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Practice Management

When a client's income plunges, planners will have to suggest some difficult options

Many advisors have seen economic fear up close and personal recently. "Some clients have lost good jobs," reports Marilyn Capelli Dimitroff, a planner at Capelli Financial Services in Bloomfield Hills, Michigan. "It's a shock at all levels, psychologically as much as financially."

For such clients, planners can play a vital role in facilitating their economic survival. "We do financial triage," Dimitroff says. The priorities involve uncovering spending needs and finding enough resources to cover those necessities.

Jerry Wade, president of Wade Financial Group in Minneapolis, also has seen the carnage. "My office has become a triage room," he says. "Most of my clients are no longer on track to meet their retirement goals." The wavering markets obviously have had a broad impact, but clients who've suffered a loss of income need assistance most critically.

Allen McLellan, associate dean and assistant professor of insurance at the American College in Bryn Mawr, Pennsylvania, likens a loss of income to the grieving process. "There's denial, shock and surprise," he says. "When the client finally asks, 'Where do we go from here?' that's a good sign."

Like Dimitroff, McLellan believes planners can help clients by identifying needs versus wants and desires. As Wade puts it, planners can help clients determine what they need as opposed to what they're accustomed to.
Squeezing Spending
When clients lose their jobs, planners "can supply the necessary discipline," McLellan says. "You can say that an expensive vacation cruise just isn't going to happen. High-dollar items such as entertainment, travel, gifts and eating out a lot will have to go."

According to Chris Haidinger, director of wealth planning at Janney Montgomery Scott in Philadelphia, many clients don't know how much they're spending. "We lay it out for them, and put their expenses into categories," he says. "Once we have a complete picture, we can show them how long it will be until their assets run out. That analysis tends to get clients off the fence, so they're willing to make some necessary changes."

The adjustments might involve cutting spending to match current income. "We try to do what can be done with the available cash flow to minimize disruption to those clients' plans," Dimitroff says. "We have helped them develop an order for paying their bills. Clients in this position have to be very diligent and cut spending to the bare bones."

Vehicles are often a big expense. "Some of them might be eliminated or downsized to cut costs," Haidinger says. But money also usually can be saved by cutting back on cable or phone bills.

Tough cuts may include cutting support of grown children. "Close the Bank of Mom and Dad," McLellan says. "I've told clients that they can loan money to their kids, but they shouldn't expect repayment. Clients can tell these children that their financial advisor said they can't afford to keep making these gifts. I'll be the bad guy."
Prudent Protection
At the same time, planners should make sure spending cuts don't go too deep. "We ensure they keep their insurance," Dimitroff says. "That includes everything from life and disability to liability coverage."

Ideally, insurance should protect clients and their dependents without causing them to overspend. For clients with reduced income, that could mean raising deductibles to cut premiums.

Many people can afford to self-insure when they are working, Dimitroff says. However, when every dollar is earmarked for basic living expenses, there isn't room for unexpected costs.

"Therefore, it may be appropriate to insure more out-of-pocket expenses. You have to do the math." That said, she adds it's also an appropriate time to shop for insurance, comparing equivalent policies from a variety of solid companies.
Cash Creation
In addition to bringing spending under control, financially pressed clients should look for ways to increase their cash flow. Beyond getting a new job, a topic to discuss is whether a spouse might get a job or go to full-time work from part-time.

Asset sales may provide capital or, "if a client doesn't want to sell a second home, renting it out is a possibility," Haidinger says. "But if the carrying costs are too high, a sale might be desirable, even in today's market. We can help clients with a breakeven analysis that shows how many months they can carry a property before they've spent as much as the loss they would have on a sale."
Win Some, Lose Some
Basic ideas seem straightforward, but how does that work in the real world? In some cases, surprisingly well.

"Clients who lose their jobs have to rethink their lives and take stock of what's really important," Dimitroff says. "After they have found a new position, I've heard clients say that this is the best thing that could happen to them. They've gotten in touch with what's important—health, family, friends—and learned to live with less."

The advisor tells of one client who was depressed after losing a well-paying job in public relations. "He took some freelance work, and then got involved in a startup company. He loves the freedom to be innovative now."

