Overview: Introducing James and Natalie
My previous case study in the December 2012 issue illustrated the winning of a corporate client that required complex financial and tax planning, highlighting the benefits for the more established. Here I recount the experience of a young couple at a cross-roads in their lives, undertaking the financial planning journey. This culminated in my assisting both them and their parents through highly beneficial inter-generational wealth planning.
Natalie and James have been in our wider circle of friends for over a decade. James is a highly successful international sales representative for a global firm specialising in laboratory equipment. As the main account manager for Europe and the Middle East he uses his engaging personality to win and retain major contracts leading to £12million in additional revenue for his employer over the last 3 years. Unfortunately his paltry bonus (relative to his business generation) and the lack of staff support have raised doubts in his mind as to whether this is the correct employer for him.
The Importance of Family Life
The couple have strong beliefs around family, prioritising time spent together over earnings. Natalie, 35, gave up work as an accountant 6 years ago to look after their first child. Following the birth of their second child two years ago, she suffered a slight medical condition which prolonged her absence from work. Her parents subsequently began playing a more proactive role in looking after the children. James, 40, has always told me that his ideal job would be to do what he does, but with flexible working hours and staff support, enabling him to spend more time with his family.
Potential Pitfalls of Friends' Advice and how to overcome them
Relating stories about the life-changing benefits of financial and lifestyle planning, I find, adds spice to dinner party conversations. However, James, wary of doing business with friends, did not follow up these opportunities. Once I understood this concern, I sought to address its underlying cause. James would only deal with someone he trusts, but had not previously met such an adviser. Natalie, following bad experiences through her work, also found advisers untrustworthy. The fear of not dealing with friends was outcome based: what if something went wrong; how would that affect the friendship? This led me to explain the Retail Distribution Review, which from 2013 replaced the need to earn commission by selling with advice-driven fees, agreed upfront, removing the need to be product-focussed. Instead it was about articulating your values-based proposition, justifying retainer fees that add value over and above its costs. I explained that proper financial planning could help him achieve his personal and financial goals and ongoing advice would only accelerate this development.
Realising this was a good lifestyle model, James asked me whether he should start his own company. Since I was a trusted friend who happened to be a financial planner, he agreed to a Discovery Meeting after completing the Online Predictor on our website. This asks a series of non-invasive questions and describes your financial position and concerns, culminating in suggesting one of our financial strategies.
Prior to the meeting they completed a detailed income-expenditure questionnaire which took into account current and desired expenditure; the latter focussing on ideal lifestyles should they stop working at a certain age.
Personal Finances: "What comes in seems to go out"
James's basic salary of £72,000 is enhanced by an annual bonus in the region of £50,000. His DC pension is worth around £90,000 and the couple have £9,000 in cash ISAs. Their home is worth approximately £400,000 with a £320,000 mortgage costing c.£2,000 a month. Loan and credit card debts amount to c.£20,000. What comes in every month "seems to go out". Generous employee benefits such as life assurance, income protection and private medical insurance mean the couple own no private policies.
The Discovery Meeting and introducing the grandparents
The Discovery Meeting progressed into a detailed discussion of their life stories in excess of our normal conversations involving their aspirations and visions of the future. The focussed meeting, combined with the targeted values-based questionnaire facilitated this discussion by providing a clear structure. Whilst Natalie's illness following childbirth was short lived, she wanted to play an active role in developing her children so decided to forego her career. James, therefore took on extra work to balance the books. Grandparents played a key role in looking after the children and Natalie's belief was that the joy and experience gained by having her parents around could not be matched by contractual child-care. Focussing on this aspect revealed Natalie's close bond with her parents and the financial aspects of that relationship. In particular, there had been discussions relevant to the present meeting concerning provision for long-term care for her parents and distribution of the family estate between Natalie, her children and her financially independent brother. A few years earlier, following the death of one of her relatives, Natalie's mother inherited a sizeable sum of money. Having no immediate needs to address, she deposited it in a bank account. As a result there are significant concerns about Inheritance Tax issues. Given the need to plan for potential life-changing events, such as long-term parental care or James leaving his current employer, and the concomitant division of responsibilities, I suggested including both generations in discussions. With this in mind the next stage was for me to provide a Draft Action Plan detailing the minutes from our meeting and illustrating a roadmap for achieving their financial goals.
The Draft Action Plan
This briefly summaries our discussion and suggested the following strategies:
Financial Foundations: for both James and Natalie
Insurance would provide a financial safety net for the family should something go wrong. There would be a supplementary tax-free income if James was unable to work in his own occupation due to illness or disability. In parallel, a significant lump sum would become payable if either suffered a critical illness or died. It also catered for a tax-free monthly income, rising each year with inflation, until the youngest child is 23, should either parent die. The specific amounts were calculated according to the income/expenditure details provided but would be open to variation depending on other factors and "what ifs" we would discuss at the Financial Planning meeting, graphically illustrating these scenarios through cash flow modelling software which effectively shows them their financial future.
