By Lawrence C. Strauss in Barron’s, featuring Tony Delane, CFP®, AIF®, Wealth Advisor
In addition to helping clients fill financial gaps, younger advisors can also provide career advice for clients seeking new jobs or considering starting their own businesses.
Financial advisors spend a lot of their time with clients looking ahead—sometimes zeroing in on how to fund a retirement that is decades away. But new challenges can emerge without warning. One such scenario: a client gets a pink slip. The latest employment report for November, released last week, showed unemployment rose to 4.6% from 4.4% before the government shutdown.
Advisors, who may have more clients confront job loss in the coming year, can help them get through these setbacks in various ways, whether it’s crafting a temporary budget or accessing emergency funds. However, the conversation with clients doesn’t always start with numbers. “There are a combination of financial and nonfinancial issues here,” says Andrew Altfest, 45, a principal advisor and president of Altfest Personal Wealth Management. “You have to be extremely empathetic and put yourself in their shoes.”
Empathy first.
Nathan Barbakoff, 37, an advisor at OnePoint BFG Wealth Partners, says the first step he likes to take with a client in such a scenario is to help them through the initial shock. “I tell them, ‘It is OK to be angry, it’s OK to be frustrated, and it’s OK to be at home and sulk for a few days.’ I want to make sure clients feel validated,” he says.
Daniel Song, 38, a partner and wealth manager at Merit Financial Advisors, says that one of his clients recently lost a job at a big company. That person, around 50 years old, wondered how this could happen. They believed they would eventually retire from that company, says Song.
He initially focused on the emotional aspects of his client’s situation, in part by sharing some of his own career experiences. Moving to the client’s financial picture, he then focused on liquidity, or available cash, and covering essential expenses.
The specifics of a client’s career arc will drive how the financial advisor approaches these situations. Is the client early in a career, in which case they may have parents, siblings or extended family to help tide them over until they find another job?
Are they in the middle of their careers, say mid-40s to mid-50s, with children still at home, college tuitions on the horizon, and maybe elderly parents to support? Or are they in their late 50s or 60s, possibly on the cusp of retirement with a comfortable nest egg built up?
Income replacement.
For Jenny Harrington, 50, CEO and a portfolio manager at Gilman Hill Asset Management, the common thread for any job loss is “how much income do you need?” “It’s all about income replacement.”
Advisors can also wear the hat of a career counselor in these situations. As clients become a little more senior in their careers, it can be harder to find a job with a commensurate salary, benefits, and title. “Sometimes the only option is just to take a step back and start from a couple notches down and work your way back up,” says Tony Delane, 32, an advisor at Halbert Hargrove.
An advisor can also help a client negotiate severance pay, depending on the situation.
In some instances, a client may have salted away savings to pay for six months of expenses—or even longer. “Obviously the emergency reserves go first,” says Barbakoff. “That’s why they’re there.”
If the reserves aren’t sufficient, the next step is to consider selling investments. Advisors can help clients manage tax impact, in some cases by using losses to offset capital gains.
Other possible areas for discussion include stock options, annual bonuses, healthcare coverage and electing to use Cobra, or the Consolidated Omnibus Budget Reconciliation Act. It allows a former employee and their families to stay on the company’s insurance for a specified time period. Other cash sources that may work include home equity lines of credit and borrowing against an investment portfolio.
Who is vulnerable?
Advisors encourage clients to have rainy day funds for this kind of an emergency. “We really try to get to the bottom of how risky their job is,” says Delane, who points out that clients in certain sectors like tech can be especially vulnerable to layoffs.
When a job loss does strike, he says, it’s important to analyze a client’s expenses as part of a budget analysis. He uses a hypothetical example of a client with a big mortgage, car payments, and children in private school. “That’s a lot harder than somebody who’s living within or below their means and who can cut some of that discretionary spending,” he says.
Another key role for an advisor in these scenarios is to help clients avoid costly mistakes. For example, it might make sense to take severance in two different calendar years, not one, to lessen the tax burden. Tapping a retirement account before age 59½ carries a tax penalty of 10% on top of the regular tax levies for withdrawals.
Harrington warns clients dealing with a recent job loss not to “chase a high yield to replace the income without understanding what the risks are” in a fund or other financial products. “You could end up much, much worse off.”
New opportunities.
For all of the trauma that can come with a job loss, there are some potential silver linings.
Altfest says one of his clients lost his job but ended up working with his wife redesigning and flipping homes, a very satisfying transition. “People have built whole new careers out of losing their job and building something else completely different,” Altfest says. Advisors can help with that process. After all, says Altfest, “You know them well financially, and you can provide more impartial advice.”
