MONEY mutual funds

Big Tax Bill Looms for Mutual Fund Investors

Even if you don't sell any mutual fund shares this year, you might owe big taxes on capital gains. Here's why — and here's how you can avoid the problem.

If you are the kind of steadfast investor who buys a mutual fund and holds it forever, prepare to pay for your loyalty next April, when you settle up your 2014 tax bill.

At the end of this year, many mutual funds are expected to distribute sizeable capital gains to shareholders who will have to pay taxes on them.

That is true of stock mutual funds that sold off last week after carrying forward big gains from 2013, and also may be true of the popular Pimco Total Return Fund, which was thrown a curve when star manager Bill Gross left Pacific Investment Management Co. in late September and the Pimco Total Return Fund was forced to sell appreciated bonds to pay off shareholders who left in his wake.

Here is why: Mutual funds must distribute realized gains to their shareholders every calendar year. Managers of both bond and stock funds have seen sizeable gains for several years running, but have not had to sell shares and realize those gains. This year, there have been some big selloffs that may have forced the managers to sell winning securities and realize those gains for tax purposes.

For individual investors, those gains might hurt more than they would have over the last few years, because a lot of investors have been offsetting their taxable gains for years with losses they carried over from the 2008-2009 rout. Now, with most of their losses used up, they will have full exposure to the gains. Long-term gains are typically taxed at 15%; those in the top tax bracket face a capital gains tax rate of 20%.

The Pimco Total Return Fund, for example, saw $48.4 billion in outflows through September, according to data from Morningstar and Pimco, and some analysts believe that could result in unusually high taxable gains.

“If Pimco sold bonds to meet redemptions at a gain, the remaining shareholders could suffer an inordinately large tax consequence,” said Tom Roseen, an analyst with Lipper, a Thomson Reuters company.

Through September, research firm Morningstar was estimating that Pimco Total Return Fund would pay out 2% of its net asset value in taxable gains, a high figure but one not out of the fund’s long-term historical range.

That means a person with $50,000 in that fund would see a $1,000 taxable gain, and — at the most common 15% capital gains tax rate — owe $150 in federal taxes on it.

Last year, the Total Return fund distributed 0.66% net asset value in gains. The year before, it distributed 2.31%, Roseen said.

Stock fund investors could be harder-hit, said Morningstar analyst Russel Kinnel. He estimates that U.S. domestic stock funds might be sitting on gains of around 20% and could end up paying 16% or 17% of their value to shareholders as gains. (When that happens, fund shareholders do not actually cash in the gain; they end up with more shares at lower prices.)

Note that none of this affects investors who hold mutual funds through tax-favored retirement accounts. They do not have to pay annual taxes on fund earnings.

For everyone else, there are very few ways to minimize the impact of those taxable gains. Here are some strategies that might help.

  • If you bought recently, you might consider selling quickly. If you have not seen much of a gain in a fund you bought, or if you have actually sustained a loss, you can sell shares and either use your capital loss to offset other gains, or at least get out before the gain is distributed. That strategy will not work if you have been in the fund long enough to rack up your own gains – then you will just have to pay taxes on them when you sell.
  • Think before you buy. The people who will get hardest-hit by these year-end mutual fund taxes are people who have not owned the funds for long. They buy in just before the distribution, miss out on the actual gains, but get hit with the taxable distribution anyway. Do not buy any funds this year until you have checked with the fund company to find out when it is distributing 2014 gains. If you think it is a fund that is sitting on big gains, wait until that date passes before making your purchase.
  • Take losses. If you own any stocks or funds that have lost money since you have held them, sell and reap the loss. It can offset those fund gains.
  • Relax. At 15% for most people (20% for top tax bracketeers), the capital gains tax is still much lower than regular income taxes. And there are worse things than having to pay taxes because you made money.

 

MONEY bonds

Risky Puerto Rico Funds Are Still on UBS’s Menu

UBS
Matthew Lloyd—Bloomberg via Getty Images

Brokers, according to an October memo, can recommend clients buy bond funds at the center of a recent $5.2 million settlement and hundreds of arbitration claims.

UBS is sticking with its recommendations that some clients buy risky Puerto Rico closed-end bond funds, despite hundreds of arbitration claims by investors who blame the securities for huge losses, according to an internal document.

