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6 Ways Advisors Can Prepare Clients for a Post-COVID-19 World

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Businessman walking toward a bright future (Image: Shutterstock)

When the noted Stanford economist Paul Romer said that a crisis is a terrible thing to waste, he was so on the money that his observation has become a cliché. Since we’re currently mired in a health and financial crisis rivaling any we’ve seen in the past 100 years, this is a good time to take that advice to heart.

For many, the next step is likely to be inertia, but if you’re standing still, you’re likely falling behind. Listed below are a few tips that might be useful for clients who want to position themselves to come out of the COVID-19 crisis better than they went into it.

1. Make a Roth IRA Conversion

The first thing I’ve been telling my clients to do is converting their traditional IRAs to Roth IRAs, if they haven’t already done so. It’s easy to accomplish and can provide huge benefits in the long run.The client simply opens a new account with the same custodian and transfers all or part of their holdings into it.

Sure, they’ll have to pay tax now, but since the values on just about every account are down, the tax impact will likely be considerably lower than at some future date.

And the holdings don’t have to be cash. They can also be shares of stock that right now are valued at all-time lows but can be reasonably expected to grow in the future. The client can move that value at the lower rate into the Roth and when it rebounds it will grow tax-free.

The account holder can then draw out that money during retirement or leave it as part of their estate. Either way, Uncle Sam has already gotten his share.

2. Exercise Stock Options

Another strategy that I recommend to executive clients is to exercise their incentive stock options.

If the stock has declined in value, but the executive believes in the long-term value of the company, this could be an excellent time to pick up a valuable asset at a bargain price. That can be an easy home run, particularly since the purchase incentive stock option is taxed differently than a nonqualified stock option.

You have to make sure that you’ve considered the Alternative Minimum Tax (AMT), but the recent tax legislation raised the threshold for inclusion, so that’s not as much of an issue as in previous years.

3. Be Generous

Right now, charities and nonprofit organizations are suffering along with businesses and individuals. The irony is that many of these groups, such as food banks, are being asked to do more at the same time that donations have dropped off.

The silver lining is that for the 2020 tax year, individuals can make direct contributions to charities and to be able to deduct the full charitable deduction against their income. It’s a one-time incentive allowing taxpayers to in effect shield some income through previously limited deductions while also helping philanthropic organizations when they need it most.

4. Invest in the Future

This is also a great time for parents (and grandparents) who may have some cash that they feel they don’t need to invest in the future by contributing to their child’s 529 educational plan at low values. The value of the mutual funds offered in most 529 plans are undoubtedly down in value and so much cheaper to buy right now.

5. Stay Invested

History has shown the importance of remaining invested. Those who move everything to cash when markets go south find it a lot more expensive to get back in when values start to climb. Being out of the market on those days when it makes huge jumps upward can be especially difficult to make up for.

If the client has losses in their portfolio, then this is a great opportunity for some tax loss harvesting. I generally will advise clients to sell a stock that’s declined in value to take the tax loss but to then purchase a proxy in the same industry to maintain diversification and exposure.

For example, if we sold a big bank stock, we might buy the ETF covering the banking industry, that way the client is still exposed to financials but has losses which are very valuable from a tax planning perspective.

Of course, it’s one thing to say stay invested, it’s another to know where. That’s certainly the big question facing investors, and their advisors.

In the face of the pandemic the most obvious sectors are technology and health care. Other areas that are currently relatively inexpensive and could present opportunities for investors willing to do their homework could be housing and financials.

There’s no doubt that the current crisis has changed how and where people shop. So, certain consumer stocks could also make sense, particularly online retailers. Traditional brick-and-mortar retailers, who were already struggling, are probably best to avoid, as the May 4 Chapter 11 filing by J. Crew has shown. Other recognizable names like JCPenney and Sears may not be far behind.

6. Stay Positive

This last tip may be the most valuable from a psychological perspective. It’s important to remember that markets are cyclical and so is life. We’ve been through tough times before — world wars, 9/11, the global financial crisis — and we will be again. There’s always a light at the end of the tunnel, we just have to keep pushing toward it.

In the meantime, do everything you can to position yourself to come out the other side in the best shape possible. That includes things like continuing to contribute to 401(k) plans at the level providing the most company matching funds and revisiting estate plans to make sure they accurately reflect the current situation and testator’s preferences.

And above all, don’t lose hope.

Kenneth Van Leeuwen is managing director of Van Leeuwen & Co., a wealth management firm he founded in Princeton, New Jersey, in 1997.