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Financial Planning

Category: Articles Published: Thursday, 26 May 2011 Written by Administrator

Stephen King apparently went a little crazy when, after years of just getting by, he found himself wealthy from the paperback sale of his first horror novel, Carrie. Like other newly rich people, King went on a shopping spree. Fortunately for his bank balance, he was living in a small town and the most expensive present he could find for his wife was a hair dryer.

Other people with unexpected windfalls have been more fiscally inventive than King, making enormous ill-advised purchases and ghastly investment errors. Even those who work with a planner from the outset can prove to be unusually difficult and irrational. Planners who choose to work with the suddenly rich have to use special people skills and sometimes even wear a psychologist's hat.

An unexpected inheritance, large divorce settlement, sale of family business, sudden access to retirement savings or even a lottery jackpot can all put millions into the hands of people who never had large sums to manage and never felt the need for advice. For those of modest means, even half a million dollars can radically and permanently change their lives.

"Unfortunately, this is a time when there are more emotion-based decisions than rational ones," says Susan Bradley, CFP, of the Sudden Money Institute in Palm Beach Gardens, Fla. "Helpful" friends and relatives come out of the woodwork with advice on investing the money -- and spending it -- leading to continued confusion. The planner's job is to deal with the emotions while piloting a rational course. Planners seem to agree that although the management of the money may be the same whether it came gradually or all at once, the management of the client differs.

For example, the clients can have certain distinct attitudes based on how they got their money. Heidi Flammang can understand this. She found herself a widow at 27 with a considerable insurance settlement. Her own experiences managing her new wealth, and her frustration dealing with planners she felt were incompetent, led her to create the Maginot Group in Parker, Colo., which specializes in helping clients with sudden wealth issues.

"When a client inherits money, particularly in a tragic situation, they may want to become totally involved in all investing decisions," she says. "They see the money as a special responsibility, a trust." Those who won a lottery, or a professional athlete who just hit the big time, for example, may be more willing to leave the details to the professionals. However, in their giddiness they may lack discipline; Flammang says this sub-group is likely to change planners a lot.

In general, says Ron Selik, CFP, of Selik Financial Services in Troy, Mich., what separates the suddenly rich from those who became rich gradually is the emotional event that led them there. To work through these problems, planners must have a combination of patience and discipline. Experienced advisers even stand ready to refer particularly difficult clients to psychologists.

An initial period of reflection may be the best advice a planner can offer the newly wealthy. Before clients buy a mansion or book a suite on the QE2, Bradley and other planners in her network recommend a decision-free zone for six months to a year. During this period the money, whether it comes from an insurance settlement, relative's estate or IPO windfall, goes into conservative, liquid investments, such as CDs or money market accounts. Based on the amount of money, planners may authorize small expenses, such as a new car to replace the old clunker (but not a Rolls Royce), but no new houses or commitments to long-term investment strategies.

Planners also have to stand firm. Steve Wightman, a planner at Lexington Financial Management in Lexington, Mass., practices financial tough love, saying, "Clients commit with us from the start or we don't work with them." And Selik says, "I act as the scapegoat," particularly during the decision-free zone. When friends and relatives descend on the client with requests for money or dubious investment opportunities, the client can just say, "I'm sorry, but my planner has it all tied up now and won't let me make any commitments at the moment."

The decision-free zone is a deceptively quiet period, because even though no strategies are being implemented, both planner and client are using the time to create a foundation for long-term money management. Bradley sees planning and preparation as the first part of a structured plan, in which implementation (such as buying a house and making investments) and stewardship (i.e., cash flow and estate planning) constitute the second and third, respectively. "If clients know there is an order, they will hold off on major spending and buy into the plan," she says.

Meanwhile, they should compile a "bliss list," a list of what the client wants to do or accomplish with the money. If a couple receives sudden wealth, each one will create his or her own list, which they will eventually merge. Bliss lists are subject to revisions over time, as the planner helps the client assign values and "perform reality checks." What is affordable? Do you want to buy a new house? Retire at 45? Sail around the world? "You can probably do some things on your list, but not everything," Bradley says.

Once there is a game plan that is in line with reality, the planner can move into implementation. Of course, these clients may never have even considered a financial plan before, and never thought actual management of money was going to be an issue in their lives, and so the planner has to keep this in mind. "The plan can be a hard sell," says Kent (Chip) Addis, Jr., of Addis & Hill in King of Prussia, Pa. "About a third of sudden-wealth clients will say a new house is the top priority. Another third will say education is." But, as he grimly relates, only about 2% want to primarily use their money to pay down current debt, and only 1% consider investments as most important.

