Financial Advisor

June 2008

War Stories


Jane Jones had $450,000 in her 401(k) plan when she called up her advisor to say she wanted to withdraw half of it. Still reeling from the loss of her husband, Jones (not her real name) had been sitting up late at night watching television when she saw a commercial in which a man was extolling the virtues of gold coins.

Jones saw the ad and knew she wanted to buy some. She called the number in the advertisement, and the next morning, she was on the phone to her advisor trying to get money out of her retirement account. Her advisor implored her not to do it, to no avail.

“I don’t know how this guy on television did it, but he had the fear of God in her, making her think she had to absolutely get this money immediately,” says Mark Colgan, a CFP licensee in Rochester, N.Y. “At least I had some influence. In the end, she only took out $92,000.”

But Colgan says he was so dead set against the purchase, and so feared what the woman might do when—not if, but when—she lost her shirt, that he asked her to sign a disclosure form releasing him of any responsibility for the transaction. He was afraid if he didn’t, he might find himself in a lawsuit. The woman wound up losing most of her money.

Another advisor says he had clients, a couple in their thirties,who had $16,000 in a 401(k) that the wife wanted to cash out in order to redo their kitchen. The advisor told them that between the state and federal tax hit they were likely to take, and the 10% early withdrawal penalty, they would probably wind up with about $8,000.

“I told them they were going to lose about half the money,” says Patrick P. Astre, a CFP practitioner in Shoreham, N.Y. “The wife said, ‘I’ll still have 8,000. That’s found money!’ I told her it was not ‘found money’ and that it might make a difference to them in 30 years.”

Needless to say, the funds were withdrawn, and the kitchen got done. He says he knew that it was going to happen anyway, even as he was advising against it, because the wife kept going back to the idea of “found money,” as if an old uncle had come and given her $8,000. “You find that a lot with clients. It’s the immediacy of the present, versus something in the distant future,” Astre says.

The other thing advisors see a lot is their clients’ reluctance to purchase insurance. It’s like trying to get a kid to eat spinach. They’re not likely to see the benefits for 20 or 30 years. Astre says he had a client who came to his office without his wife, and as he helped construct a financial plan for the family, Astre suggested the man buy a small whole-life insurance policy and a large term-life insurance policy.

His rationale was that the small whole-life policy would kick in later in life, when the man’s large expenditures, like his children’s college, would already be behind him. And in the interim, because the man had three children, Astre suggested he buy term-life insurance, in case something happened early on. The client liked the whole-life policy because it accrued in value, but he didn’t want to spend the money on the term policy. He wound up doubling up on the former and passing on the latter altogether, despite Astre’s protests.

“My words to him were if something happens to you, you’re going to create a welfare family here. His wife would be raising three kids, she doesn’t work, and he has insufficient life insurance,” Astre says. “It was just shortsighted.”

Astre felt so strongly about it, he had the man sign a statement saying it was his decision to go against the recommendations of his advisor. The man got into a fatal car accident several years later on the Northern State Parkway on Long Island. Astre says the man had stopped coming to see him by that point, but he learned of the accident when he was contacted by an attorney, who said he was representing the man’s wife. She was suing him because her husband was underinsured. Astre sent the attorney the statement the man had signed and the matter disappeared.

Investors aren’t just resistant to life insurance. They’re not too keen on buying long-term-care insurance either, says Matthew Tuttle, president of Tuttle Wealth Management in Stamford, Conn. In fact, Tuttle says he sees this counterintuitive divide: People in their fifities have less of a problem buying it than people in their sixties and older, the ones who are more likely to need it. They struggle with the prospect of paying the $4,000 to $8,000 annual premiums, Tuttle says.

“The 50 year olds will say, ‘Where do we sign?’ and the 60-and-up crowd will say, ‘We’ve looked at it before, and we don’t’ want it,’” Tuttle says.

Tuttle thinks the issue is that the parents of the 60 year olds died younger and didn’t really have a reason for it, while the parents of the 50 year olds—who are part of a generation of people living longer—have wound up actually needing long-term care.

“They see Mom and Dad slowing down and forgetting things, and they see how in a year or two, they may have an issue,” Tuttle says, noting that Connecticut, where he is based, is the second most expensive state in the country for nursing homes, after Alaska.

Joshua Shorr, a senior investment consultant at Robert W. Baird & Co. in Alpharetta, Ga., says he, too, sees couples chafe at the prospect of buying insurance. He had one couple in their mid-fifties who were very underinsured, and the husband, a mechanical engineer, was the only one working. Shorr told the man that if anything happened to his wife and he became mentally incapacitated and unable to work, he would have no income. The man wound up buying some insurance, but a lot less than Shorr recommended. And to save the $1,000 annual premium, he bought no coverage for his wife. Shorr asked the man to sign a letter saying it was his own decision to remain underinsured.

