Working through a portfolio makeover with a new client.

Bertram Johnson III, despite his elegant moniker, is related to neither the yacht nor the marine engine dynasties with whom he shares, alas, only a name. No scion of privilege, Bert managed a one-location Chevy dealer in a small New Jersey township for nearly 40 years. Over those years, while supporting a family of three children, he was able to faithfully squirrel away money in tax-deferred accounts that, as he proudly (though inaccurately) related to me on the eve of his retirement, now amount to a half million dollars.

About five years ago, Bert's wife, Hilda, inherited some stocks from her mother's estate which, when added to their collection of mutual funds purveyed by an assortment of friends and relatives over four decades, now constitute a taxable portfolio worth about $300,000.

That is where we begin the saga of reshaping Bert and Hilda's eclectic nest egg into a professionally diversified portfolio that they can confidently expect will support their modest lifestyle for perhaps 30 or 40 years and provide a cushion for emergencies.

Routine Assignment, Right?

I am a retirement investment specialist, so this should be duck soup, right? Having determined with the Johnsons the amount of money they will need to withdraw each month, and having worked out their long-term cash flow model replete with assumptions for inflation, investment returns and contingencies, I will mentally begin with $800,000 of cash, start crafting the appropriate mix of asset classes and work my way down to the individual securities selections. No problem, right? Well, maybe in a theoretical universe, but not in the world of real people.

Any advisor who has done even a few portfolio makeovers has almost certainly learned from experience that it's not as simple as liquidating all of your client's holdings and starting over with a list of investments to your professional liking. But isn't that what they are hiring me to do, you might object? Well, yes and no.

Except in relatively rare cases (lawsuit settlements, insurance proceeds and cash inheritances) the advisor is usually presented a collection of existing investments, each of which arrives with some baggage: financial and emotional characteristics that will need to be considered before changes are suggested. Here are a few examples.

When we recommend mutual funds in my firm, we always use no-load funds. But often we are called upon to redesign a portfolio that already includes investments that are exposed to surrender charges, such as "B" shares or annuities. We not only must make a professional decision about whether or not it makes sense to incur the charge in favor of what we consider a more appropriate investment, but also be prepared to articulate our judgment for a client who may be convinced that it is always best to wait out the surrender charge period.

In a taxable account, for another example, an investment's cost basis or holding period may be a meaningful issue. This is sometimes complicated by the client's lack of information. Were these shares inherited or were they an intervivos gift? When did you buy this mutual fund? Were the dividends always reinvested? Often the honest answer to such questions is a shrug of the client's shoulders.

A client may have a personal attachment to a stock for one reason or another. Probably the case we all see most often is a position in the employer's stock. Is our client afraid that selling would look bad to his boss or peer group? Is she just convinced that the company she works for is the next Microsoft? Or maybe the client is legally restricted as to sale of the employer's shares.

Not infrequently, inherited stocks are regarded as a personal connection to the decedent, usually the client's parent; obviously we need to be sensitive in our handling of this situation. If an advisor proposes liquidating shares that a client has personally selected, there could be a small confrontation of egos. Another common situation is a client's attachment to a stock because it has been good to him, and its rising price has created an expectation of endless ascent ("I finally got a good one and you want to sell it?!)

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