Getting Spending Right

The impact of client spending habits and changes to the financial professionalís service offerings and compensation models.

February 21, 2008
by Lewis Schiff

In my last column, I elaborated on ways in which advisors and CPAs could assist high-net-worth (HNW) clients who are facing broader implications of retirement. Here, we take a closer look at the impact of client spending habits — and how financial professionals are reimbursed for services they provide to their clients.

Client spending habits can dramatically affect even the most thorough investment plan. Spending too much money, especially in the earlier years of retirement, can diminish the client’s asset base to such an extent that they may not be able to generate sufficient income to sustain them in their later years of life. If an affluent client suddenly adopts the spending habits of a 20-year-old pop star, it may be time to help them evaluate their monthly expenditures.

On the other hand, liquidity and significant net worth does not necessarily give clients the emotional freedom to spend money on themselves, notes Peter Carnathan, a planner with Washington, D.C.-based Fiduciary Trust Company International. “They just will not splurge at all on themselves. It’s really a mindset that they’ve had throughout their entire life. And while it’s admirable, at the same time, we have to remind them that every once in a while, it’s okay to take a trip or buy a new car.”

Bedda D’Angelo, of Fiduciary Solutions in Durham, N.C., is one of those seasoned advisors who observed that many very wealthy people still maintain the middle-class values of their less affluent early years or exhibit the same traits if they’ve had wealth their entire lives. One of her clients, a business owner, lives in the same small comfortable home on the same middle-class street on which he has always lived and still drives an old Mercedes. Little do his neighbors know that his net worth is over $40 million. D’Angelo also has clients with significant old money who have little concept of the cost of living today and remain terrifically frugal about all expenditures.

Note to Readers: Lewis Schiff will be holding workshops to introduce the newest solutions for your high net worth clients at select U.S. cities. View more information.

You may have to convince your clients that they can retire early, if they wish. E. W. “Woody” Young, a planner with Raymond James in Dallas, Texas, had a client who never quite understood how much wealth he had accumulated until the advisor laid out his portfolio, stock options, retirement plan and other assets. Once he understood that he was financially very secure, he agreed to a plan with trusts for his children and a philanthropy program. Even after gifting, his net worth was over $12 million. He retired 10 years ago.

In the last six months, the client’s wife has been diagnosed with a treatable, but incurable cancer. The future quality of her life is uncertain at this point, but, because they retired earlier, they managed to have 10 years of retirement the way they wanted it.

The Evolving Model

Retirement for advanced planning clients has evolved over the years. Having been in the industry for 25 years, D’Angelo has observed a shift in retirement planning over the years. Even the sources of retirement income have changed. Early in her career, she rarely had a client with an executive compensation package. Now, several of her clients receive annual stock options worth about a million dollars. She invests those proceeds, which later form nonqualified portfolios that will contribute to the client’s retirement income stream.

Similarly, Young has seen his own attitudes and those of the profession change over time. His practice, in its 20th year, now has 17 certified financial planners (CFPs) on salary and is on retainer with about 300 families in 30 states and four countries. Their retention rates run about 95 percent. In 1987, when the firm started to do financial planning, the profession was just starting to mature. “Fee-based advisory relationships were more a dream. They weren’t reality yet,” he notes.

The expectation was that the clients would accumulate sufficient assets to become financially independent. Once they had enough, the advisory relationship diminished. Fifteen years ago, Young altered the practice to become more active in working with the goals and lifestyle questions of client’s retirement. “Over the years, we learned that we can start asking those questions earlier in the relationship. And so, if we have someone who is affluent, we’re able to go with our experience and pretty much demonstrate how they can be financially secure in retirement.”

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Lewis Schiff is a senior managing principal for Advanced Planning Group, where he leads a team of private wealth experts who specialize in the needs of high-net-worth clients globally. His forthcoming book, The Middle-Class Millionaire can be pre-ordered at Amazon.com, Barnes & Noble and DoubleDay.