When financial advisors’ actions fail to consider the financial needs, goals and tax implications of their clients, the results can be dismal. When a client is elderly, it can sometimes even be described as elder financial neglect, says one professional.
Becky Gersonde, a vice president and investment advisor at Heber Fuger Wendin (HFW) Inc., a fee-only financial advisor and investment counsel firm in Bloomfield Hills, Mich., recently brought in a 70-year-old client whose previous advisor did a number of things out of neglect that hurt the client’s financial well-being. The client had a trust and an IRA and was living on a fixed income.
The client had significant holdings in Facebook stock and had asked a previous advisor what to do with the position around the time that investors started selling off shares of the social media giant. The advisor then sold the client’s entire position in Facebook, which was in a taxable account, and took all the gains for the client.
This advisor “didn’t discuss it with the client, just sold it,” says Gersonde. “That started the ball rolling where the client got very disenchanted.” The previous advisor was also supposedly dismissive to the client when asked at year’s end about the capital gains situation.
The client also asked about buying tax-exempt bonds for a taxable account, but the advisor responded that the client didn’t have enough money to do this. This wasn’t entirely true, says Gersonde. She points out that anyone can buy municipal bonds through a mutual fund.
The client then met with and planned to sign on with a different advisory, but had reservations about what was being proposed. “They were going to sell all the client’s holdings [mostly mutual funds] and flip the client into their box of funds,” says Gersonde, “and never did the topic of the tax implications come up.”
Had they sold all the holdings, the client would have incurred capital gains and gone up one or two steps in Medicare’s income-limit brackets, says Gersonde. That would’ve bumped up the client’s premium for Medicare Part B (medical insurance) by at least $50 per month. “For somebody on a fixed income, that’s a big step to add another $50 monthly,” says Gersonde.
The client had always tried to keep annual adjusted gross income below $85,000 in order to avoid incurring a higher premium. (For 2020, the cap for the lowest bracket has edged up and is based on 2018 income of $87,000 or less.)
When the client expressed concerns to this prospective firm about being pushed over the Medicare limit if all assets were sold, and stated a preference to sell just some of the assets, the answer was, ‘Nope—all or nothing,’” says Gersonde. The advisory wouldn’t stagger the sales because they said, “‘That defeats the purpose.’ But what purpose?”
According to Gersonde, the client has had a tremendous buildup in a taxable account in the trust because of the great stock market. The client also didn’t know whether it would be possible to continue working part time. The client enjoys the work and the small extra income it provides, but has to be careful about triggering a higher Medicare premium.