Problems can crop up no matter where the money comes from. Selik says some of his sudden-wealth clients came into money not from something startling like a lottery but from the very prosaic source of a well-funded 401(k) plan. "For years, they couldn't really touch this; it was Monopoly money. Now they could have $1.5 million in the account." He has to point out that this money has to last for years; it's not something they can quick go out and spend. Maybe the new retirees can afford to set up a college fund for a grandchild? Great, says Wightman, as long as no one is too squeamish to discuss money. "You need intergenerational planning," he says. "Preparation is better than surprise." For example, he knew of one family in which parents and grandparents each started a college fund for a child without the other's knowledge, over-endowing the future scholar.

Shelley Fernstrom, of Raymond James in Naples, Fla., works with lots of divorced women. "It doesn't matter whether they're getting $100,000 or $10 million. They have to develop a budget," something they may not have done before if their husbands handled all the money issues. "Did they get the marital residence or is it being sold? Is there child support?" In addition to a settlement, some women get "rehabilitative alimony" for a few years until they can get back onto a career path. "I have to explain that this money isn't going to last forever."

This was a concept Wightman had to hammer home in a case involving a $12 million estate. "The divorced woman's new boyfriend was already talking about a yacht and mansion, without giving any consideration to taxes she still had to pay." Also working with many divorced women is Michelle Maton, CFP, of Aequus Wealth Management Resources in Chicago. "Some of these women now have $4 million and up. They have to ask themselves what they want to accomplish." Maton teaches them about managing their own money and cash flow with the aid of Quicken, the simple off-the-shelf budgeting software.

Fernstrom also has to explain that unlike salaries, income from investments can vary from year to year. George Strickland, CFP, of Financial Synergies Advisory in Houston, finds even a good investment year causes problems for clients just getting used to the idea of living partly or entirely from investment income. "If we're assuming a steady 10% a year from certain investments and one year we get 20%, I tell clients to give the extra back." That is, he tells them to reinvest it and not assume there will be another 20% next year.

Many clients also want to use their new wealth for charitable purposes. Again, this is a sudden ability, not a gradual development as with clients who slowly increased their money, and charitable giving, accordingly. Philanthropy should be subject to the same rational plan as other uses of the money. And clients don't have to have tens or hundreds of millions of dollars to engage in charitable giving in a meaningful way. Harvey Rowen, of Starmont Asset Management in San Francisco, says even clients with a few million can set up a charitable foundation. "The planner needs to assemble a team, with a lawyer, CPA and a charitable-giving consultant, if necessary."

As with all your clients, the investment specifics will vary with the amount of income, age of clients and their goals. Nevertheless, Fernstrom has found that many of her clients can do well with a mix of mutual funds and bonds for income. In a more general way, Strickland says he ascribes to the "three-bucket theory." For many of his clients, he puts two years of what the client will need to live on into CDs. The client then lives off that. Three additional years of income is in bonds. The rest is in long-term investments. He finds this a suitable balance between the desire for high interest and the need for some liquidity.

Of course, investment plans and matching goals with money is nothing new for planners. But with a suddenly wealthy client, it isn't the "wealthy," it's the "suddenly" that's the problem. Instead of getting to prepare for wealth over many years as a business grows over the decades, or as a client rises from junior manager to CEO, these challenges hit recipients all at once. Sober analyses of fund performance sometimes come up hard against irrational human emotion. Bradley sums it up: "The client will follow your lead, but the adviser has to be strong. Clients with new money may suddenly feel too empowered and thus not acquiesce. They think of themselves as too rich, too beautiful, too popular, to follow your advice."

Financial advisor Patrick Christensen was watching the news on television, like virtually everyone else in the nation, when his phone rang.

It was John, a client who is about three years away from retirement.

As the world watched rescue workers dig through the smoking wreckage of the World Trade Center and Pentagon, John told Christensen this is a major crisis, and he wasn’t going to be left holding the bag.

"Sell," he told Christensen.

"It was less about the investments and more that he wanted to do something," says Christensen, president of Independent Financial Solutions LLC in Salt Lake City. "He wanted to feel that he was somehow taking action. The way I handled it is, I listened to him for a while."

Then Christensen started to reason with him.

If he sold now, Christensen told John, he’d be doing the worst possible thing by probably selling low. To make matters worse, history shows the market again and again plummets and then bounces back after a national or international crisis.

Appealing to John’s sense of patriotism, Christensen told him he’d be playing into the hands of the terrorists if he sold off his equity holdings. Hang in there, he told him, and go about your business as usual. In the end, John, a Vietnam veteran, calmed down and agreed to stay the course.