UBS told brokers that they may continue to recommend the funds to clients following a $5.2 million settlement last week with Puerto Rico’s financial institutions regulator about sales practices involving the funds, according to an Oct. 9 internal memo reviewed by Reuters.

However, brokers “should continue to evaluate investment recommendations in a manner consistent with UBS policies and FINRA rules,” the firm said in the four-page memo, written in a question and answer format. FINRA, the Financial Industry Regulatory Authority, is Wall Street’s industry-funded watchdog.

Brokers who have questions about whether a “particular investment recommendation” is suitable should contact their branch manager or the firm’s compliance department, UBS wrote.

It is unclear who wrote the memo, which is unsigned.

A UBS spokeswoman did not say whether the firm planned to give more specific guidance to brokers. She said brokers consider “each client’s entire range of wealth management needs and goals when devising their financial plans.”

She noted that Puerto Rico municipal bonds and closed end funds provided excellent returns for more than a decade, as well as tax benefits.

FINRA requires that investment recommendations be “suitable” for investors, based on factors such as risk tolerance and age.

Lawsuits have been mounting, and there are more than 500 arbitration claims against UBS following a sharp decline in the value of Puerto Rico municipal bonds last year. Investors in closed-end funds with heavy exposure to those bonds suffered deep losses.

Puerto Rico regulators interviewed a sampling of UBS clients while looking into the firm’s bond fund sales practices. Those interviewed were elderly with low net worth and conservative investment goals, according to the settlement with UBS, also on Oct. 9. UBS did not admit to any wrongdoing as part of the deal.

According to the settlement, six UBS brokers in Puerto Rico “may have” directed their clients to improperly borrow money in order to buy the funds. Lawyers handling the arbitration cases said the investors’ losses were magnified because they invested through the illegal loans, sold through UBS Bank USA of Utah.

Even without the added leverage, analysts say funds that invest heavily in Puerto Rico debt still carry significant risk. Ratings agencies have cut Puerto Rico’s debt to junk status because of significant default risks.

Puerto Rico has an onerous debt burden that faces headwinds of a weak economy and significant unfunded pension obligations, said Morningstar analyst Beth Foos. She declined to comment specifically on the UBS funds.

Analysts said investors continue to buy Puerto Rico bonds, drawn to tax advantages and attractive yields as high as 7.75 percent, even though there is a significant risk that the U.S. territory will not be able to repay its bond obligations.

MONEY bonds

Why Does Grandma Still Buy EE Savings Bonds?

granddaughter hugging grandma after graduating from college
Alamy

This popular investment pays much lower interest than people think and probably won't return much in time for college.

Last month I made a presentation to a bunch of high school students on the importance of basic financial planning skills. I had hopes of starting a conversation about saving for large purchases such a college education or a car. But the students were surprisingly interested in learning about EE savings bonds — those gifts that grandparents and other relatives give children to commemorate life events such as a birthday, first communion, or a Bar Mitzvah.

One student said he had savings bonds that were worth over $2,000. On special occasions, he said, his grandparents would give him a $50 EE savings bond. They told him that in eight years it would be worth $100 and then it would continue to double in value every eight years thereafter.

The Truth About Savings Bonds

Savings bonds that double in value every seven or eight years, however, have gone the way of encyclopedia salesmen, eight-track tapes, and rotary telephones. EE bonds sold from May 1, 2014 to October 31, 2014 will earn an interest rate of 0.50%, according to the US Treasury website. It’s not surprising that these interest rates are so low; what is surprising is that people are still buying these securities based on very old information.

You can buy EE savings bonds through banks and other financial institutions, or through the US Treasury’s TreasuryDirect website. The bonds, which are now issued in electronic form, are sold at half the face value; for instance, you pay $50 for a $100 bond. The interest rate at the time of purchase dictates when a bond will reach its face value.

This rate is detemined by discounting it against the 10 year Treasury Note rate, currently about 2.2%.

Years ago, you could calculate when your bond would reach face value by using a simple mathematical formula called the Rule of 72. If you simply divide an interest rate by 72 you can determine the number of years it will take for something to double in value. So, let’s try it. 72 divided by 0.5% = 144 years. Ouch!!

