Just as the days of summer grew longer, so did the unemployment rolls.

Advisors have begun to field calls from people whose worlds have been thrown into disarray, figuring (perhaps prematurely) that their plans are in ruins, their retirement forestalled and their financial security forever compromised. Naturally, they are ripe to make all kinds of blunders, reacting emotionally to a situation that demands common sense.

It's not just blue-collar workers catching pink slips, but also those in executive offices. Throughout the spring and early summer, the ax fell in industries as varied as manufacturing, financial services and the media. As the economy slows down (and companies seem unimpressed by the Federal Reserve's rate cuts), some of the world's largest corporations are announcing cutbacks, including Cisco, Dell, DaimlerChrysler and Disney.

According to the Bureau of Labor Statistics, there were 1,426 mass layoff actions by employers in May alone. The number of unemployed from the ranks of executive, administrative and managerial ranks jumped 31% for the year ending June 2001. The unemployment rate among this group rose from 1.7% to 2.1% in that time.

Advisor Peggy Cabaniss says five of her clients have lost their jobs this year.

"I've been shocked at some of the mistakes people have made," says Cabaniss, of HC Financial Advisors in Orinda, Calif. After losing his job, one client spent $60,000 to $80,000 on home remodeling and a fancy wedding for his child, she says. Another bought a $50,000 car. On margin.

Elizabeth Jetton, an advisor with Financial Vision Advisors in Atlanta, calls this phenomenon "revenge spending." It's frightening, she adds.

"They are taking it out on nobody but themselves," Jetton says. "It's normal to feel like you're entitled to a reward, because [the layoff] was so painful. I tell clients to go out and buy a nice dinner and wait." Sometimes, however, clients get their misbehaving out of the way before sitting down for the first post-layoff powwow with the advisor, she says.

The other response also is common and familiar: Clients go into paralysis, refusing to spend any money at all. Leery of dealing with anything financial, they put off things that should be done quickly, such as exercising their stock options within the brief window of time allowed, usually 60 to 90 days. "Some of these people [when terminated] go into a state of denial, not opening mail, not dealing with stuff," says Richard Moran, an advisor with Financial Network Investment Corp. in Rolling Hills Estates, Calif.

And where does that leave the advisor? Thrust into the role of therapist. Clients, feeling betrayed by the fickle loyalty of their employers, want empathy as much as financial acumen.

Ray Sanabria of Sanabria-The Wealth Management Co., in Tampa, Fla., says that with one of his own recently fired clients, he found it best to work through the emotional issues first. "I wanted to give him a sense of security that it's not the end of the world and that there are other possibilities-that the chances of him becoming homeless in the next couple of months is nonexistent. ... They are already under a lot of emotional duress. So now is not the time to discuss convoluted asset-allocation charts and explain risk tolerance."

Brass Tacks

After the first meeting with such a client, Sanabria performs a cash-flow study, looking at the cost of living and taking into account any severance or vacation pay and the amount of cash available. If the client is cash-starved, Sanabria looks at liquid assets, determining which ones to liquidate while trying not to incur damaging tax liabilities.

Good advisors stress the need for a contingency plan in case of financial emergencies, keeping a cushion of assets that can last clients anywhere from six months to two years and allow them to continue their lifestyle uninterrupted. In many cases, it will turn out that after a layoff, the client's situation is not bleak at all.

The most important financial aspects of this transitional period are dealing with the client's health care, 401(k) rollover and stock options. Clients have 30 days to decide if they want to pay into a COBRA health plan or buy into a short-term medical plan. You can keep re-enrolling in the latter for up to two years, says Tony Novak, a registered investment advisor with MedSave.com. The choice will depend on whether there are pre-existing health conditions or a family situation. "For the average healthy family, it can be $200 or $300 a month cheaper" to go with a short-term plan, he says.

In some cases, clients can execute a qualified retirement plan rollover to an IRA and then pay health-care costs as a penalty-free withdrawal, Novak says. "You're going to have expenses anyway, and you're going to cash in retirement anyway, so why not pay as little as possible?" he asks. This option particularly is useful for those leaving to become self-employed, he says.

