Financial Blog

Post-Brexit: How planning strategies for advisers must evolve

For the financial planning industry, the UKs Brexit vote and ensuing market volatility highlights the need to adopt a new reality: this is what the markets will continue to look like in the foreseeable future.

That said, how can RIAs and fee-based advisers adequately protect clients' portfolios from dramatic swings without completely eliminating any potential upside?

Long before the Brexit vote, volatility was rated a top concern for both advisers and investors in our second annual Advisor Authority study conducted by Harris Poll, which surveyed 638 RIAs and fee-based advisers and 733 individual investors nationwide.

Maintaining cash flow when the paychecks peter out

As financial planning evolves from asset accumulation to portfolio drawdowns, the key role for advisers becomes helping clients who are retiring replace their paychecks.

"Many clients want to start withdrawing from their taxable accounts to hold taxes down," says Paul Gydosh, a CFP and managing director at Kensington Wealth Partners in Columbus, Ohio. "I give them two reasons to take money from their [individual retirement account], too."

First, Gydosh explains that depleting taxable accounts will leave only their IRAs.

Then he asks whether the government will need more or less money in the future.

"They usually answer more," Gydosh says. "The trillions of dollars in IRAs could be a target for tax increases."

Second, Gydosh points out that if clients die holding only IRA money, the next generation will have to take taxable distributions, reducing the legacy.

If retirees withdraw from taxable and tax-deferred accounts, they can retain some highly appreciated portfolio assets on the taxable side.

"Those assets will get a basis step-up to market value, under current law, reducing or eliminating the tax when the heirs sell," Gydosh says.

Gydosh adds that few retired clients are willing to deplete their IRAs first.

"The tax bite would be too painful," he says.

Advising clients to go halfway might find receptive listeners, Gydosh says.

Other drawdown decisions involve asset liquidation, converting portfolio securities to spendable cash.

"The answer on where to pull assets from is not the same for everyone," says Jessica Hovis Smith, a CFP and the vice president and director of financial planning at Longview Financial Advisors in Huntsville, Ala. "We want to make sure that tax planning and portfolio liquidation are annual decisions that are in keeping with the client's plan."

Smith's firm makes those annual decisions by reviewing the portfolio, including all taxable and tax-favored accounts, at the time.

"We adjust across multiple asset classes to ensure the portfolio stays in balance with the client's risk tolerance, risk capacity and risk need," she says. "Depending on the current market conditions, this could mean cutting back on equities or cutting back on fixed income."

Gydosh prepares for portfolio drawdown by estimating cash needs, in addition to Social Security and other sources.

"We want clients to retire with a cash bucket of five years' withdrawals," he says.

"If the need will be, say, $5,000 a month -- $60,000 a year -- we'll plan to have $300,000 in bank accounts and money market funds and short-term bonds. Then the clients will sleep well and I'll sleep well, without worrying where the money will come from, regardless of market performance," Gydosh says.

Interest and dividends from other portfolio assets generally don't flow into the cash bucket.

"That reinforces the concept, making it clear to clients how the cash is going down," Gydosh says.

"Among the other portfolio assets, bonds typically won't fluctuate very much," he says. "If stocks have run up, we may cream off some profits to put money into the cash bucket."

Such a plan can keep clients confident that they can ride out any market turmoil.

This story is part of a 30-30 series on ways to build a better portfolio.

Growing practices need more hands on deck

Sole practitioners or leaders of small firms who want to take their practice to the next level should seriously consider hiring more advisers, though there are, of course, cost decisions to consider, observers say.

"If your practice is growing, you can only go for so long before clients might begin to notice that you're juggling too many balls," says Harriet Brackey, a CFP and the director of investments and the co-chief investment officer at GSK Wealth Advisors in Hollywood, Fla. "Adding good technology will help, but hiring someone is really the eventual answer."

If a sole practitioner decides to add advisers, typically client service improves and a practice can gain more revenue, Brackey says.

Catherine Seeber, a CFP and a partner and senior adviser at Wescott Financial Advisory Group in Philadelphia, says that the decision as to whether to stop being a sole practitioner is an individual one.

She points to the 2015 FA Insight "Study of Advisory Firms: People and Pay," which found that the most financially successful and profitable advisory firms are taking home more in owner income than advisers in larger ensemble firms.

However, Seeber, asks, what other "prices" are they paying?

At the same time, adviser recruiting firms say that there is growing consolidation of firms because it is difficult and expensive to be a sole practitioner, she says.

Much of the recent merger activity among advisers is based on the fact that the solo firms recognize that their expenses will overwhelm them if they don't find at least one other practitioner with whom they share the burden.

"Personally speaking, ignoring the glory of autonomy or financial and hardship impact on the solo practitioner, the overwhelming benefit of having more planners on staff is the leveraging of knowledge among your peers," Seeber says.

In retaining and acquiring clients, they often feel more satisfied knowing that there is a deeper bench of support and human capital, she says.

That isn't to say, however, that sole practitioners don't have a wide array of support and people that can be the "team behind the scenes," Seeber says.

"You just have to be more strategic in your alignment of networks and hope that all of your outsourcing is working in tandem with one another," she says. "Without saying, the obvious disadvantage of a solo practice is succession planning."

This story is part of a 30-30 series on ways to upgrade your practice.

JCI begins financial planning for final automotive spinoff, including Holland Lakewood plant

  • JCI begins financial planning for final automotive spinoff, including Holland Lakewood plant
  • The JCI Lakewood plant in Holland Township will be part Adient when the spinoff is complete, which is planned for Oct. 3. The plant at 205 Douglas Ave. makes metal components for automotive seating. The spinoff was announced in July 2015 and the name was announced in January 2016.

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