Fortunately, the Treasury has made a promise to double your investment in a EE savings bond in no less than 20 years. Actually it’s a balloon payment. So if you happen to cash out your EE bond in it’s 19th year, 350th day, you’ll only get the interest earned on the initial investment. You need to wait the full 20 years to get the face value. At that point, you’ve effectively gotten an annualized return of 3.5% on your initial investment.

So let’s recap. If Grandma wants to buy a EE savings bond for a grandchild to cash in to cover some college costs, she ought to buy that bond at the same time she’s pressuring her kids to start working on grandchildren. I joke, but, I think it’s very important to recognize the world has changed, and savings bonds don’t deliver the same solutions that many people remember from years past.

But back to the boy who stood up in class to talk about the savings bonds. What about the bonds his grandparents had purchased over the past several decades? Well many of those bonds may in fact be earning interest rates of 5% to 8%. It just depends on when they were purchased. The Treasury has a savings bond wizard that will calculate the value of your old paper bonds. Give it a shot. You may be pleasantly (or unpleasantly) surprised at the value of the bonds you have sitting around.

———-

Marc S. Freedman, CFP, is president and CEO of Freedman Financial in Peabody, Mass. He has been delivering financial planning advice to mass affluent Baby Boomers for more than two decades. He is the author of Retiring for the GENIUS, and he is host of “Dollars & Sense,” a weekly radio show on North Shore 104.9 in Beverly, Mass.

MONEY Financial Planning

A Simple Tool for Getting Better Financial Advice

financial advisor with couple
Ned Frisk—Getty Images

If a financial adviser doesn't know what's going on in a client's life, the advice will suffer. Here's one easy way to fix that.

True story: Many years ago, I was meeting with a married couple for an initial data-gathering session. Halfway through the three-hour meeting — the first stage in developing a comprehensive financial plan — the husband excused himself for a bathroom break. As soon as the door shut, the wife turned to me and said, “I guess this is as good a time as any to let you know that I’m about to divorce him.”

That’s just one example of why exploring a client’s financial interior is a worthwhile investment for both the adviser and client. All the effort we had expended on their financial plan, for which they were paying me, was for naught.

So how can an adviser really understand what’s going on with his or her clients?

A great first step is to fully explore the simple question “How are you doing?” Not “How are your investments doing?” or “How is your business doing?” but “How are you doing?”

As financial planners, we are quick to put on our analytical hats. We will gladly examine numbers down to three decimal places, but we often fail to delve below the superficial on a relational level.

Here’s a tool that can help. I include it with permission from Money Quotient, a nonprofit that creates tools and techniques to aid financial advisers in exploring the interior elements of client interaction. It’s called the “Wheel of Life”:

Wheel of Life

The instructions are simple: you rate your satisfaction with each of the nine regions of life listed on the wheel. Your level of satisfaction can range from zero to 10—10 being the highest. Plot a dot corresponding to your rating along each spoke of the wheel. Then you connect the dots, unveiling a wheel that may — or may not — roll very well.

If you’re wondering what value this could bring to your client interaction, consider these five possibilities:

  • It’s an incredibly efficient way to effectively answer the question, “How are you doing?” In a matter of seconds, you know exactly where your client stands. You now have an opportunity to congratulate them in their successes and encourage them in their struggles.
  • It demonstrates that you care about more than just your client’s money. It shows that your cordial greeting was something more than just obligatory. It shows that you recognize the inherently comprehensive nature of financial planning.
  • It helps in gauging how much value you can add to a client’s overall situation. For example, if this is a new client, and all the numbers are nines and tens except for a two on the “Finances” spoke, then it stands to reason that good financial planning could have a powerfully positive impact on the client’s life. If, on the other hand, a prospective client’s wheel is cratering, you might conclude that his or her problems lie beyond the scope of your process. Your efforts may be in vain, and a referral to an external source may be in order.
  • It could tip you off to a major event in a client’s life that should trump your agenda for the day. Many advisers use this exercise as a personal checkup at annual client meetings, sending clients the “Wheel of Life” in advance. Doing so encourages clients to share if they have suffered one of life’s deeper pains, like the loss of a loved one. That’s likely your cue to recognize that now isn’t a time to talk about asset allocation. It’s simply time to be a friend and, as appropriate, address any inherent financial planning implications.
  • You’ll likely find it a beneficial practice for you, too! I don’t recommend putting a client through any introspective exercises that you haven’t completed yourself. So please, complete your own “Wheel of Life” exercise. You’re likely to see this tool in a new light and find valuable uses for it that I’ve not uncovered here.