Then there is the tricky area of stock options. Exercising options and then selling company stock gives a newly unemployed client a much-needed influx of cash for the uncertain transition period following termination. But it's hard to decide when to sell, especially when the stock is volatile (as many are right now). And there also are tax liabilities to consider, such as the alternative minimum tax, activated when incentive stock options are exercised.

And many people, including executives, know little about their stock options. According to a survey commissioned by OppenheimerFunds, last year, 11% of option holders surveyed allowed in-the-money options to expire. About 39% said they knew little or nothing about their options. And 75% said they knew little or nothing about the alternative minimum tax.

No one can predict the future value of the stocks. But volatility can be so dramatic that it can overwhelm tax planning. "A client who gave me the worst stomachache exercised his options at $50 a share," Cabaniss says. "They are now at $25 a share. He has a huge [alternative minimum tax] to pay, and he has a margin account, and his stock is dropping like a rock."

Alex Kimura, also with Financial Network Investment Corp., says that despite the risk, some clients might want to hold onto the stock, especially if it's a company with a solid business or name. If the client is in the 39.6% tax bracket and the client holds the stocks for a year to create a long-term capital gain, she could reduce her tax to 20% plus estate taxes, he says. That would almost be like cutting taxes in half. But, he says, "with any stock, there's a risk of decline."

Moran says that if the value of a client's stock and options in the company exceeds 50% of total investable assets, he starts selling the stock and exercising the options without becoming too concerned about taxes. Lack of diversification is a serious problem, he says, and the taxes might not hurt so much because a person laid off won't be incurring taxes on salary anyway.

"The safest thing to do is to sell enough shares after the exercise to pay the alternative minimum tax," Moran says, "and pay the income tax and keep the rest of the shares to get long-term capital-gains treatment."

A meeting with the client at the end of the year can help an advisor decide whether to hold the shares and incur the alternative minimum tax or whether it would be better to sell the stock (which would then be taxed as income for the year). In any case, the client would want to sell enough to pay taxes.

"You don't want the client spending money for himself and then come April 15, they don't have the money to pay the tax," says Tom McFarland of The Darrow Co. in Boston.

Advisors also have to remind clients that they could use too much of their newly freed cash from options without addressing the need to change lifestyles.

Re-examining Goals

Some clients will discover, to their delight, that they not only can live comfortably between jobs, but even can follow through on some of their pre-layoff plans, such as vacations. Sometimes it's just a matter of seeing the balance sheet.

"When you do come in and go through the numbers," Moran says, "it turns out in most cases to be unpleasant, but not nearly as bad as they thought."

Other clients, however, have to look for another job immediately. The toughest road is often for those in their late fifties or early sixties who face age discrimination and very often won't find new jobs.

"Particularly for the men, this has been emotionally devastating," Cabaniss says. "These people have always been able to get jobs quickly. Now, they are not only dealing with an economy that they can't do anything about, but recruiters admit that there is an age problem. ... If there's a 48-year-old candidate who's just as good, [they say] 'Here's somebody we can get 15 years out of.'"

For those who don't have to go back to work, now is a good time to re-examine goals. "Usually, this is a time for them to start thinking of the next half of life if they are in their forties or fifties," Sanabria says. "Take off to rest, to do the things you've postponed for the last 15 years. Spend time with family. Play some golf. Do some reading."

They might even pick a different career. Or go into business for themselves. Cabaniss has a client, dismissed from a marketing and distribution job, who founded a private consultancy. He ended up making more money than he had before.

Advisor Michael Boone of MWBoone & Associates in Bellevue, Wash., says one of the first things to remember is to set aside liquid savings for times such as these. And second, he says, advisors should try to minimize the long-term damage to the client's financial situation. In other words, he says, "try not to dismantle all your financial goals over a temporary period of time without a job. Try as much as possible to keep the long-term stuff intact."

Many of Boone's clients had prepared for the sting of unemployment before it happened, so being laid off has not been that much of an emotional issue for them.

"We've got one client who just had a dotcom layoff," Boone says. "He knew it was coming.... He took a month off and went to Australia. He thought he would come back and go to work, but he found no work. So now he's going to Africa to climb Mount Kilimanjaro."