How Do You Pivot a Client's Investment Strategy After a Major Life Event?

How Do You Pivot a Client's Investment Strategy After a Major Life Event?

Exploring the pivotal moments that necessitate a shift in investment strategies, we’ve gathered insights from a Wealth Manager and a Physician Financial Advisor. While they share their professional expertise, we’ve also included additional answers to provide a well-rounded perspective. From evaluating the impact of life events to diversifying to mitigate future risks, here are several strategies advisors employ to navigate major life changes.

• Evaluate Impact of Life Events
• Convert Retirement Savings to Roth
• Reassess Risk Tolerance
• Introduce Tax-Efficient Investments
• Adjust for New Liquidity Needs
• Realign for Stable Income
• Diversify to Mitigate Future Risks

Evaluate Impact of Life Events

Many factors are considered when crafting financial portfolios. Significant life events such as changing jobs, having children, getting married or divorced, illness, or death can and often do change a person's financial goals. These events don't always necessitate changes to a client's portfolio, but they do prompt a discussion about their impact on the financial plan. Money and significant life events can both be highly emotional. When they intersect, we work with our clients to pause, carefully evaluate, and discuss the impact on their financial plan before making any irreversible decisions.

Here are a few scenarios and conversations we have had:

A client received an unexpected inheritance and wanted the inherited money to be invested more aggressively for the benefit of their children. This life event changed the overall portfolio from a 60% equity and 40% fixed-income allocation to an 80% equity and 20% fixed-income allocation.

A client worked for a company that went public, resulting in a conversation about diversification. The client had to decide if they wanted to sell any of the newly public stock and how it should be reinvested. While the overall portfolio allocation did not change in this case, the client’s exposure to the newly public company and their underlying asset classes did.

A client became ill and needed additional distributions for their monthly expenses. This resulted in the portfolio becoming more conservative as they were no longer comfortable with the equity/risk exposure that their current portfolio had.

Convert Retirement Savings to Roth

I had a client graduating from a dermatology fellowship in OH and moving to CA for her attending-physician job, so her income was going from roughly $60k in a low-income-tax state to $300k+ in a high-tax state as a single tax filer. We converted all pre-tax retirement savings, including employer matches, to Roth while an OH resident in her last year that did not include any income at her higher-paying attending-physician job. She now has a very large amount of tax-free dollars invested in equity index funds to start her career.

Reassess Risk Tolerance

After a major life event, financial advisors often reassess the client's risk tolerance and rebalance their asset allocation appropriately. This ensures the investments align with the new financial situation and goals of the client. For instance, a shift from high-risk stocks to more stable bonds might be recommended.

This keeps the investment portfolio more secure and suited to the client's current needs. It's important to evaluate risk tolerance carefully after significant changes. Speak with your financial advisor to discuss how your risk profile has evolved.

Introduce Tax-Efficient Investments

In light of major life changes, financial advisors might introduce tax-efficient investments into the client's portfolio. This is to ensure that the client maximizes their after-tax returns, especially when their financial landscape has changed. Tax-efficient investment strategies could include municipal bonds or retirement account contributions.

These strategies not only help in managing tax liabilities but also improve the overall portfolio growth. Understanding the tax implications of your investments is essential during these times. Schedule a review with your advisor to explore tax-efficient options.

Adjust for New Liquidity Needs

When a significant life event occurs, financial advisors often adjust the investment plan to accommodate new liquidity needs. This could be necessary if the event triggers immediate financial requirements, such as medical expenses or purchasing a home. Strategies might be put in place to ensure that there are enough liquid assets available when needed.

Making sure the portfolio maintains a balance between growth and accessibility becomes crucial. Review your liquidity needs with your advisor to ensure your plan reflects your current circumstances.

Realign for Stable Income

Adjusting the portfolio to meet changing current income requirements is a strategy often employed by financial advisors following a major life event. For example, if the client has retired or lost a job, there might be a need for steady income from investments. This might mean investing in dividend-paying stocks or bonds that provide regular interest.

Ensuring a stable income stream is essential for meeting daily expenses without compromising long-term goals. Consult with your advisor to realign your portfolio for stable income generation.

Diversify to Mitigate Future Risks

After a major life event, diversifying investments is a common strategy used by financial advisors to mitigate unforeseen future risks. Life changes can introduce new uncertainties, and spreading investments across various sectors and asset classes reduces exposure to any single risk. This approach promotes a more resilient portfolio that can better withstand market fluctuations.

Diversified investments can thus protect against significant losses during unexpected situations. Engage with your advisor to understand how diversification can help safeguard your investments in the future.