———-

Financial planner, speaker, and author Tim Maurer, is a wealth adviser at Buckingham Asset Management and the director of personal finance for the BAM Alliance. A certified financial planner practitioner working with individuals, families and organizations, he also educates at private events and via TV, radio, print, and online media. “Personal finance is more personal than it is finance” is the central theme that drives his writing and speaking.

MONEY Kids and Money

You Can Teach a Two-Year-Old How to Save

child's hand with ticket stubs
Frederick Bass—Getty Images/fStop

Worried about your children's retirement? With the help of a few carnival tickets, says one financial adviser, you can get them started early on saving.

A new type of retirement worry has recently surfaced among my clients. These investors are concerned not just about their own retirement, but about their children’s and even grandchildren’s retirement as well.

Much of our children’s education is spent preparing them for their careers. But in elementary school through college, there is little discussion about what life is like after your career is over. Little or no time is spent educating children about the importance of saving — much less saving for their golden years.

When it gets down to the nitty-gritty, parents want to know two things: One, at what age should they start teaching their children about saving? And two, what tactics or strategies should they use to help their children understand the importance of saving?

While parenting advice can be a very sensitive subject, discussing these questions has always worked out well for my clients and me. I keep the conversation focused around concerns they have brought up. In a world where student debt is inevitable and other bills such as car loans and mortgage payments add up quickly, parents are concerned for their child’s financial future. We now live in a debt-ridden, instant-gratification society, so how can our children live their lives while still saving for the future?

Here is what I tell my clients:

You can start teaching children the value of saving as early as two years old. At this age, most children don’t necessarily grasp the concept of money, so instead I recommend the use of “tickets” or something similar — maybe a carnival raffle ticket. As a child completes chores or extra tasks, he or she receives a ticket as a reward. The child saves these tickets and can later cash them in at the “family store.” This is where parents can really get creative: The family store consists of prepurchased items like toys or treats, and each item is assigned a ticket value. The child must exchange his or her hard-earned tickets to make a purchase.

I’ve seen first hand, and been told by others, that the tickets end up burning a hole in children’s pockets. They want immediate gratification, so they cash their tickets in for smaller, less expensive prizes. This is where parents can begin to really educate kids. Through positive reinforcement, they can encourage their children to save their tickets in order to purchase the prize they are really hoping for.

Eventually, saving becomes part of the routine. As children receive tickets, they stash them away for the future with the intentions of buying the doll, bike, video game or whatever their favorite prize may be.

As the child gets older, parents can transition to actual money using quarters or dollars. Now the lesson has become real. Parents can also implement a saving rule, encouraging the child that 50% of the earnings must go straight to the piggy bank. By age five, most children can grasp the concept of money and can begin going to an actual toy store to pick out their prizes. By starting out with tickets, parents are able to educate children about the power of saving at a younger age. By switching over to real money, children can then begin to learn the importance of saving cash for day-to-day items while still setting aside some money for later.

While this tactic may seem like it’s just fun and games, I have received feedback from several clients and family friends that it does in fact instill fiscal responsibility at a young age. Most importantly, I have seen it work first hand. My wife and I used this system with our five-year-old daughter. She was like most children in the beginning and wanted to spend, spend, and spend. Now, it is rare that she even looks at her savings in her piggy bank. She has graduated to real money and seems to really value its worth. She identifies what she wants to buy and sets a goal to set enough money aside for it. Before purchasing, she often spends time pondering if she actually wants to spend her hard earned money, or if she wants to continue saving it. In less than a year, she developed a true grasp on what it means to save and why it is important.

By implementing this strategy, financial milestones like buying their first car, paying for college, or purchasing their first home could potentially be a lot easier for both your clients and their their children. And the kids will learn the value of saving for their retirement, too.

———–

Sean P. Lee, founder and president of SPL Financial, specializes in financial planning and assisting individuals with creating retirement income plans. Lee has helped Salt Lake City residents for the past decade with financial strategies involving investments, taxes, life insurance, estate planning, and more. Lee is an investment advisor representative with Global Financial Private Capital and is also a licensed life and health insurance professional.

