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When the harsh reality of the pandemic hit, I took stock of my own situation. A declining portfolio was the least of my concerns. My wife and I are within the demographic of those likely to suffer serious complications if we contract COVID-19. We may not even survive.
If one of us catches it, the other is very likely to become infected.
Some of your clients may be in a similar situation. Here’s how we are dealing with it. Perhaps our experience can assist them.
Personal financial planning
There’s nothing like a pandemic coupled with a massive drop in the market to stress test your personal financial planning. How did your clients fare? How did you fare?
According to this article, some advisors found it necessary to apply for the PPP loan, which isn’t surprising. I wonder if those advisors, in hindsight, would have been more conservative about having enough cash reserves to withstand this kind of black swan event.
I’d also be interested whether this crisis causes more advisors to rethink their AUM-based fee model. You have no control over the spread of COVID-19. Why should you be penalized for things you can’t control, like bad markets, or rewarded for good ones?
I took an unconventional route, which most advisors wouldn’t condone. I have a significant amount of cash value in life insurance policies. In my asset allocation decisions, I considered this cash value as the equivalent of low-risk bonds.
When my stock portfolio took a hit, I was comforted by my cash-value reserves. It helped me stay the course emotionally.
Should you take another look at the role insurance (of all types) and single-premium immediate or deferred-income annuities play in an overall financial plan? It’s hard to quantify the peace of mind this kind of planning can provide.
Estate planning
Our estate plan is in good shape. The typical plan contemplates the simultaneous death of a couple. Until COVID-19, this seemed like an academic exercise. Now, the prospect of both of us dying within a short time of each other is far more likely.
I finally did what I (and perhaps your clients) should have done long ago. I wrote a detailed letter to my heirs telling them exactly what to do in the event we both died. It included the password to my computer and to my password program, a listing of all our accounts, the names and contact numbers of those who would be responsible for administering our affairs, along with other details.
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I previously provided in my will that our assets (which are in trust) would be handled by a directed trustee who did not manage money. The trust has instructions that govern the type of RIA the trustee can hire. It provides that the RIA must be “evidence-based,” focus on keeping costs and fees low, invest in a globally diversified portfolio and defer or avoid taxes where possible. The RIA would not engage in stock picking, market timing or trying to select actively managed funds that attempt to “beat the market.”
When I told my estates lawyer what I wanted to do, he asked me to draft the provision because he had no familiarity with “directed trustees” or “evidence-based” investing. Subsequently, he told me he has used it with other clients.
Many of you tell your clients you “coordinate” their estate planning. Do their trusts have a similar provision?
I wonder how many of your clients understand the conflict of interest and risks inherent in appointing a “full service” trustee, who also handles investments, to administer their trusts.
Once we confronted the harsh reality of the pandemic and took steps within our control to deal with it, it was easier for us to adjust to the “new normal” of social distancing and living with the fear and anxiety COVID-19 causes in all of us.
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