It was, it turns out, the only call of panic Christensen received after the tragedies of September 11. But he was busy the following days calling clients, checking on their feelings and reassuring them that over the long run, things would be OK.

Financial advisors across the nation, in fact, were engaged in similar activities—making telephone calls, sending out e-mails and rushing out letters, urging their clients to remain calm.

Reflecting on John’s call, Christensen shook his head at the irony of it all. During the high-flying days of the bull market, he spent much time instilling caution in his clients. As clients relished in a stock market that seemed so incredibly strong, Christensen constantly was harping on how things could someday go so incredibly wrong.

Now, Christensen says, he has taken on the role of an eternal optimist—constantly reminding clients that things will get better. "I think you could call us romantic depressives," he says wryly.

Christensen certainly is not alone. Following possibly the most traumatizing tragedy in the nation’s history, financial advisors found themselves among the nation’s crisis workers. While rescuers were digging through rubble, advisors were working the phones to provide support, calm nerves and solidify hope among a shaken clientele.

Few advisors interviewed for this article reported a rush of calls from panicky clients. In fact, many advisors say they were surprised how calm their clients remained through the crisis and the subsequent fall of the stock market the week after.

"I think it could have been worse," says Dottie Koontz of Financial Dimensions in Longview, Wash. "I’m really surprised, because for the most part, my clients aren’t panicking. I think we’re all just waiting."

Linda Leitz, co-owner of Pinnacle Financial Concepts in Colorado Springs, Colo., was on her way to the airport to attend the annual conference of the Financial Planning Association in San Diego. Those flight plans were dashed and the conference canceled as a result of the terrorist attacks.

She returned to her office expecting a flood of frenzied telephone calls. But they never came. "I was expecting a bunker mentality," she says, "but most clients have done just the opposite … A lot of them are saying they really need to get their financial act together now."

Some silence could have been due to disbelief and shock. Moreover, it seemed that many clients realized there were some things a lot more important than their portfolios. Around the nation for several days, few people were thinking of finances first as they were transfixed by the news.

But advisors still reached out—and not necessarily to talk about finances. "You just cease to be a financial planner, and you just become a human being, first and foremost," says Richard Hearn, president of STARCARE Inc. of Newport Beach, Calif. "You couldn’t find a time when caring about people and their feelings is more important. This is so much bigger than people’s money. This is about our way of life."

Because STARCARE has 300 clients, Hearn couldn’t call everyone. So he wrote a newsletter that contained condolences, confidence in the nation and the warning that financial markets would be unsettled for a while. He sent it the day of the attacks.

"Doomsayers and financial news people will spread misinformation and gloom for instant consumer anxiety," he wrote. But he concluded by reminding clients of the reasons to expect the nation to get through the crisis. "Thugs have hijacked planes and brought down buildings. They have not hijacked our markets or brought down our dreams. They can never do that."

The day after the Twin Towers collapsed, Weil Capital Management LLC of Palo Alto, Calif., called its 95 clients. "Two of the clients literally reduced me to tears, saying, ‘You know, it never dawned on us to be worried,’" says Curt Weil, the firm’s principal.

Few clients, meanwhile, called the firm, he says. Weil insists the only panic he’s seen in the financial markets has been in the media. "The ones who have to fill the air every minute," he says. "I think it’s silly to get my knickers in a twist over the remainder of a correction that’s been going on since March of last year."

If anything, advisors say, the market’s reaction to the terrorist attacks have served to educate investors further about the risks of equity investing.

The overoptimism that was a hallmark of the 1990s bull market seems finally to be a thing of the past, says Dan Moisand, president of Optimum Financial Group in Melbourne, Fla. "Even a few weeks ago, we were fighting that battle with people," he says. "There has been a profound attitude adjustment on a lot of levels with regards to investments. You don’t have to convince people of the risks."

Advisors repeatedly pulled out historical references to convince clients that the financial impact would be short-term. Several firms, in fact, constructed charts showing a list of historical crises and the subsequent stock market reaction. The charts quickly made the rounds among advisors nationwide, becoming a commonly used tool for crisis intervention. "Part of our job is to be there and give perspective," says Bill Carter, president of Carter Financial Management in Dallas.

He notes that Operation Desert Storm was marked, at first, by a declining market. Following the invasion and retaking of Kuwait, there was an upturn. The recovery led to a bull market that didn’t let up for nine years. "When things are really, really bad, when emotions are at their highest, that’s typically, historically, one of the best times to buy," he says.