MONEY charitable giving

Give to Charity Like Bill Gates…Without Being Bill Gates

Bill Gates, co-founder of Microsoft, co-founder of Bill and Melinda Gates Foundation.
Chesnot—Getty Images

You don't have to be rich to set up the equivalent of a charitable foundation — one that can continue making donations even after your death.

One of my clients — I’ll call him Jonathan — came to me recently with concerns about his estate planning. Jonathan was a successful corporate manager who received a big payday when a major firm acquired the company he worked for. With no children of his own, he’d arranged for most of his wealth to be divided between two favorite charities: a local boys club and an organization that helped homeless people train for work and find jobs. Life had been good to Jonathan, and he wanted to give back.

But recently, there had been some management changes at the homeless support agency, and Jonathan was no longer confident that his gift would be well used. He was thinking about removing them from his trust.

We suggested something that sounded to him like a bold plan, but was really quite simple. Amend your trust, we told him, so that upon your death your funds go to a donor-advised fund — a type of investment that manages contributions made by individual donors.

Jonathan knew what a DAF was. He was already using one for his annual charitable giving because it let him donate appreciated securities, thus maximizing his annual tax deduction. Like many people, however, he’d never thought about donating all his wealth to a DAF after his death. He was under the impression that a donor needed to be alive to advise the fund.

Not so. Jonathan just needed to establish clear rules on who the future adviser or advisory team would be and how he would want them to honor his philanthropic wishes. With a DAF, he could arrange for a lasting legacy of continued giving beyond his own life. Another plus: Because no organization’s name is written into trust documents, changing your mind about what charities to give to is quick and simple. With a trust, changing a charitable beneficiary often requires a trip to your lawyer.

People tend to think that leaving an ongoing charitable legacy is exclusively for uber-wealthy people such as Bill and Melinda Gates, whose foundation gave away $3.6 billion in 2013. While there is no defined level under which a foundation is “too small,” Foundation Source, the largest provider of foundation services in the US, serves only foundations with assets of $250,000 and up. While foundations offer trustees greater control over investing and distribution of gifts, they are costly to set up and run, and have strict compliance rules.

DAFs offer an alternative. Their simplicity, relatively low cost, and built-in advisory board make them an ideal instrument for securing a financial legacy. Unlike foundations, there is no cost to set them up. And the tax advantages are better. The IRS allows greater tax deduction for gifts of cash, stock, or property to a DAF, compared with a foundation. Foundations have to give away 5% of their assets annually, but there are no distribution requirements for DAFs.

All DAFs have a board of directors as part of their structure. Many of them are willing to maintain the gifting goals of a donor after their death and insure that the recipient charities are eligible for the grants each year. At my firm, we have been asked to serve as part of clients’ DAF’s adviser team, to which we have agreed. Upon Jonathan’s death, we will continue to monitor his charitable recipients for quality of services, efficiency, and results — all very important goals of Jonathan’s.

You have many options to choose from. DAFs come in many shapes and sizes, from local community foundations to national organizations. Most of the independent brokerage firms have their own funds, with minimum initial contributions as low as $5,000.

With a little research, a family should be able to find a suitable home for their estate and leave a lasting legacy — whether they are rich, Bill-Gates-rich, or not wealthy at all. To learn about finding the DAF that fits you or your loved one’s vision and values, one way to get started is to check out the community foundation locator at the Council on Foundations.

———-

Scott Leonard, CFP, is the owner of Navigoe, a registered investment adviser with offices in Nevada and California. Author of The Liberated CEO, published by Wiley in 2014, Leonard was able to run his business, originally established in 1996, while taking his family on a two-year sailing trip from Florida to New Caledonia in the south Pacific Ocean. He is a speaker on investment and wealth management issues.

MONEY financial advisers

When It’s Time for the Adviser to Fire the Client

Pink Slip of termination
Tetra Images—Getty Images

The relationship between a financial adviser and a client can be like a marriage — sometimes a failing one.

Sometimes there’s a client relationship you sense is no longer as functional or effective as it once was.

Perhaps the client engagement was never ideal in the first place, but you took on the client even when your gut suggested it wasn’t an optimal fit. Or, in some cases, the client did once fit the ideal client description in your practice, but your own practice changed rather than the client. In other cases, the client chemistry changed just like it can between two spouses. Life circumstances sometimes prompt this shift, but other times you can’t even put your finger on why things aren’t quite like they used to be.

