Advanced planning for affluent clients is often like solving a puzzle. The puzzle pieces include your clients’ attitudes, goals, and assets as well as extensive knowledge about the sources of their wealth. Usually you know–or at least have a rough idea–about these subjects, but it pays to be skeptical about what you think you know.
The picture you have initially may change radically as you dig deeper and your clients reveal important facts that alter your understanding of their situations.
As asset managers, imagine this example: If a client had 20 acres of rural property that had since become suburban and failed to mention that to you, you might mistakenly consider her under-exposed to real estate and place some of her liquid assets in REITs or other real property investments. In advanced planning, the problem incomplete information creates is multiplied. When advanced planning is well done, it is a team effort that combines legal, tax, asset protection and asset enhancement disciplines, among others. Carefully developed advanced plans can make the impossible possible by leveraging one asset to facilitate the development or deployment of a completely different solution. For example, some clients look at insurance as money poorly spent. However, when the insurance costs can be paid for by leveraging other assets, the advisor can turn the client’s attitude towards insurance into something positive. These kinds of solutions are not possible when the client only provides a partial picture.
Prospects may intentionally hold back from giving you a complete view of their financial lives. Some people need to slowly develop trust before they will reveal more than a slice of their net worth. Even long-term clients may withhold information. Many clients view financial advisors as product sales people and only give out the information they believe is needed in order to find out which products are available to them. As an advanced planner, you need to set yourself apart with a consultative approach that suits their level of net worth.
Hiding assets from an advisor can take several forms, but all potentially can affect the true value of the financial service you provide.
Hiding the Husband
The new middle age client (“Alice”) spoke more freely about her assets than her personal life to Todd S. Smith of Azmyth Financial in Phoenix, Arizona. She indicated on the client questionnaire that she was married, but she didn’t talk about her husband at all. After a few meetings, Alice made it clear that she wanted to keep her assets separate from her husband’s. It turned out that they were married later in life, and he had acquired considerable assets on his own before they became a couple.
“I gave her the choice,” says Smith. “I said we can operate within a vacuum if you want, and I can deal strictly with your assets. But, I think it’s not in your best interest to do so.” After much education and explanation, Alice agreed to look at both buckets of assets together. When he first spoke with the husband, he had only a vague idea that his wife was pursuing a financial plan. Smith created a solution where assets were more segregated on paper to make it easier for them to track, but he developed a full estate plan with trusts.
A Hidden Reason
Sometimes the money psychology of a client can defy explanation–especially if you’re missing a vital piece of information. For Ian M. Weinberg, CEO of Family Wealth and Pension, Woodbury, New York, the enigma came in the form of a 50 year-old client (“Lawrence”) who earned seven figures annually and had amassed about $6 million in investable assets. Yet, he had a very simple orientation toward his money.
Lawrence was only interested in very safe, secure rates of return–preferring investments like CDs, government bonds, and municipal bonds. Weinberg tried to explain that over his remaining lifespan, having no equity in his portfolio could seriously hurt the value of his principal when inflation was considered. Even some exposure in conservative equities left Lawrence unsettled. He understood modern portfolio theory and the difference in growth rates between equities and debt products over the long haul. Still, he was extremely risk-averse.
Eventually, Weinberg learned the reason. It turned out that Lawrence was due to inherit another $20 million–a fact he never revealed. Knowing that that inheritance was coming led Lawrence to feel that he didn’t need to take any risk at all with his investments.
Although others expecting a significant inheritance might lead some to feel comfortable placing some assets into growth investments, Lawrence didn’t see it that way. He absolutely couldn’t tolerate seeing a dollar worth of assets temporarily drop to 99 cents.
“Forget about rates of return and risk. If he’s worth close to $10 million with real estate and investment assets today [and] the fact that he’s going to inherit another $20 million down the road,” Weinberg observed, “his risk is estate taxes.” Eventually, the entire family was convened to begin the discussion about planning for estate taxes.
Hidden in Plain Sight
Leon Rousso, an advisor in Ventura, California, first met “John”, when he implemented a company health insurance plan 23 years ago. John was a member of well-known real estate family. After putting the health insurance plan into place, John told Rousso that he wanted $500,000 worth of life insurance. He revealed little about his family or net worth at that time. The attorney and accountant also confirmed that entire family is extremely private and doesn’t discuss assets.
About a decade later while reviewing his life insurance policy with Rousso, John decided that he wanted a $1 million policy since he had recently gotten married. As the financial planner sat in his house and began to talk to John about life insurance and what it could accomplish, the planner decided to be bold. “You know, John,” Rousso said, “You’re almost 57 years old, and we’ve never talked about this. I assume your family has got a lot of wealth.”
Rousso started talking about estate tax. John was completely unaware of the issue, since he had limited management of family assets–his father took care of just about everything. As it turned out, John and his father owned an avocado ranch in southern California worth about $25 million. With the help of his attorney and CPA, Rousso developed an estate plan, including a very large life insurance policy that ended up in an irrevocable trust.
Nate Wenner, an advisor in St. Paul, Minnesota, recently met with a new client (“Tom”), along with one of his colleagues. At first, Tom would say little about how much cash, money market, or other liquid investments he had. It felt to Wenner that Tom was answering his questions as if he thought the advisor was going to push him into highly speculative investments.
Eventually, Wenner would learn that Tom was keeping this money off to the side because he already had plans for the funds. He was preparing to buy a new home and would use the money from these investments for that purchase.
Wenner knew about Tom’s intentions to purchase a new home but not about the size and breadth of his cash reserves. Any long-term financial projections Wenner could provide wouldn’t be accurate with the information he had. A reasonable assumption on the surface would be that Tom might need to take out a jumbo mortgage or liquidate some of his long-term investment portfolio. Carefully, Wennner educated the client and eventually brought him around to a comprehensive financial plan.
Details Hidden Until Death
Rousso had another client (“Bill”) for which he handled only a portion of his affairs–a life insurance policy to fund a buy/sell agreement for his business, and a profit-sharing plan with two other partners. Bill had other advisors, so Rousso never saw the entire picture of his financial life.
And as he was leaving that partnership arrangement, he mentioned to Rousso that he had a fianc?(C)e and that he also wanted the planner to manage $500,000. Less than a year later, he died on a racquetball court. At the funeral, Rousso met the fianc?(C)e for the first time but he had no idea what Bill stipulated in his will, until she asked him to manage her assets, which were worth about $5 million at the time.
Then in August, she called him and asked him to look at a document about refinancing related to Bill’s old partnership. It turns out that she inherited Bill’s share and has become a 1/12 owner in a major shopping mall in the Los Angeles area. Her net worth–and need for advanced planning–jumped several multiples.
As the owner of the client relationship, discovering your client’s financial story is among the most important roles you can play in the advanced planning process. As the trusted advisor, you are best positioned to fill out the entire picture that will allow you and your team to deliver on the promise advanced planning offers. In upcoming columns, we’ll look at ways to discover more about affluent clients earlier in your relationship with them and how some of these data points hold the key to marketing your practice to other high net worth clients.