But part of the uncertainty arises from the fact that the events of September 11 are unprecedented historically, say some advisors. "I didn’t really know what to do," Stanley Ehrlich, of S.F. Ehrlich Associates in Clinton, N.J., says of his reaction to the attacks, which took more than 6,000 lives. "Who’s been through this before? What’s the history on this one?"

Ehrlich eventually sent e-mails to clients, strongly advising them not to take any drastic financial actions. He expected to be fielding a lot of calls during the day, but he received only two. "And the two I got were positive," he says.

But Ehrlich doesn’t know what that really means. He points out that financial advisors probably don’t top the list of people to call during a time of such crisis. "I’m not so naÔve as to think that people aren’t concerned," he says. "Nor am I so presumptuous to think they feel there’s never a need to worry because Stan’s on the case."

Existing clients may have been quiet, but prospective clients seemed visibly distracted. Steve Wightman, a principal of Lexington Financial Management in Lexington, Mass., says several potential clients canceled meetings after the attack. "Financial planning is low on people’s list of priorities," he says. "They, understandably, would rather be with their families now more than anything. Outside of that, their minds are preoccupied by bigger and greater things."

Many advisors specifically warned their clients that they expected a precipitous drop in the market when Wall Street went back to business the Monday after the tragedies. The prediction came true, of course, but nobody seemed to sense the drop would be as prolonged and deep as it turned out to be.

Continuing to extract hope out of such a bleak situation, advisors kept prodding their clients to look past the immediate events. Randall Kratz, an independent advisor in Richmond, Va., says he’s been stressing to clients the factors that point to an economic recovery, including the prospect of massive government spending and the Fed’s continued reduction of interest rates. "The worst-case scenario is if people listen to the wrong people, and that would be just listening to the doomsday preachers," he says.

Backing up the silver-lining perspective, some advisors were doing limited buying the week of September 17. David L. Berman, of the Berman Financial Group in Baltimore, says his office did $1 million net investing that week. "Philosophically, we haven’t changed a thing," he says. The firm sent out a five-page letter to clients that "reinforced our philosophy as being one of building all-weather portfolios and letting them endure through all types of weather. You don’t build an all-weather portfolio and change it once you hit a storm."

Despite a dark view of the short-term economic picture, Thomas Grzymala, president and CEO of Alexandria Financial Associates in Alexandria, Va., has been doing limited buying for some clients. Among the shares the firm bought were General Electric, Nokia and Cisco—all of which fell below the firm’s buy price the week after the terrorist attack.

For the most part, however, the firm is sitting tight, he says. "We’re not jumping in with both feet at all because I think the market volatility will continue at least until that time when we have had a demonstrable effect on the terrorists," he says.

During the first week of trading after the attack, cash was moved in only a few thousand of the 110,000 advisor accounts at SEI Investments, says Carmen Romeo, the company’s executive vice president. Starting on September 12, SEI held four nationwide conference calls, involving from 600 to 1,000 affiliated advisors with each call.

SEI advised callers to separate their client bases into three groups: those who are comfortable with the market volatility, those who need a little reassurance and those who can’t sleep at night.

For the latter two groups, Romeo says, SEI suggested advisors reprofile clients, including a reassessment of risk tolerance and planning goals.

"Fundamentally, we believe in asset allocation and diversification and staying the course," Romeo says. "But this is also an opportunity for advisors to revalidate their clients’ starting positions."

With the stock markets shut down for four days, there eventually was time for people to opine in self-serving fashion that it was investors’ patriotic duty to buy stocks or that it was in poor taste to even think about the subject. Ultimately, however, more level-headed commentators noted that the United States is blessed with free markets than can express whatever they want.

When the markets finally opened, there was a lot of pent-up selling pressure and bargain-hunting. At LPL Financial Services, the nation’s largest independent brokerage, the firm experienced its biggest day ever on September 17. The firm processed 20,000 transactions, but they were split almost 50-50 between buy and sell orders. "It was pretty clear people were selling something to buy something else," says Jim Putnam, managing director at the San Diego-based firm.

Keeping one’s cool has been important, says Michael Kresh of M.D. Kresh Financial Services Inc. in Hauppauge, N.Y. He says he received "absolutely no calls of panic" from any of his 100 clients, some of whom added to their equity holdings the week after the terrorist attack.

But he adds that it is wrong to be too optimistic in light of what happened. He says the events of September 11 amount to a "defining moment" on the scale of Pearl Harbor and the assassination of President John F. Kennedy.

"I don’t think it could not change anybody in a permanent way," he says. "We cannot ignore the fact that the basic fundamentals of this country have changed. We will never be the same."

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