Can you stop spendthrift clients before they drive themselves to the poorhouse?
How can advisors help clients who are spending their
way into poverty? Advisors who have worked with spendthrifts say it can
take a lot of effort-and patience-to help such clients overcome their
self-destructive behavior.
Thomas E. Murphy, a CFP licensee from Dallas,
relates the story of a client who won $24 million in the lottery, or
about $14 million after taxes. "He was a barber and she was a church
secretary and they had four children, with the oldest being 17 at the
time they won the lottery. I took them to Austin to pick up the first
check because they did not have a car reliable enough to make it there.
I had done some research and knew lottery winners often go through
their winnings within a few years, so we set aside money for the kids,
bought a new house and car," says Murphy of TEMAA Financial. "But after
that they were struggling to live on $675,000 a year. He bought cars-30
of them-then he bought a building to store them in.
"This guy had a fantasy about what life would be
like after he won this money. Life was supposed to be perfect, but it
wasn't. Some people do not understand that having money only solves
those problems created by not having money, and it creates a whole
other set of problems in the process," he says.
In this instance the family was relatively lucky
because many of the extravagances the husband indulged in were things
that did not lose value. "Whenever you invest in property around
Dallas, it is probably going to increase in value, but this client now
knows he has to sell the cars," the advisor says. Murphy, who holds
designations as an estate planner and a divorce financial analyst,
continues to work with the family because they have options open to
them.
Another client of the Dallas firm faced a similar
situation, but the problem had a completely different source. A father
was with his 12-year-old son at an event at a pistol range when a stray
bullet struck and killed the boy. A wrongful death suit resulted in the
family receiving several million dollars. The wife was so traumatized
that she was absent from the financial planning, but the father
collected the money and then began spending indiscriminately.
"He had grief counseling, but I still worked with
him for a long time before we were able to figure out what was behind
his spending. Every time he looked at that money, he remembered how he
got it and he was just trying to get rid of it," Murphy says. "Once we
figured out what was going on, we changed the whole plan."
Some of the money was used to create a memorial for
the son and to accomplish other things of that nature. This family,
too, is still a client of Murphy's firm. Many other financial planners
say they have faced similar problems, and it often takes a large
measure of patience to resolve it.
"If the advisor can identify the emotion that is
behind the spending, it can sometimes be dealt with," Murphy advises.
"If you can recognize what is going on, you may want to suggest
counseling. You can sometimes call the counselor a career coach or a
success coach, which makes it a little more palatable. But even when
the client recognizes the problem, that does not necessarily mean he or
she has the skill set to deal with it, and it may take a lot of talking
to find out the cause behind the spending."
Many suddenly well-off people are unconsciously
struggling to return to the economic level where they felt comfortable.
In some instances, the client knows he or she is indulging in
self-destructive behavior but is not willing to change. Steven Landis,
CFP at Landis Financial and Investment Services in Columbus, Ohio, had
a 40-year-old client whose husband died, leaving her with a substantial
insurance settlement and three children.
"The first child went through Notre Dame; the second
is in state university and the youngest is in a parochial middle
school. She wants the child in parochial school and I have to respect
her choices, but she is going to have to tell him she cannot pay for
his college. Now she is depleting her assets with credit card debt,"
Landis says. "Sometimes a single parent does not want to tell a child
'no,' but at some point she has to realize she cannot do everything.
"She now calls our office at night or on weekends
when she knows she won't have to talk to a person. We finally had to
put it on our answering machine that no orders to redeem resources or
requests for checks could be left on the voice mail," he says.
The firm continues to work with her to a certain
extent, but without charging for its time or expecting much in the way
of results. "I cannot make someone do something," Landis says. "I can
hope they will see what they are doing and change, but this is a
venture fraught with disappointment. We tried for years to get this
particular woman into grief counseling, and she would not go, but I
won't say I will not talk to her.
"I think we all need to do some pro bono work, so
whether I will tell a client not to come back depends on how the client
treats me," he explains.
