Business people of a certain age probably can remember a plaque that secretaries everywhere once displayed with pride: “Poor planning on your part does not constitute an automatic emergency on my part.” It's a saying financial advisors should encourage their retiring clients to forward to their baby boomer children.
Retirement planning is all about identifying the client's desired retirement lifestyle, then translating that into savings and investment goals. But increasingly, family crises — and the emotions that go with them — are disrupting these well-laid plans. Advisors who have designed solid retirement blueprints and worked years to maintain them are now faced with clients who want to withdraw $25,000 or $50,000 to help grown-up children deal with issues like divorce, health problems or the loss of a job.
Today's generation of working adults “has very little financial cushion,” says Tom Sedoric, senior vice president of investments at the Portsmouth, N.H., office of A.G. Edwards. When bad times hit, their lack of savings and high debt levels often leave them with little flexibility. “If there's a job loss or illness, suddenly there's trouble,” says Sedoric. “Baby boomers have no place to turn but their aging, retired — or semiretired — parents.”
Consequently, many families have begun viewing the parents' retirement plan as something like a family bank account. “People don't understand it's a retirement income account — not a savings account,” says Joe Birkofer, a certified financial planner and principal of Legacy Asset Management in Houston. Retirement accounts are intended to generate the income needed to maintain a lifestyle — an important point often missed by family members, if not by the clients themselves.
People Get Ready
If you have not been confronted with this issue yet, prepare yourself. Few things will put you in a more awkward position than clients who want to act against your advice in an area as basic as leaving their retirement plan whole.
Some registered reps say a trend of tapping into the retirement kitty is gathering steam as today's 30-, 40- and 50-year olds face a pressured economy with low savings and lots of debt. Rather than let a client's family financial crisis catch you by surprise, it's best to lay down some plans in advance for how such situations will be handled.
Birkofer says the familial “emergencies” take two common forms: an adult child's ongoing financial needs and one-time financial emergencies of an adult child.
This burdens advisors with a new reality: They need to help clients face family financial crises and, at the same time, preserve their principal. In such cases, advisors assume a unique — and sensitive — role. Exactly how they approach the situation depends a lot on their relationship with each client.
“Hopefully, it's the financial advisor who gets the first call,” says Julie Welch, a certified financial planner and partner at Meara King. in Kansas City, Mo. “Hopefully, people think of those who've helped them over the years.”
Once that call comes, it's critical to demonstrate you're acting in the client's best interests. “You have to paint yourself as the client's advocate,” says Sedoric. Despite the crisis, “your job is to help them reach and maintain their goals.”
Drain the Emotion
He stresses keeping the discussion focused on the facts — the potentially devestating impact of taking money from their retirement plan, for instance. But, don't allow the discussion to become emotional. “The advisor will always lose in emotional discussions,” Sedoric observes. “But remember, the client came to you for help. At that point, you have leverage.”
That leverage is important. When clients want to make moves that will hurt them financially, the advisor's best tools are credibility and facts. Your first order of business is to get a detailed understanding of the situation.
“First off, try to determine if it's a crisis as opposed to someone just throwing money to their child,” suggests Welch. In the long run, she notes, a pushover parent's open-wallet policy can end up making the situation worse by allowing children to go deeper into debt or by simply delaying the inevitable.
If children face issues that can be addressed by improving their cash flow, parents might help by dipping into savings that aren't earmarked for retirement. For example, the parents could pick up loan payments using their own home equity or other lines of credit. Expenses for grandchildren, such as school and medical bills, can also be paid directly by the grandparent/client. Such tactics can ease the child's financial pressure and allow clients to follow their often-preferred course of action: giving, not loaning, needed funds to their children while leaving retirement savings untouched. “Always ask what nonretirement financial resources can be brought to bear,” says Birkofer.
If parents insist on providing lump sums, Welch says it's best “to call it a loan first. Later, they can gift it if they want.” Welch advises parents to draw up a loan agreement: “Formalize everything.” If they don't, the client's “loan” could be construed as a gift for tax and legal purposes. In addition, signing a loan agreement tends to help children realize they're making a serious commitment to their parents, she says.
Families have other options, as well, although they may be less attractive on an emotional level. For example, a child could move home until the financial storm passes. Though some may find this less than ideal, “from the financial point of view, it can help minimize expenses and provide emotional support and interaction,” says Welch. She suggests families set goals — such as whether the child will move out in six weeks or six months.
Preconceived Ideas
Many times, however, clients arrive at the advisor's office with their minds seemingly made up about giving money to their progeny. When that happens, Joe Birkofer talks “right off” about penalty and taxes. “We use it as a bogyman to try and scare away the idea of an early distribution,” he says. He believes that “if I'm asked the question in the first place, parents are looking for a reason not to do this.” The advisor, he says, can support them by acting as “the third-party, outside bad guy.”
Welch also turns to the financial facts of life at such meetings. “I go back to the basics, reminding them how you start saving early to make more,” she says. Obviously, when parents are close to or in retirement, time isn't on their side. But when she asks if they're willing to sacrifice all they've earned for their kids, parents often answer that they are, she says.
In some cases, a conversation between the child and the advisor might be helpful, though Birkofer points out, “this is a judgment call.” The advantage here is that advisors can often pose the hard questions parents aren't comfortable asking. “There might be something the child can sell or do to solve the problem,” says Birkofer. “As the parent's financial advisor, I think there's a place for a rep to be the heavy. You can do that in a respectful way.”
“Parents know they have a finite amount of money,” he observes. “If you're 57 years old and someone wants to remove $25,000 from your retirement account — to get that back in eight years is damn near impossible.”
“What-if” scenarios — such as Monte Carlo tools recently approved by the NASD — can be an effective way to turn conversations into what Sedoric calls “real-life, nuts-and-bolts” discussions. Such tools “really help clients see the probability of maintaining a certain goal, once the impact of their gifts is factored in,” he says. “If they see the probability going from 80 percent to 40 percent, they'll probably think twice about gift-giving.”
Client's Call
At the end of the day, though, whether or not to make an early distribution is the client's decision. “The one thing you can't say is, ‘No, you can't do that,’” observes Sedoric. At that point, the advisor's job is to minimize the damage. “Let's think about the short-term issues,” Birkofer tells them. “Can we wait until Jan. 1 to push off a revision in the tax bracket? Don't forget penalty and escrow for tax. And look for ways to put money back into the retirement account from cash flow, without counting on getting paid back from the child.”
Advisors can also relieve pressure by suggesting resources to help children address their financial issues. “Give the client tools,” suggests Sedoric. “Provide references and contacts, such as credit-counseling services or whatever's appropriate.” Leading parents through a factual discussion can empower them to offer help beyond simply writing a check. “Give parents analytical tools of their own and they'll be appreciative,” he says.
“Through the years, advisors see families go through their challenges,” Sedoric points out. In his experience, the families that handle challenges best are those engaged with information.
Depending on how your firm handles such matters, be sure to execute an engagement letter or document your discussions for your own information. That way, says Sedoric, “If you've got someone sitting in front of you broke because they ignored your advice, at least it's in your file.”