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Jay Reynolds, of Rod Ric Drilling in Midland, Texas, has learned the benefit of diversifying sources of income.

David Bowser • New York Times ,

Money advice for people in boom-or-bust fields

  • Article by: Paul Sullivan
  • New York Times
  • March 23, 2013 - 10:04 PM

 

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.

“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.”

Clients benefit 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.”

I’m looking 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.

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, Texas, 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,” 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. He said he has been buying real estate recently, with an eye toward mineral rights and royalties, which could be a source of income.

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 Crunk, co-founder and managing director of Syntal Capital Partners, which works primarily with oil and gas clients like Reynolds. “When they’re bringing capital to us, it’s not for rates of return. It’s seeking diversification away from their core business.’’

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,” 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 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 too many stories about athletes spending a lifetime’s worth of income in 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 Olympic swimmer Michael Phelps and 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, 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,” 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.

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