Phillip Cook, CFP, of Cook and Associates of
Torrance, Calif., says he tries to get spendthrift clients to commit to
a set of goals, and each time they want to spend money they have to
weigh whether it is worth sacrificing the long-term goal. "If you take
away their goal in exchange for an immediate purchase, sometimes it
rattles them and forces them to look realistically at their goals. You
can talk 'till you are blue in the face and achieve nothing, but
sometimes if you run the numbers it will be effective," Cook says.
But no technique is foolproof. Another couple Cook
worked with briefly could not be helped. "She was the breadwinner and
he was a househusband and they had psychoanalyzed money issues to
death, but they each wanted something different out of life. I told
them they had to pick one set of goals, but I don't expect to see them
again. It is amazing how emotional money can get, and emotional
decisions are not good ones."
"It all boils down to attitude," explains Gary
Silverman of Personal Money Planning in Wichita Falls, Texas. "It does
not matter what a person makes. You can save a lot while making a
little, or save nothing while making a lot. I can't help everybody. The
Silverman rule of client acquisition is, the client has to be pleasant,
has to need our help, has to be willing to pay us and has to take our
advice at least sometimes. If they ignore us, it is a waste of their
money to pay us and it is frustrating for me."
Katherine Simmonds, director of investment planning
at Brouwer & Janachowski Inc. in Tiburon, Calif., tries to involve
another professional, such as a counselor, attorney or accountant, when
she encounters a problem client.
"The team effort works tremendously well. If they
hear the same thing over and over from more than one person, it will
sometimes get them to acknowledge what they need to do. When they get
religion about saving, they really get it and it becomes very rewarding
for those who can get closer to their goals, but we cannot work with
people who refuse to make changes," Simmonds warns.
Lili A. Vasileff, CFP, president and owner of Money
Matters!, a private financial planning firm with offices in Greenwich
and New Haven, Conn., sees what is often the end result of spending
conflicts. One couple drowning in $75,000 of credit card debt sought
her help and, despite her best efforts, she says, the couple is in
financial limbo and teetering on the edge of divorce. Another client
couple ended in divorce because she thought money was free for the
spending and the husband thought it was for saving.
"There are individuals who have no concept of
overspending. You have to show them the ripple effect of their
expenditures or the problems that can be caused by a blip in their
credit rating," Vasileff says. "But you have to pick and choose these
clients, because it takes a tremendous amount of your time. If you can
get them to buy into the idea that overspending is THEIR problem, not
some amorphous idea out there, then they can reach a turning point."
Vasileff specializes in divorce planning, so she
sees many couples who have not been able to resolve that conflict.
"Some of my clients, if they catch the problem early, can avoid
divorce, but being their financial advisor is a matter of relationship
building, so you have to hope this is going to develop into a long-term
relationship," she advises.
Much of the question boils down to the amount of
time a financial advisor is willing to invest. "We are people first and
financial planners second," says Steven J. Williams, CFP of Santa
Monica, Calif., whose firm is self-named Steven J. Williams CFP. "We
are dealing with the human element, and mine is not an all-or-nothing
type of practice. If a client does most of what I say I will stick with
them, as long as they are honest with me and not doing anything
unethical or illegal. If it is a couple and one is spending too much, I
try to influence the spender through the spouse, but I want to make
sure the spender does not hurt the saver.
"One woman was literally on the way to our office to
roll over her 401(k) and stopped at a Jaguar dealer on the way. She
spent more on a car then she made in a year. I have not heard from her
since," he recounts.
Educating the client to the potential for disaster
is often the key to success, notes Marc Cortazzo, senior partner at
Macro Consulting Group in Parsippany, N.J., and a broker-dealer with
SII Investments, a part of the National Planning Holdings network. "We
educate the clients to the chance of failure. In the '90s, no one cared
about the downside of investing because the returns were so great. Then
by 2002 people did not care about their return, they just wanted their
money to be safe. There is a happy medium between those two," Cortazzo
says. "Another problem is that people today underestimate their
longevity. The quality of life for an 80- or 85-year-old today is
dramatically different than it was in the past.
"Our goal is to minimize the client's risk of
failure and there is always some give and take in doing that," Cortazzo
continues, "but I have turned away prospective clients because their
expectations were unreasonable."