Advice matters: 3 ways I’ve helped clients recently

Most clients think of their financial advisor as the person who is managing their investments. While that is true, a lot of the things we do for clients goes beyond the scope of simply managing portfolios. But often times, clients are left unsure of just what to ask of their advisor. I’m here to tell you that you should ask for anything and everything! If it’s related to your financial situation in any way, run it by me. In case you’re looking for some inspiration… here are a few tasks I’ve helped clients with recently.

Sourcing for tax help

I live in Illinois but have clients all over the country. Recently, a client who lives in the southwest asked if I knew of an accountant to help them with their taxes. The answer was yes and no… I had referrals for accountants in Illinois, but none in the state where they lived. Due to their personal tax situation, I recommended they work with someone in their local market.

However, finding an accountant you can trust (and who isn’t swamped with existing work), can be very time consuming. So I got some key background information on my client’s tax situation, as well as their budget, and I began sourcing for a tax professional in their local market. I conducted phone interviews with five different accountants and narrowed the best option down to a single choice. At the time of the official introduction, both my client and the accountant were able start working together immediately; there was no need for a “do you think you can help me with this?” type of conversation.

In this case, I was happy to save my client time and expect they’ll save money too due to getting a larger than usual tax refund.

Analyzing big expenses

I was pretty surprised when a client, who is around my age, mentioned to me how much he was paying for life insurance. Aside from discussing the assets held in their Schwab account, this client had not really utilized me for much else. Once the life insurance topic came up, I suggested he send me a recent statement for the life insurance policy he was holding. It turned out to be (1) more life insurance than was reasonably appropriate for a (2) longer term than was likely needed at a (3) higher cost than you could find today if you shopped around.

A similar discussion has been happening in the housing market. Clients, especially those considering first-time home purchases, are being met with the highest mortgage rates since 2011. There’s been a bit of sticker shock for anyone who started running numbers months ago based on a 4% 30-year mortgage rate and is now having to recalculate for 5% or more (plus, even higher home prices as well).

Press others for more information

This is high time in the mortgage industry for mortgage brokers to take advantage of prospective buyers. We reviewed one client’s mortgage proposal: a 30-year fixed at 5.45%. When we asked if the mortgage broker had presented any other, lower-interest rate options, they said no. We suggested they ask the broker about a possible 7/1 or 10/1 adjustable rate mortgage (ARM), which locks in a fixed rate for 7 or 10 years. These rates are usually well below 30-year fixed rates because they then adjust after the initial 7 or 10 year period.

Our client was able to lock in a 10/1 ARM at less than 4.50%. There is risk that the rate could adjust higher than 4.50% after the initial 10 year term is up. However, our client plans to move within the next 10 years. Furthermore, if the 30-year fixed rate falls back to 4.50%, (a level it was at just one month ago), anytime within the next 10 years, the client could choose to refinance out of the 10/1 and into a 30-year fixed.

This new mortgage put the client’s expenses much closer to their original projections and relieved some stress around the current state of home buying. Anytime you find yourself shopping for a loan (home, car, refi, etc) or a quote (insurance, attorney fees, financial advisor 🙂 be sure to press the professional you’re working with for more information. Good questions to ask:

1. Are these my only options?
2. How can I lower my fee? (there’s always a way…)
3. Why did you make this recommendation?
4. What would YOU do if you were me?

Managing employee stock based compensation

Many of our clients work for publicly traded companies and receive stock based compensation. This compensation takes many forms: RSUs, stock options, participation in an employee stock purchase plan (ESPP). For many employees, the idea of holding onto their company’s stock sounds like common sense. You work at XYZ company, you believe in the mission, and you expect the stock to rise over time. So why wouldn’t you hold? While the logic is well intended, it ignores some important details:

1. Most clients receive recurring RSUs (at least for a few years)
2. Growth in the company share price likely accompanies growth in the company’s earnings… which could lead to increased compensation anyway
3. Conversely… declining sales could lead to a declining share price which could lead to worthless stock options, or worse, being laid off completely
4. There’s no guarantee that the company stock will perform any better than the broader market as a whole

For these primary reasons, we typically encourage clients to sell most positions in company stock as soon as they are able to.

Last quarter, a client was participating in her company’s ESPP, which allowed her to purchase stock at a 15% discount to the market and sell it the next day. This was a great ESPP plan as companies will often restrict immediate sales for six months or longer. The client said her colleague told her to just buy and hold the stock because it “always goes up.” We pushed back on that and suggested participating in the ESPP, but selling the position immediately to realize the quick 15% gain.

We know the client has a long-term goal of buying a home, and knew the ESPP could be a useful way to generate low-risk savings for a down payment. We calculated how much company stock they were able to purchase based on their company’s plan, without impacting personal cash flow, and executed the savings generation strategy. The company’s stock has since fallen by more than 35%.

Advice under management

While our compensation as advisors is tied to assets under management, clients should think of our services as advice under management (credit to Sara Grillo for the phrase). Our efforts in portfolio management run parallel to the following mission, but as you see, giving good advice is a big part of that:

1. Making our clients lives easier (like finding a tax professional for them to work with)
2. Helping them make well-informed decisions (such as comparing multiple mortgage loans or insurance quotes)
3. Working towards achieving long term goals (like using stock based compensation to jump start savings on a home)

These are just a few recent examples that occurred in the first quarter. Two other common topics include generational wealth transfer and advising on non managed assets (401k, etc). My goal with writing this article is twofold:

1. If you’re a current client, I hope you will tell me the next you’re wondering… “I wonder if this is something I should talk to Kevin about?”
2. If you’re someone else’s client, make sure you’re getting the level of service you expect… not just strictly portfolio management.