Celebrating Advice: How to manage serious money

Profile of: Adrian Mastracci, R.F.P. Portfolio manager KCM Wealth Management Vancouver Years in the business: 35

About me

My specialty is designing and managing “serious money” portfolios. My expertise coordinates client investment portfolios with their retirement aspirations, risk tolerances, estate planning, income tax and business planning strategies as required.

How I work with clients

I’m very fortunate to have long-standing clients. My first priority is to determine what’s important to each client by balancing the safety of the client’s wealth with the return on the wealth. The chosen combination sets the tone for the client’s investing strategy.

The question I ask every client is simple: What’s more important, the return of your money or the return on your money?

With that answer as guide, I aim to control as many factors as I can. Here are some of the primary ones:

• risk tolerance and time horizon
• desired rate of return and sensible asset mix targets
• investing style and rebalancing frequency
• selling thresholds and investment quality
• frequency of investment purchases

Every client game plan can control each of these factors. It’s never too late to tweak a portfolio if it’s out of sync with personal goals.

One client met with his previous advisor to say 90% allocation to equities was too high for comfort. The advisor came back with a 30-page report outlining how wonderful the portfolio was. This client came to me with a request to interpret the report content. I told the client that the advisor had not heard anything the client had said.

My next question to the client was, “What equity level is comfortable?” The client has been with me ever since.

I’m upfront with each client that I will be wrong at times. I try to set up reasonable expectations in each client’s mind. I focus more on the goals that the client has set out and what happens to the total portfolio.

My philosophy

My core beliefs address three fundamentals that have stood the test of time. First, managing client wealth is a long-term process, not a sprint. Second, investing within a broadly diversified asset mix is a must. And finally, preserving capital is uppermost. My investing style tries not to incur a large loss. That is, first preserve what we have, then grow the nest egg when we can.

I’m a fan of always considering investment risks first, returns second. That builds better portfolios. The goal for each client is to be comfortable, as well as to seek a good return.

I don’t pin my hopes on market outcomes. Nor do I fret about them. I prefer to keep the investing basics in mind.

What’s most important is not where the markets are going. Rather, it’s where the client wants to be. Say in five-to-10 years, not in five-to-10 months.

I favour owning quality investments, sprinkled broadly among different geographies and sectors and within a comfortable mix of assets for each client. My investing vehicles typically contain the larger, well-known companies. Many of the selections pay a dividend and are quite liquid should the need for selling arise. Most client portfolios have a mix of Canadian, U.S. and global equities.

Why I matter

I felt the markets were becoming more risky in the summer of 2006. U.S. job creation was beginning to slide. Retail sales were softening. Oil prices were flirting with $75 once again. Companies were warning about future prospects. Investor expectations were slipping.

I didn’t think the sky was falling. The U.S. picture suggested a possible slowdown ahead. Perhaps, a market downdraft.

I posed the question to each client whether it made sense to temporarily adopt a more defensive portfolio strategy than the normal investment mix. The tradeoff was to accept a fixed return for the possibility of missing a price drop on equities. Everyone understood that markets could move higher. My defensive strategy was meant to stir thought and it was optional.

I asked my clients to think outside the box. It was about putting a defensive risk management strategy into action in times of volatility—one tailored to each client.

I had no perfect crystal ball, nor was I a market timer. This protective stance simply allowed clients to temporarily park more funds into fixed income.

Clients considered this approach where preservation of capital was more important than capital appreciation, especially retirees and those about to become retired.

Incurring large losses is the biggest obstacle to portfolio growth. Hence, a temporary tradeoff of earning a fixed income return became quite acceptable for those who were not comfortable with the perceived market risks. The vast majority of clients indicated comfort pursuing the defensive strategy of incurring less risk. From then on, the client equity portfolios were systematically pruned and reinvested into more fixed income.

In hindsight, I was a little early. However, clients appreciated and stayed with the approach. By mid-2008, the average client portfolio had a large component of fixed income and a smaller allocation to equities.

A few clients made occasional references to my defensive approach. However, they recognized they had a personal game plan and they were receiving a return on their fixed income. Moreover, the changes to equities were made slowly and methodically. Hence, not all was lost as the markets rallied.

I spoke to clients who had ongoing questions. They knew the strategy had flexibility and wasn’t totally foolproof. It was also reassuring to them that I was using the same approach in my own portfolio.

Clients welcomed this strategy. Today’s client portfolios are showing higher values as a direct result of having suffered small losses.