How do you decide if it would make more sense to discontinue the relationship? When do you make the change? And how do you do it? I have sometimes struggled with the ifs, whens and hows.

I think it is part of the DNA of advisers to want to serve our clients no matter what, and thus very difficult to see that it is not always best for each party, even if it seems obvious. I give a lot of credit to a financial coaching firm I worked with many years ago for encouraging us as advisers to try to recognize when it’s time to say goodbye. They told us if we could recognize that the relationship was not working for everyone, it might be time to consider parting ways. In the end, they said, it’s often better for the client, better for the adviser, and better for the other client relationships.

Years ago, I had a client who, at the beginning of the relationship, fit the description of my ideal client. This person even added services over the years to the point where he was one of my highest revenue clients. In time, he began making requests that I felt were unrealistic and unreasonable. But, for a time, I stretched and successfully responded to each request, even though I was stressed by them. He persisted and made the same request again and again, also saying he was going to reach out to other advisers to get other quotes.

The stress on my business grew as the demands continued, even though each time he apologized afterward. After four of these anxious experiences, I realized that if it happened again, I would need to let the client go. Remembering the coaching, I thought it through on all fronts.

It would be better for my client to find another adviser who might provide a better overall fit, and thus my client would be better served in the long run. But also, I’d be less stressed as a result of no longer attending to requests that seemed inappropriate. And I’d be that much more fully available to help out my clients who were still with me. Ultimately it would be a win, win, win for all.

If realizing the need for a break up is tough, working through the breakup can seem worse – but try to remember the end result of things getting better for everyone.

Such was the case when I informed this particular client — in an email followed by a phone call — that I was resigning from our work together and that I felt I wasn’t the financial adviser to take him through the next phase of his financial life. As could be expected, he was at first upset and unhappy. I don’t know what happened with that client and his next advisers, but I do know that I slept better the first night after that conversation and went into the office the next day feeling much more relaxed.

And despite having to make some adjustments when that client revenue ended, in time, the loss of that client actually propelled me to make some major changes to my practice that took me to new professional heights. In the end, the move helped me better serve my remaining clients, add more ideal clients, and pursue other professional and personal goals for myself.

How to end a client relationship depends on the client relationship. Sometimes a letter is sufficient. Other times a phone call is best. And from time to time, an in-person meeting is the way the go. The breakup can be awkward, no doubt, and I don’t think there’s a template to follow. But it’s best to formalize the end of the relationship so the client knows his or her next steps, your staff knows what is happening — when and why — and everyone can go forward with eyes wide open.

In the end, this is all about the client and making sure your client is well served…even if you have decided you no longer want to be the adviser serving him.

———–

Armstrong is a certified financial planner with Centinel Financial Group in Needham Heights, Mass. He has guided clients since 1986 in matters of financial planning, insurance, investments, and retirement. He currently serves on the national boards of the Financial Planning Association and PridePlanners. His website is www.stuartarmstrong.com.

MONEY financial advisers

Get in Touch With Your Prejudices…About Money

Tipped scale
Steven Puetzer—Getty Images

Financial planners need to understand that their feelings about wealth are in fact their feelings — not necessarily their clients'.

It’s only human to hear and see a situation through the lens of our bias and experience. And that’s often where we tap into when we speak.

So, when years ago, a client of mine expressed how she and her boyfriend were “freaked out” by his sudden and very dramatic jump in income, I can forgive myself for bungling my reply. I don’t remember exactly what I blurted out, but it was probably something along the lines of “What do you mean freaked out? Most people would love to be in your situation.”

I saw their situation through my lens: If he were well paid for work that had been his life’s passion, that could only be a good thing. I just couldn’t relate to the stress they were feeling and the cascading dominoes of what that high income now meant for them.

The reality is that their stress was related to the change they were experiencing, the change that psychologist Jim Grubman, in his book Strangers in Paradise, likens to what immigrants experience upon arriving in a new land. With both my client and her boyfriend having earned modest incomes up until then, how would this high income change each of them? How would it impact their relationships now that they had arrived in the Land of Wealth? Could they adapt in a healthy way? What if they bungled it?

Because of my lens and the money scripts playing in my own head, my ears focused just on the part about their jump in income. It was only because I asked her to elaborate on her “freaking out” that I understood the stress they felt. It’s now easy to see that I should have known that wealth and stress often go hand in hand.

