One thing 2003 made clear: high-net-worth clients need thorough wealth managers now more than ever. Domestic and world events, federal legislation and shifting personal values have significantly altered the landscape for these individuals. To help them plan effectively, advisors must regularly conduct comprehensive reviews of each client's entire financial situation. The goal of each review is to ensure that a plan accurately reflects the client's current circumstances, goals and attitudes.
In my practice training and educating financial advisors, I have identified 13 key issues (see “Wealth Management Checklist,” page 29) that must be addressed to develop what I call a “Comprehensive Wealth Management Plan.” Gaining an integrated understanding is critical because a client's position relative to each of these 13 issues represents a unique operation, and change in one may affect not only the overall equilibrium — but also how all the factors interrelate.
CHANGE ON MANY FRONTS
Notable developments of 2003 included new tax laws and regulations, a rebound in the financial markets, an economy that is beginning to show signs of growth, and continued record low interest rates. These events were punctuated by numerous scandals that ranged from corporate boardrooms to Wall Street, spawning changes in governance, reporting and oversight.
Managing investments for clients in this environment presents many challenges — as well as opportunities. The rebounding financial markets have lifted the spirits of both advisors and investors. Signs of economic recovery and gains in financial markets, however, can often bring complacency and a false sense of security. Even in strong markets, advisors need to lead clients through a review of their overall situation, feelings and goals, making certain that their aggregate portfolio (which may be spread across multiple advisors) is truly reflective of where they are and where they want to go. The objective is to identify early on any potential issues that may necessitate some repositioning. (See “Be Careful Out There,” page 32.)
Last year brought important changes in the taxation of dividends and capital gains. Both could significantly affect how clients structure and rebalance their asset allocation. The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003 reduced the tax bias against dividends. Before last year, many investors looked to equities for capital growth rather than dividend income. Today's record low interest rates have many of these same investors scrambling to generate the cash flow to meet their lifetime capital needs. Given this new tax environment, it may be appropriate to revisit the asset allocation based on the client's expectations for income.
The scandals concerning corporate misdeeds that seemed to break every month of 2003 helped educate us all on just how devastating the potential cost of risk can be. For many high-net-worth individuals, significant concentrations in single stocks helped create their wealth. But advisors must guide such clients through examining the risks inherent in continued lack of diversification and devising appropriate strategies for managing that risk. Fortunately, reductions in capital gains' tax rates may help as clients seek to reposition assets.
On the life insurance front, the Internal Revenue Service issued its final position on split dollar arrangements in 2003. For many, these plans no longer provide the benefits that once made them so popular. Advisors should exercise caution when working with clients who have split dollar plans that were in force before Jan. 28, 2002. Any material changes to these plans could cause the loss of grandfather status and the corresponding tax benefits. (See “The Post-Split Dollar World” in the December 2003 issue, page 18.)
In response to the demand for greater transparency in corporate reporting, many major corporations transitioned from traditional nonqualified compensatory stock options to restricted stock programs for their key employees. The primary planning issue in this arena centers on the differences in taxation of restricted stock, which is considered compensation upon vesting regardless of whether that option has been exercised. It is imperative that advisors ask clients: “Has your stock option plan been changed to a restricted stock program? What is your overall exercise plan?” In addition, for those whose equity falls under rules promulgated in Internal Revenue Code Section 144, it may be appropriate to discuss the advantages of a blind trust.
The Economic Growth and Tax Relief Reconciliation Act of 2001 included numerous scheduled increases for qualified retirement plan contributions that will take effect in 2004, allowing plan participants to defer more money in their retirement plans. The total deferral limit for defined contributions plans will increase to $41,000, based upon the compensation limit of $205,000. Additionally, the elective deferral limit for 401(k) plans increases to $13,000. Participants age 50 or older in 2004 will be able to use catch-up provisions to defer an additional $3,000. (See “Unexpected Drama” page 40.)
Scheduled increases in the applicable credit amount for estate taxes also will become effective in 2004. This increase allows an applicable exemption equivalent of $1.5 million. A careful review of funding formulas for credit shelter trusts and marital trusts may be required to ensure that funding is appropriate, from the perspective of taxation as well as the control afforded the surviving spouse.
This new year is sure to bring at least as many changes. In particular, keep an eye out for those that may affect clients' charitable giving. The Charity Aid, Recovery and Empow-erment Act currently awaiting passage in the U.S. Senate provides incentives for individuals to fund charitable gifts from their individual retirement accounts.
Addressing recent and potential changes with our high-net-worth clients not only creates extra work for advisors, but also new opportunities. If the “Comprehensive Wealth Management” approach has not been the basis of your practice, this is the year to start. When clients regard you as the central advisor for their overall plan, you will keep these clients for life.
WEALTH MANAGEMENT CHECKLIST
To develop an integrated understanding of a high-net-worth client's plan, advisors must address these 13 critical issues:
- Distributions from qualified retirement plans/individual retirement plans
- Stock options
- Business succession
- Durable power of attorney/successor trustee
- Lifetime charitable giving
- Titling of assets
- Executor successor trustee
- Distribution of assets at death
- Charitable inclinations at death
— Ted Ridlehuber
Neuchâtel regulator floor clock, 2 meters tall, attributed to clockmaker Jean-Pierre Droz circa 1760, sold at auction in October 2003 by Antiquorum for $13,167.