Gary Gilgen, director of the financial planning department at Rehmann Financial in Troy, Michigan, relates a similar story. "One of my clients is an engineer who had been with GM since college," he says. "He was terminated when he was in his mid-forties. It was a shock to the engineer and his wife; they thought this job was forever."

Plan A, according to Gilgen, was to help this client find a comparable job. "I coached him and helped arrange meetings with placement firms," he says. But no jobs were forthcoming, so Gilgen encouraged the client to move on to Plan B.

"I suggested he go into his own consulting business," Gilgen says. "I helped him set up a limited liability company and offer his services. As it turns out, this client now makes more money and has more control over his life than he had when he worked for GM. He even turned down a permanent job offer recently because he didn't want to be an employee anymore." The key, says Gilgen, is to get a client who has lost a steady paycheck to focus on something besides the job hunt—a new business, continuing education, leadership courses or some other worthwhile pursuit.

All financially pressed clients do not make lemonade from life's lemons, though. Another of Gilgen's clients also was let go by GM and has been out of work for nearly three years. "They manage on his wife's income, but they're not saving for retirement," Gilgen says. "They had hoped to retire to two homes—one in the North for the summer and one in the South for the winter—but they've had to tone down that plan."
Better Business
Aside from losing jobs, some clients have lost a once-profitable business they owned. A financial planner may be able to help keep the enterprise alive if problems are discovered before they spin out of control.

Gilgen remembers a client who had a successful small business as well as a lavish lifestyle that resulted in heavy debt. When the client saw his company's revenues drop by two-thirds, Gilgen warned him to cut back or face serious trouble. "At first, this client didn't want to believe me," he says. "So I started to meet with the client and his wife, going out for dinner and lunch, keeping the pressure on. The wife was the one who finally persuaded the client; she kept saying, 'We need to protect our homes.'"

Gilgen was able to help the client work out a plan that included laying off employees, selling business assets and reducing his income draw from the company. "He cut back on the gifts he was making to a life insurance trust and to charity," Gilgen says. "He also sold a large motor home and two of his three airplanes." Not only did this client manage to retain a plane, the couple also kept all three of their homes, with all the debt paid off.

Another saving: The client reduced the fees he pays to Gilgen's firm now that there's less need for intensive counseling. "He's still a significant client, and he has been an excellent source for referrals because of the quality of advice we have provided."

Financial distress can be especially hard for clients who are business owners, says Gary Pittsford, president of Castle Wealth Advisors in Indianapolis. "They worry they'll lose everything, including their home," he says. "They're afraid of getting registered letters or nasty phone calls from their creditors."
Like Gilgen, Pittsford believes many troubled small companies can be saved, especially if they're not leveraged too heavily. "The owner is often too close to the situation," he says. "We're objective, so we may see what can be done." Often, that includes getting rid of the least productive employees, cutting bonuses, trimming inventory and working with creditors. "Business owners feel better just knowing that something is being done, so they often follow our suggestions."

Sometimes the least productive employees are a business owner's grown children who work at the company. Pittsford recounts the story of a client who employed four children in his business. The planner told him he needed to fire two who weren't earning their pay. The client had acknowledged the problem, but kept them on the payroll.

"After I presented him with our evaluation, he did fire those two," Pittsford says. "He told them his financial advisor has gone over the numbers and said the company couldn't afford to pay them any more. I'll be the bad cop, letting the owner use me as an excuse to make difficult decisions."
For many business owners, difficult decisions don't end at the office. "They know they have to tighten their belts," Pittsford says. "They can't afford a jet any more, so they have to fly commercial. They may have to sell the boat and give up the expensive country club membership. One client was taking the children and grandchildren to Mexico every year, but that's no longer affordable."
Good Advice
While cutting back and cashing in may be good tactics for clients who have seen their income implode, planners might want to extend those suggestions to clients whose income looks safe, at least for now. "Most of my clients have made some adjustments in their lifestyle over the last few years," Wade says.

"Even if they haven't lost their job, they see a brother or sister or co-worker who has. With no raise and no 401(k) match in three years, they're willing to accept that the world has changed," he adds. Those changes may require more care with money—and financial planners are often in the best position to prescribe such precautions.

Donald Jay Korn is senior editor of Financial Planning.

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