Financial advisors know too well that optimism can be a negative force — especially when it is applied to planning for a client's medical care.
People from all walks of life tend to think positively when it comes to assessing their own chances for long-term health, and the baby boomer generation seems to have elevated this optimism to an art form. Unfortunately, many of these sunny-side types are fooling themselves when it comes to the need for financial preparations. For advisors with large numbers of boomer clients, the practice management implications can be monumental.
What follows is a story of a couple of solid clients whose financial fortunes turned abruptly on a single traumatic event. What makes the case instructive is not just the event's direct impact on the couple's financial state, but also its effect on their relationship with their financial advisor.
Matt, a founding principal in an advisory firm called Capital Preservation Associates, concluded an annual review with Jack and Nancy Smith this spring. (All names have been changed.)
Jack and Nancy are 58 and 57, and in many ways are ideal clients. Jack was earning $200,000 a year as a longtime employee of a consumer products company, and Nancy was drawing $100,000 from her “dream job,” CEO of a small communications company.
They pegged their net worth, exclusive of the value of their primary residence, at $2.5 million (see table), and they owned $1 million in life insurance for Jack and $500,000 for Nancy. They did not own long-term care insurance.
Their primary residence was in Cincinnati and they have two grown children, Harry, age 26, and Nancy, age 30. Harry remains single and is in graduate school for fine arts in Chicago. Nancy is married and has two children. Jack's mother is 89 and living in a long-term care facility in Florida; Nancy's parents live in Florida in their own home and are in good health at ages 82 and 84.
Not the Rockefeller clan, but not chopped liver either. On the face of it, these are just the sort of clients that most advisors lust after — particularly because both Jack and Nancy are healthy and are looking to build up a modest inheritance that they can pass on to their children, who might someday become clients for Matt.
But this all changed in the blink of an eye one day, when Jack was permanently incapacitated in a car accident. In addition to bringing his career to an abrupt and unexpected halt, it introduced a suite of ongoing medical expenses for which the family had not planned.
Nancy, whose income was a nice supplement that the couple hoped to watch grow over time, suddenly was thrust into the role of primary wage earner.
Adding to the burden, Nancy's mother had taken ill, raising the specter of having to fund or supplement long-term care for her. Nancy's parents had lived well on a TIAA-CREF pension and social security, but their income could not begin to cover long-term care expenses. Worse, at age 84, it probably would not be long before Nancy's father needed help as well.
What It Means
As should be obvious to any advisor looking over Jack and Nancy's net-worth numbers, they have some options. For starters, selling the vacation home would reduce expenses and help address any immediate need for cash. Further, the couple's taxable investments could be rejiggered to help make up for the income shortfall that Jack's accident has spawned.
Indeed, after much work, Matt was able to adjust Jack and Nancy's financial plan to account for the couple's new reality. Suffice to say their vision of the future has greatly changed. Where they once hoped to travel and retire on an income in the neighborhood of 75 percent of their full working pay, they now are looking to squeak by. And the dream of leaving money to the kids is gone.
Jack's accident had a profound effect on Matt as well. After working with Nancy and Jack to completely reconfigure their financial affairs — at no small expense to the firm — the principals of Capital Preservation Associates convened at their regular monthly staff meeting. It was here that the firm took a long hard look at its client base and found that 60 percent of the 500 households it served had heads of households aged 50 to 60.
In short, there were a lot of Nancys and Jacks in their future. The implications of this fact are threefold.
First, the firm needs to sit down with its existing clients and urge them to plan for worst-case health scenarios. This includes making sure that disability and long-term care insurance policies are sufficient and up-to-date. But it also means addressing the long-term care options of the clients' extended family — and anyone else whose medical care might turn into a financial burden for the client.
Second, the firm needs to start weaning itself off the addictive flow of income coming from baby boomer clients. Over the course of the next decade, many firms will watch large swaths of their client bases morph from low-maintenance accumulators into high-maintenance distributors. The time to start making up for this shift is now, by acquiring new, younger clients.
Lastly, advisors with the wherewithal to do so should consider deploying specialists who are specifically dedicated to dealing with helping clients through unexpected events like Jack's. As the years grind on, situations like his are likely to become all too common. And the hard reality of the advisory business is that few advisors will be able to survive, much less thrive, if they are spending large amounts of their time and energy scrambling to address the emergencies of clients who are on the downside of their earning potential.
Of course the advisor still owes these clients top-notch service, but calling for reinforcements is probably in the best interest of all involved.
Writer's BIO: Stephen D. Gresham is executive vice president of Phoenix Investment Partners.
Glen E. Gresham, M.D., is professor emeritus of rehabilitation medicine at the University at Buffalo, The State University of New York.
A COUPLE'S RESOURCES
|Retirement Plans||$1.4 million|
|* Jack's profit-sharing plan||$900,000|
|(primarily his company's publicly traded stock)|
|* Nancy's IRA Rollover||$350,000|
|* Nancy's 401(k)||$100,000|
|* Jack's IRA||$50,000|
|* Long-term cash||$100,000|
|* Mutual funds they acquired||$400,000|
|* Stock left to Jack by his father||$100,000|
|* Stocks/managed accounts||$300,000|
|Real estate equity||$200,000|
|(not primary residence)|
|* Vacation home||$200,000|