Targeted Wealth Accumulation: for James and Natalie
If the couple were going to enjoy a similar standard of living in their late 50s with no debts, they would need to save a significant sum every month. Since saving was not habitual, I recommended both direct a regular sum into utilising their annual ISA allowance. Further, we identified that he would need to make at least £36,000 gross pension contributions each year in order to attain his "number" which is the amount of money he would need to live the rest of his life the way he wanted to.
With regard to the debt mitigation programme, as well as advising on how to actively reduce debts, I invited all the parties, including Natalie's parents, to discuss the potential inheritance.
The Financial Planning Meeting . . . everyone singing from the same hymn sheet
I had anticipated reservations from Natalie's parents about working with a friend of their son-in-law, but a pleasant surprise was in store as James informed me that they had agreed to meet me to discuss their finances. In light of their existing concerns about wills and inheritances and seeing the potential of my draft action plan, Natalie's parents, especially her mother, Susan, were keen to be included in my work with the clients. They did not want to gift the capital only to see its value fall through poor investment choice or through loss of its control should there be a change in family circumstances. As expected, this conversation was somewhat awkward with James being present as Susan concluded that she did not want to lose the money should there be a potential divorce. At this stage I asked her what she would do with the inheritance if she found out she had 24 hours to live; who would she want to gain control of the money and why? Susan's concluding remark was very revealing: "in that case, I suppose Natalie would get her portion straight away because that is its intention – a gift upon my death." This is something that should be at the heart of what we do in this profession – where do our clients actually want their wealth to end up?
The grandparents subsequently began to feel more comfortable around me and the questions as they began to realise that these were discussions they would never have addressed even though they probably wanted to. The interaction which followed, inputting the income needs and "what if" scenarios into the cash flow model was particularly engaging as the grandparents suggested they would help if something went wrong, and also understood the significance of losing one partner either through death or a serious illness requiring long term care. All four family members agreed to the recommendations in the Financial Foundations strategy where we agreed how much money would be needed if one or even a combination of the events we had considered were to occur.
Sorting out inheritance monies
Taking my cue from the concerns Susan had voiced, I focussed on how to achieve her long-term aims of a smooth inheritance and enabling her daughter to live without debt. If her intention was to gift the money on death, would it not be better to gift the money now, solving a major barrier to the children's financial efficiency, namely interest on their debts? We eventually agreed that it made financial sense to use the inheritance to clear the debts and reduce the mortgage with the gift incorporating a degree of asset protection through a legal document drafted by a firm of solicitors. Discipline was key to ensuring they did not revisit credit card habits and this was highlighted by showcasing the amount of interest they had paid over the last 3 years. The couple committed to paying off credit card usage each month.
Potentially setting up James's own business
A detailed comparison was given showing the pros and cons of working as a sole trader or limited company. The importance of working together with James's accountant (soon to be Natalie) was highlighted as his drawings would be directly related to his income/expenditure needs as well as meeting his savings targets. Confident of retaining six key accounts, James would make at least £10,000 a month which, theoretically, means he earns approximately the same salary whilst working for only 6 months of the year.
What happened next
James resigned from his employer with no restrictive covenants which enabled him to act as a direct agent for the main manufacturers. His close relationships with both the purchaser and buyer enabled him to win key accounts earning his company £170,000 in its first year. James and Natalie took a small salary from the company and shared dividends appropriately. As a family we agreed to save for the purposes identified above, with discipline and commitment from all parties, replacing the 'what comes in goes out' approach. The promising cash flow model and the subsequent investment portfolio recommendation for their savings and pensions convinced Susan to transfer authority of her investment portfolio (worth over £400,000) to me. In addition she agreed to gift Natalie a lump sum of £150,000 immediately subject to asset protection. This was used to eliminate the loan and credit card debts, as well as reducing the mortgage. The subsequent interest saved over the term by doing this amounted to over £36,000.
This case study should reaffirm our belief that financial planning, when used to its most efficient, can result in far reaching solutions than originally anticipated. It confirms that by being client (not product) and goal-focussed, you can overcome potentially undermining beliefs and even conclude with inter-generational wealth planning. James and Natalie now have clearly defined goals, understanding of what they need to do to attain their respective "numbers", are prudent with their money, and, above all, enjoy a better standard of living.
Kusal is branch principal and an award winning Financial Planner at Appleton
Gerrard in Manchester. He is a Certified Financial PlannerCM and a Chartered Financial Planner with 14 years experience in financial advice. Kusal studied for a degree in medical biochemistry from Royal Holloway, University of London before making the switch to finance. Prior to his role at Appleton Gerrard, Kusal worked as an analyst for senior advisers, set up an independent financial adviser division for a large national network and implemented and managed the Times Inheritance Tax Service. Kusal also speaks at seminars and conferences about Financial Planning and the pursuit of money.