Advisors must take the lead when other professionals counsel clients.
Imagine a symphony being composed by several very
talented composers. One writes the music for the string section,
another the woodwinds, and others for percussion, brass, etc. Each
sounds wonderful by its self. There is one major problem, however. None
of these composers spoke to each other before writing their own piece.
As a result, when the music is put together, there is no symphony, as
expected, but many distinct sounds that are competing with each other.
Fortunately, music is not written this way, and one composer must coordinate the efforts if a beautiful symphony is to be produced. Yet, many of our new clients come to us having arranged their financial affairs in a similar fashion. They may have very competent professionals offering advice about their taxes, estate planning, insurance, etc. But like our composers, we discover that these advisors seldom, if ever, talk to each other. And what may look like good planning may be flawed when taken into context with the clients' goals and other strategies.
For example, how many of us have reviewed perfectly written wills that, among other provisions, create a unified credit trust to avoid unnecessary taxes, only to discover that the attorney did not have a discussion with the investment advisor or insurance agent about ownership and beneficiaries? Or, perhaps it was done properly when the will was written, but new insurance was purchased later and the insurance agent neglected to ask about the provisions in the will. These are fairly common mistakes that would never occur if a competent financial planner conducts as the other professionals play their parts. We always ask our clients to advise us if any changes are being contemplated in their estate planning, insurance, tax planning, etc. Since financial planners generally know more about their clients' situations than other advisors, it is our responsibility to be the people who coordinate all advice to assure that it is compatible with their other goals.
About six months ago one of our clients was advised by her accountant that she should change the titling on an account she had with us to "Joint Tenants with Right of Survivorship." If they did that, he told her, she would avoid probate. The problem with that advice was that we had titled the account in her husband's name because he was much older than she and was terminally ill. He had many securities in his portfolio that were purchased many years ago and had a very low cost basis.
If the accountant had called me, he would have discovered that. Of course, he didn't make the call. As an aside, her husband died last month, and we can now sell the securities with no adverse tax consequences. His advice, if implemented, would have left her with two choices: keep the stocks and increase her risk, or diversify the portfolio and pay more than $45,000 in capital gains taxes.
Because some of these professionals may have myopic views of their situations, our clients have found it very helpful for us to be an integral part of the dialogue to add a more holistic perspective. For example, Ernie and Joanne were both in their second marriages and each had children. He owned a home building business and his son was in the business with him. Aside from the money he had tied up in land and building projects, he had very little liquid assets.
Ernie wanted to start a new development, but he had exhausted his line of credit and his bank would not grant additional funds until some of his current projects were complete. Joanne, on the other hand, owned several properties free and clear of debt, as well as liquid assets. Whenever he needed additional advances from the bank for new projects, Joanne pledged her assets as collateral. Based on the provisions of their prenuptial agreement, she would inherit half of the business and its assets at his death.
Ernie wanted to be assured that his son, Al, would get the entire business when he died and Joanne felt that this was unfair since her assets were being used as collateral for many of the projects. She informed me that she had retained the services of a real estate attorney to "see that I get all that I should if Ernie were to die." They had scheduled a meeting at the lawyer's office and I asked if I could attend since I was very familiar with their financial situation as well as their goals. She and Ernie agreed that it would be a good idea.
The lawyer opened the conversation by making it clear that he was representing Joanne and that she was entitled to her share of the business because her assets were at risk. Leaving the business to Ernie's son would have deprived her of her legitimate claim, he said. As he presented his case, I felt as if I was in a divorce settlement meeting, and an adversarial relationship between my clients was beginning to develop. Ernie protested that the money made from the sale of his projects was being used to support their lifestyle, and that should be enough to satisfy Joanne. I decided to try to get to the bottom of the problem, as I knew it to be from the relationship we had established over the years.
I do not represent only one of them, I said, and my goal was to do my best to satisfy both Ernie and Joanne. I asked permission to ask each of them some questions. I asked Joanne what it was that she really wanted-the business assets or the security those assets represented. Security was her major concern. Did she have any objection to Ernie's son owning the business provided she was adequately taken care of if Ernie died? No, she answered.
Actually, she had a great relationship with Al, and thought he had worked hard and probably deserved to take over the business. I asked Ernie if he would object to helping Al pay the premiums on a life insurance policy to fund a buyout at his death. The money would be used for Joanne's needs at Ernie's death. He did not object and Joanne thought it was the best way to resolve all of the issues. When Ernie died, Al would get the business and Joanne her security,. Just when I thought everything was resolved, the lawyer spoke up. "It's not that simple," he said. "Joanne needs to be compensated for the risk she has taken with her assets."
It seemed to me that he was handling the situation as if Joanne and Ernie were business partners and not life partners. It also became apparent to my clients that the solution, however simple it was, would be perfect for resolving their issues, so they decided to implement it. There is no way of knowing what the outcome would have been if I were not present and the lawyer persisted in making this more of a problem than it actually was. Ernie, no doubt, would have retained his own counsel and that would have probably increased the tension. In order to assure that our clients stay on track for reaching their goals, we believe that we need to be aware of the advice they are getting from their other professionals. We communicate that to them early in the process, and most of them agree and run most of their recommendations by us before they are implemented.
Our clients come to see us expecting their financial lives to be coordinated like the pieces of a well written symphony. As financial life planners, it is our duty to help them to make that happen.
Roy Diliberto is chairman and founder of RTD Financial Advisors Inc. in Philadelphia.