and beyond.

“I learned early that things can change in a very unexpected way,” Mr. Reynolds said. “When things get better, they get better very quickly. But there is a downside. Out here, you don’t bet the farm.”

HANDLING A WINDFALL While people who go lose it all in the oil business could make it all back in the next boom, most athletes have just one windfall in their lives. There are all too many stories about athletes spending a lifetime’s worth of income in just a few years and having no idea where it went.

Advisers said one of their big problems was persuading clients that they could be in that spot. “Everyone thinks it’s not going to be their problem,” said Frank Zecca, a senior vice president at Octagon Financial Services, whose clients include the Olympic swimmer Michael Phelps and the former basketball great Moses Malone. “I talk to them about how they’re going to need the money to last a long time.”

Spending everything they make and more can be a problem. To deal with that, Mr. Zecca said, he adopted a strategy a few years ago from the mental accounting playbook. Instead of nagging clients about buying foolish things, which he did for years to no avail, he persuades them to invest a certain percentage of their income every payday and then sets goals for them.

“We allow them to spend money on things that are commensurate with the money they’re making,” Mr. Zecca said. “When they make it out of the minors, they buy their watch. When they sign a new contract, that’s when they buy their car. When they get their long-term contract, that’s when they buy their parents a house.”

While this may sound like that old-fashioned concept of delaying gratification, he said it had worked incredibly well with his clients. They are goal-oriented, and spending targets give them something to aim for.

Now, he said, he no longer cares about what they are buying with the money that is left. “What do we care if they’re buying 10 $1,000 suits or one $10,000 watch?” he asked.

Athletes also have to deal with the issue of a second career. Many want to be sports analysts or coaches, but those jobs are few, and they rarely pay as well as being a professional athlete.

“They’re in a lifestyle that they’ll never be able to maintain once their career is over,” said Ron Rubin, managing principal at Bridgewater Wealth and Financial Management, whose clients include Dan Jansen, the Olympic speed skater, and Jerome Williams, a retired basketball player.

But he said his clients’ big concerns were no different from most people’s. Among them are what investments should they consider, how much will they pay in taxes and what should their budget be?

“Early on, most of them think they’ll play forever and have all the money they’ll ever need.” Mr. Rubin said. “That’s never the case. Unless you’re LeBron James or Tiger Woods, you’re going to have a budget when you’re finished playing.”

So the advice to athletes is much like the advice given to young workers: start saving early in your career and don’t wait until you are 50.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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