This experience reinforced how important it is to bring my own biases to the surface and identify the lens I wear. It also reiterated that while it’s essential to learn about tax strategies and portfolio design, it’s equally important to continually study the cultural and psychological aspects of money. These go hand in hand too.

It’s from this place of deeper self-awareness and deeper understanding of the psychological side of money that I can truly be present with my clients who experience a windfall, to anchor them as the tidal wave hits, and to move forward with them after the wave passes.

Here are some resources I’ve found helpful in understanding my own biases surrounding money and getting a better idea of what my clients are thinking:

  • The Soul of Money book and workshop with Lynne Twist (www.lynnetwist.com). This was very useful for me at the beginning of my financial planning career; it helped me let go of a lot of mental baggage related to money.
  • Money Psychology teleclasses with Olivia Mellan (www.moneyharmony.com). Taking her classes, along with being coached by her, increased my understanding of gender and money, and how couples communicate about money.
  • Facilitating Financial Health: Tools for Financial Planners, Coaches, and Therapists by Brad Klontz, Rick Kahler, and Ted Klontz. This important and accessible textbook for financial planners includes useful exercises to use with clients.
  • Strangers in Paradise by James Grubman (www.jamesgrubman.com). This book about generational wealth transfer among the superrich made me think more about what clients at all income levels go through when they become wealthier.
  • The Challenges of Wealth: Mastering the Personal and Financial Conflicts by Amy Domini, Dennis Pearne and Sharon Lee Rich. I read this when I had my first client who inherited wealth. It has exercises to help clients who feel knocked over by the experience.
  • Sudden Money: Managing a Financial Windfall by Susan Bradley and Mary Martin. Written for the general public, it has advice for dealing with specific types of windfalls, whether it results from the death of a parent or winning the lottery. One important lesson: In these situations, it’s as normal and helpful to have a therapist as it is to have a lawyer or accountant on the client’s financial team.

——————-

Jennifer Lazarus is a certified financial planner and the founder of Lazarus Financial Planning, an independent, fee-only firm specializing in the financial planning needs of socially responsible investors in their 20s to 50s. She most enjoys helping people reach a place of empowerment and financial calm.

MONEY stocks

How to Stay Calm in a Rollercoaster Market

Man in business suit in hammock
PeopleImages.com—Getty Images

After a five-year bull market, investors worry that a big drop is right around the corner. Here are some ways advisers ease clients' fears.

Market swings are top-of-mind for people who still can’t relax, five years after the 2008-2009 stock market meltdown. Investors worry that the five-year bull market in stocks could suddenly turn.

Clients of financial advisers worry about market swings even more than they fear running out of money in retirement, according to a Russell Investments survey.

The reason? Many investors can’t erase memories of 2008, said Scott E. Couto, president of Fidelity Financial Advisor Solutions. The Dow Jones Industrial Average dropped 54% between October 2007 and March 2009. After that dive, the market has risen 133% from March 9, 2009 to Sept. 29, 2014.

“Losing hurts worse than winning feels good,” Couto said. Many older investors are particularly cautious because they are taking retirement distributions, or will need to do so soon.

Relaxation Strategies

Advisers can ease clients’ fears by describing market swings in a long-term context, Couto said. For example, advisers can share statistics with clients to show how long it typically takes for markets to rebound after a downturn, and how stocks have yielded decent long-term returns, despite fluctuations.

Other strategies include holding the equivalent of a “Back to School” night for advisers to tell clients what to expect for the year, said John Anderson, a consultant for SEI Advisor Network in Oaks, Pa., who counsels advisers on running their practices.

Advisers can also prepare clients for future risk, Anderson said. For example, advisers could show estimates of how much money clients would lose if the S&P 500 stock index dropped 20%, 30%, or 40%. That could prompt clients to switch to less volatile investments or at least assess their risks.

That type of groundwork is part of every first meeting with new clients for Robert Schmansky, a financial advisor in Livonia, Mich. Most clients, as a result, never ask about market fluctuations, Schmansky said.

Schmansky’s strategy uses stocks to maximize growth, while balancing portfolios with less volatile assets such as Treasury Inflation-Protected Securities (TIPS) and short-term bonds.

The approach eases clients’ minds because they know that part of their portfolio is safe from market swings and always available for income, he said.

