Canada’s oil and gas sector took a major tumble in 2014 and 2015 and still remains in the doldrums, leaving workers in those industries – from corporate executives to mom-and-pop operators of oilfield services companies – dependent on good financial advice to weather the tough times.
Financial advisors say that helping clients have rainy day funds and broadly diversified portfolios in place – as well as communicating regularly with them – are the best tools to deal with the boom-and-bust finances of the oil patch.
“You have to insulate yourself from those downturns by having some very, very conservative cash or liquid investments you can count on when the storm clouds gather,” says James McCreath, portfolio manager at The McCreath Group, a division of BMO Nesbitt Burns Inc., in Calgary.
As such, he advises clients to have six months’ worth of income readily available.
“I would candidly doubt that most people have that available … but for anyone who is an entrepreneur or in oil, gas, or in both of those areas, you have to focus on that rainy day fund really aggressively.”
Apart from that rainy fund is the makeup of these clients’ long-term investment portfolios. Advisors agree that those who work in the oil patch need to diversify away from oil and gas investments. If your house value and security of employment are bound up in the oil and gas economy, having investments in the same sector can magnify downturns in the cycle.
“There are many people who say, ‘I understand oil and gas, so it’s where I like to invest my money.’ That can work for you for a prolonged period, then you deal with a downturn and you look at the page again and say, ‘That wasn’t such a good idea,’ ” Mr. McCreath says.
“That’s really where a professional can step in and say, ‘Listen, let’s take a step back here and look at the big picture. You [own] a small oil field services firm in Red Deer and your sales are down year-over-year [by] 50 per cent. Let’s get some of your money into something that’s in [the U.S] or more global in nature and away from so much focus of your net worth on an Alberta-centric portfolio,’ ” he says.
Mr. McCreath’s practice focuses on creating portfolios of blue-chip equities. Building a well-diversified portfolio of equities that pay regular dividends is a prudent strategy, he says, but it also depends on the clients’ risk tolerance.
Katherine Ross, portfolio manager, private client group, at Raymond James Ltd. in Calgary, also reduces financial dependency on the oil patch for her clients who work in that industry. She favours a more broadly balanced portfolio with exposure to a range of industrial, geographical and currency investments – and a weighting in smaller firms, as well.
The conversation about the need to diversify investments with clients who want to invest close to home became easier after the 2014 bust, Ms. Ross says. The challenge is to help clients form a long-term plan during the boom years.
“It takes a certain amount of discipline and a persuasive advisor when times are good to say, ‘Look, you have to diversify. And I know your company’s been going up by 30 per cent a year, but that may not always be the case. You have to make sure you have money that’s not going to be affected by oil and gas when there’s a downturn,’ ” she says.
Clients who work in the oil patch and face yo-yoing incomes also need to watch their debt, advisors say.
Having no debt allows clients who work in the oil patch and are near retirement age to retire if things go south and they lose their jobs. And for younger workers, paying off debt is a wise strategy once they get a severance payout if their employment ends.
Mr. McCreath tells his young clients to treat that windfall in a way that would make their parents or grandparents proud.
“If you go purchase a new car, I’m not sure that’s something those people would be proud of,” he says. “But if you went to Sunday dinner and told your parents you got a payout from the company you were working at and you paid off your debt, [they would be proud].”
Kelly Kotello, financial planning specialist at RBC Wealth Management in Calgary, says severance packages also should be viewed in terms of tax implications.
“We counsel clients to speak to their former employers to see if they can split that severance over a couple of years … to take advantage of tax brackets,” she says.
In addition, registered retirement savings plans and tax-free savings accounts can be deployed to clients’ advantage in severance situations, she says, as can charitable giving.
“If they have a philanthropic goal, we can pre-fund that charity piece where we can use the donation tax credits in the year where they have the high income, but then carry the benefit forward to the charities out into the future,” says Ms. Kotello.
Mitch Vandemark, co-founder and managing partner at Rubbix Risk and Wealth Management Inc. in Grande Prairie, Alta., says communication is the key to his relationships with clients, many of whom are in the oil field services industry.
“We’ve taken in millions of dollars in the past few weeks just because so many people have not spoken to their advisor or their advisor has not called them for a year, or two or three years,” says Mr. Vandemark. “They want to have that constant communication: that monthly email or that quarterly email. Now is an amazing time to go and gather assets.”
Although these times may be resulting in growth to his business, Mr. Vandermark says it can be stressful to talk to clients going through difficult times.
“It’s definitely an emotional roller-coaster, not only for them but for us because we want to do everything we can [for these clients],” he says. “If they’re used to making $150,000 [and are] not making anything [now], [and] maybe they’ve exhausted all of their resources, it’s definitely a hard conversation to have.”