A lack of liquidity and diversification are one matter - when it's compounded by college expenses and an unexpected death, it's a different matter entirely
By Wendy W. Murphy

I love my job! It is such a privilege to get to help people figure out what they want their lives to look like in one year, five years, and in retirement, and how they are going to get there.

A few years ago, I met a vibrant gentleman in his 50’s. He had real estate investments, and felt confident that he did not need my help. He accounted for every penny, and was all set. He did not need my help.

When I looked at his financial situation from afar I was concerned that all his eggs were in one basket, and when the real estate market turned down, he could find himself in trouble. After several offers to run a comprehensive financial plan for him, he finally agreed.

There were some red flags when the plan was finished. The biggest ones were his lack of liquidity, his large real estate holdings and lack of diversification, and the titling of his estate. After 20 years of marriage, he and his wife were divorced, but his will had not been updated, his beneficiary designations had not been changed, and he needed an Irrevocable Life Insurance Trust (ILIT). He had children fast approaching college age, and he wanted to establish a plan for how he was going to pay for college.

He hired an estate planning attorney and we got his will, trusts and an ILIT in place. Then he changed all the beneficiary forms for his annuities and retirement plans. Finally, he replaced an expensive whole life policy that no longer met his needs with a new policy that cost less and accomplished what he wanted.

As his eldest child was about to embark on her college career, he was clear that he did not want to have the college funds exposed to market volatility so we set up a laddered CD portfolio in his taxable account to fully fund his children’s college expenses. Finally, he rolled over his retirement accounts and invested them. He did not have much experience investing in stocks, bonds and other investment products, so we took it slowly and worked on helping to educate him and helping him get comfortable with the ebbs and flows of the markets.

One month later, his ex-wife unexpectedly died. He called me the next day to tell me the news. He was devastated. Over the course of the next few months our team spent a lot of time with him. He was finding this transition difficult and said it was a relief not to have to worry about what would happen to his children financially if something happened to him.

Then the market turned down. He handled it well as we had considered his risk tolerance and time horizon when we set up the accounts, and had spent the time up front educating him and making sure he had realistic expectations of what could happen in a down market.

He is starting to plan for the next phase of his life cycle, and we are working with him to help create streams of retirement income. We have begun to discuss ways to maximize his social security benefits when the time comes. He has a very clear vision of how he wants to spend his retirement years-- participating in the outdoor sports that he loves. And he hopes to spend lots of time with the people that are most important to him -- his children and family.

What started out as someone who was confident that he did not need our help has turned into one of our favorite clients. He expresses often how much he appreciates what we do for him. It is a reminder of how lucky we are to be financial advisors, as we can surely make a difference in our clients’ lives.

[This story first appeared in the May issue of onwallstreet.com]

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Diversification does not guarantee a profit or protect against a loss.

CDs are insured by the FDIC, an independent agency of the U.S. Government, up to a maximum amount of $250,000 (including principal and interest) for all deposits held in the same insurable capacity (e.g. individual account, joint account) per CD depository, through December 31, 2013. On January 1, 2014, the maximum insurable amount will return to $100,000 (including principal and interest) for all insurable capacities except IRAs and certain self-directed retirement accounts, which will remain at $250,000 per depository. For more information visit the FDIC website at www.fdic.gov.

Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein and their attorney for matters involving trust and estate planning and other legal matters.

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