Such strategies have grown more popular since the 2008 crisis, said Couto. Some advisers now pitch “outcome-oriented” investing that focuses on clients’ objectives, such as having a certain dollar amount for retirement or putting kids through college, instead of returns. The adviser may speak of dividing assets into “buckets,” each designed for certain objectives, such as achieving growth, hedging against inflation, or preserving capital.

Some advisers go even broader when adding investments to clients’ portfolios. They may include commodities, such as gold or timber, which could move in a different direction from stocks, or market-neutral funds that claim to do well regardless of the direction of the market. Couto cautions, though, that the risks and fees associated with some such strategies may overwhelm the benefits.

He suggests advisers build stability into portfolios by adding less-volatile bonds, shares of dividend-paying companies and quality big companies with market values over $5 billion.

More importantly, having conversations about risk and volatility can separate the great advisers from the average ones, says Couto. “One of the best things advisers can do is help clients understand their long term objectivesand stay focused on their ‘personal economy,'” he says.

MONEY Estate Planning

The Hardest Part of Making a Will: Telling Your Kids What’s in It

Kids taking cookies from plate
Gene Chutka—Getty Images

An awkward part of estate planning is telling your kids how much — or how little — they'll get. Here's how a financial planner can help.

For clients, one of the most stressful aspects of estate planning — already an emotionally difficult process — is the prospect of telling heirs what they plan to do with their assets. Because conversations about legacy plans can be terribly difficult, clients may avoid them at all costs — and the costs can indeed be substantial.

Financial planners, however, can help clients overcome the challenges of having these important conversations. Here are a few suggestions for how to do it:

  1. Encourage clients to communicate their values about money in a larger context. Often, clients’ estate plans reflect lifelong values such as a commitment to charitable giving or a wish to provide first for their families. If children are familiar with their parents’ values, chances are they will have a good idea of what to expect from their estates.
  1. Help clients evaluate their children’s money skills. Just because kids grew up in the same family doesn’t mean they will have the same knowledge and attitudes about money. Especially if children will inherit significant amounts, conversations about estate planning can become part of larger conversations designed to help teach them how to manage and become comfortable with their legacies.
  1. If a client’s estate plan does not treat children “equally,” for whatever reasons, it’s best to share that information well in advance and to communicate it privately to each child. There are many reasons why treating children differently in an estate plan can be the fairest thing to do, but that doesn’t mean it’s a wise to let them learn the specifics when a will is read. If parents and individual children can discuss these provisions and the reasons for them ahead of time, there is less likelihood of conflict between siblings after the parents are gone.
  1. Encourage clients not to allow children to assume they are inheriting more than is the case. Not telling them may avoid conflict now, but it will sow seeds for deeper conflict and resentment after your client’s death.
  1. Help clients prepare children for large or unexpected inheritances. I’ve worked with heirs who were stunned to receive legacies much larger than their parents’ lifestyles had led them to expect. If clients have a substantial net worth that’s under the radar — perhaps in the form of land or business ownership — their children may be totally unprepared for what they will inherit. Planners can suggest ways to help the heirs learn more about both the financial and the emotional aspects of managing inherited wealth. They may also encourage parents to consider options, such as giving more to the children during their lifetime, that might reduce the impact of a sudden inheritance.
  1. Acknowledge clients’ fears, even indirectly. Although it is seldom expressed, perhaps the strongest reason for not discussing estate plans with family members is fear. Parents may be afraid that children will be angry or disappointed, will build too much on their expectations for an inheritance, or will be resentful of other heirs.

Talking to family members about estate planning and legacies can be difficult and even painful. Those discussions, however, will almost certainly be less painful in the long run than the stories children may make up after parents are gone about why they made the choices they did.

Financial planners can play an important role, not by taking on the task of telling heirs what parents want them to know, but by facilitating the family conversations. In especially difficult circumstances, the help of a financial therapist can be invaluable. Supporting clients as they discuss their wishes with family members can be an important estate planning service that enhances the legacy parents want to pass on to their children.

———————

Rick Kahler, ChFC, is president of Kahler Financial Group, a fee-only financial planning firm. His work and research regarding the integration of financial planning and psychology has been featured or cited in scores of broadcast media, periodicals and books. He is a co-author of four books on financial planning and therapy. He is a faculty member at Golden Gate University and the president of the Financial Therapy Association.

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser