This article first appeared in the Greater Phoenix Edition of the Financial Consultant in 2013.
The role of most financial advisors has been static for many years; to turn nickels into dimes. Increasingly that role requires a wider view of your clients, their assets and exposures beyond just the traditional issues of asset allocation, growth and tax efficiency they traditionally look to you for help with.
What Happened To All The Wealthy People and Their Money?
The economic downturn we experienced here in Arizona affected nearly every imaginable business channel. Starting with those in real estate where the majority of the state’s wealth was concentrated
we saw developers, builders, contractors and all others lose a lifetime of work in as little as forty eight months. Some of it was due to a complete lack of diversification, they said things like, “I make 30% a year in my dirt deals, why would I give money to you?” which was a good response until the music stopped, and they didn’t. What these folks and everyone else experienced was a combination of the following, to name just a few:
• Loss of 30-50% of their home equity, a significant asset in “house-proud” parts of the valley where the HNW live.
• Stalled or negative investment momentum for those that did actually have investments outside real estate and their primary businesses.
• A lack of complete and sophisticated legal counsel on the deals they were in: I’m amazed how many people signed personal guarantees for 100% of the debt in a given deal when they owned 25% or less of the project – this is just plain old “bad lawyering” or in many cases “no lawyering”
• A near complete lack of liquidity and diversity in the concentration of their assets.
• Increased litigation exposure on every imaginable front including among and between partners and investors, employee lawsuits, the list is staggering.
• The lack of any kind of defensive legal and financial planning (asset protection) and a fatal reliance on traditional estate planning (death planning) alone. Most of these folks were one big, undivided and collectible bucket of money.
Why Did Some People Survive and Even Prosper During the Same Time?
It’s interesting to note that at the same time we saw an economic climate with so much loss, some individuals survived and even prospered. Some of those people were just lucky, others planned for success, either on their own or with the help of top advisors who actually looked at the client as a holistic being with many moving pieces, not just as an account holder, estate planning client, etc. However they got there, they shared some common traits:
» They and their advisors were aware of potential exposures and were proactive in addressing them.
» They are able to make their personal, family overhead commitments from existing resources for an extended period of time, even without additional cash flow.
» They were willing and able to adjust their lifestyles and expenditures to current economic conditions. They lived very well, but well within their means, as opposed to at the limits of their means.
» They had assets that allowed them to meet existing business financing burdens and other fixed costs in a form that they were able to liquidate at minimal delay and expense. This included a fixed and disciplined allocation to cash or cash equivalents.
» They had top counsel in place on tax, business and estate issues, and that counsel used a variety of strategies that not only served the primary goals but also protected those assets for the family. Some examples you are responsible for are the use of life insurance and annuity products that preserve certain assets for the family by statute. (As a simple example I help advisors and their clients nationwide use life insurance in this tactical way. In one case, an individual with a net worth of $150 million was wiped out by leveraged real estate exposures and left with just a single asset to start over, the statutorily protected cash value of his life insurance policy which amounted to seven figures).
» They had great credit and relationships with banks that allowed them to agree on terms that were best for all parties involved, and had these relationships with several institutions.
» They were taught to “safety wrap” assets in various legal entities that had legitimate business purpose and could segregate their assets from their personal and professional liability. Simple examples include the use of LLC’s for investment real-estate, the use of LPs to own and control non-qualified investment accounts, the use of irrevocable trusts as opposed to dumping everything into their revocable living trusts (financial suicide).
»They had long term assets that were able to be made liquid with minimal penalty and delay, despite that liquidation not being part of the original plan, i.e. long term investments with an escape or liquidity plan built in. This liquidity will allow many I have personally worked with to take advantage of current pricing and inventory in real estate, as just one example, and some have already been able to double their net worth.
Clearly some of these “recession survival traits” are things you can help with, others are things you need to develop the right resources on. Either way, expanding the scope of your inquiry and discussion to include them is vital to both the continuing success and solvency of those you serve and to your own practice, which must adapt to the current economic reality in order to remain relevant and to continue to attract and retain the affluent clients every advisor wants.
Ike Devji is an Asset Protection only attorney, author & speaker that works from Phoenix Arizona with a national client base. Wealth preservation planning has been the sole focus of his planning for nine years & he helps advisors across the United States protect literally billions of dollars in client assets. For more information including client friendly education materials, please reach him at davismiles.com or call 480-733-4593.