Within a year, the wife called her husband at work one day saying she felt dizzy and weak and wanted him to come home. When he arrived, he found her dead on the kitchen floor. And as Shorr had prophesied, the worst-case scenario played out. The wife had no coverage, the man had a meltdown and couldn’t work, and he ultimately lost his job, Shorr says. He wound up having to sell his house in a fire sale and move in with his children.

“He was actually very upset with me,” Shorr said. “‘You should have told us about the risks,’ he said. I think he’s very litigious. I think he would have sued me.”

Shorr says the man had e-mailed him and his branch manager, very upset and saying he didn’t have enough insurance. It was as if he was trying to build up some kind of case, Shorr says.

Advisors say the problem is usually that the client doesn’t want to spend the money today, so they ignore the potential consequences of tomorrow. Shorr says he was working with another client on an estate plan, and the man had about $13 million in real estate, but only $600,000 of it was in liquid assets. Shorr warned him that it could be problematic because when he and his wife died, the children would be facing a $5 million estate tax bill. And they would probably have to sell some of the real estate empire he had taken a lifetime to build in order to pay for it.

Shorr suggested setting up an irrevocable trust to pay for it. The trust would cost $10,000 to $15,000 to set up, and the man would have to pay an additional $5,000 to $8,000 a year in life insurance premiums. The insurance would then pay the estate taxes. The man declined.

“He was a south Georgia real estate guy. He didn’t trust lawyers,” Shorr says. “He thought, ‘Whatever my kids get, that’s more than I had.’”

About a year and a half later, Shorr got a call from the man’s daughter. Shorr knew the father had died, but the mother had now passed, and the children were trying to gather up their parents’ financial documents. Shorr says when he told her about the tax bill they faced, she got extremely upset and then became upset with him. Fortunately, he had brought the children into the estate planning discussions, and the girl remembered those conversations about the tax bill. The children wound up having to sell property to pay the Internal Revenue Service.

While some clients won’t open their wallets, others can’t seem to shut them. Kathleen Godfrey, principal with Godfrey Financial Associates in Latham, N.Y., says she had to fire a client couple in 2005 after working with them for nine months because they were addicted to spending. The couple, in their mid-forties, had a combined annual income of $350,000, and yet they could not make ends meet. Their monthly spending was more than $20,000; they each had extensive wardrobes of elegant couture, jewelry and accessories; and they vacationed at the most exclusive resorts around the world.

They owned a fleet of his and her vehicles, including Porsches, Harley-Davidsons, Cadillac Escalades and speedboats—all of which they bought on loan—and had less than 5% equity in their $450,000 home. And every time they would begin to accumulate equity again, the couple would refinance the loan and cash it out.

Their financing costs were so high, they had little to put toward retirement–they had less than $50,000 put away and contributed only minimal amounts to their 401(k)’s–and much of their $20,000 monthly expenditure went toward loan payments. Their annual bonuses, of about $30,000 each, were used to pay down debt and acquire more stuff.

“This couple was too narcissistic to follow through on any money management or retirement planning strategies,” Godfrey says. “To avoid any possibility of future legal entanglements, the only prudent move was to fire them.”

And then there are the clients who get seasick when the market falls and they call their advisor screaming, “Sell!” despite their advisors’ pleas to hold on for the ride. That group can include anyone from the chief bottle washer to the chief executive.

One advisor says he had a client who was a concrete contractor, and during the market downturn in 2003, the client began talking about liquidating his stock portfolio. The advisor kept trying to persuade him to hold on to it, but after several months, the client could take it no longer and sent a fax that said he was done. He wanted to sell everything. The advisor complied, but he says the man’s timing was impeccable. Not moments after the time stamp on the fax, the markets turned around and began what would be a five-year bull market.

And then there are clients who won’t sell their stocks for anything, particularly if it’s the stock of a company for which they worked. Unfortunately, if the company doled out stock to its employees, these clients’ portfolios are overloaded with that company’s shares and desperately need diversity. Advisors say they frequently tell their clients not to have all of their eggs in one basket, but it often falls on deaf ears. That’s sage advice, as evidenced by all of the former employees of tech businesses when their companies’ share prices plummeted and their pensions were wiped out.

But what happens when the client actually listens and sells his stock, only to see it jump from $30 to $300? “You’re going to lose that client,” one advisor predicts..