In September, members of the Institute of Advanced Financial Planning met in Banff, Alberta to consider its annual case study. This year’s case study involved a client everyone could identify with.

The case

Russell is an independent financial planner, but like the proverbial overweight doctor who smokes, he hasn’t heeded the advice he gives to so many of his clients. At 56 years old, he’s only now considering how to transition his practice and plan for his retirement.

But before diving into his financial and insurance problems, Russell needs to address the so-called soft issues around his retirement plan. Far from being soft, these issues are typically the hardest to address: Personal identity, spousal wishes and ensuring everyone is treated fairly.

Russell has three children to consider: Kathy, his daughter from a previous marriage, Melanie, his stepdaughter from Diane’s previous marriage, and Terry, the couple’s son. Melanie works with Russell as a junior partner in his planning firm. She has 13 years of experience in the industry, including six in Russell’s office.

While there is little in the case study to define the psychology of Russell and Diane, Barry LaValley, founder of The Retirement Lifestyle Center, says some extrapolation from how advisors deal with clients is probably instructive as to Russell’s state of mind.

Too often, advisors tend to focus on the client’s finances, rather than how they plan to spend retirement. The assumption seems to be that if clients are financially fit, they can look after retirement on their own. As such, the bar is set quite low for retirement planning.

“Retirement is not about creating bucket lists,” LaValley says. “It’s about removing the roadblocks clients face.”

Russell needs to flip his professional mindset and train himself to think like a client, focusing
on lifestyle issues first, with financial decisions tailored to support these goals. “The money needs to fit around his plans, not be the basis of them,” LaValley says, recommending Russell and Diane try a practice retirement for a few months to see if the lifestyle they envision is actually appealing.

“If a vacation is a break from work, where is your break in retirement?” LaValley asks. Retirement is not the automatic party popular culture depicts. Russell defines himself by his work, and he may struggle to redefine himself.

As one of the authors, Kathy McMillan, RFP, has some special insight into the case. She admits advisors seldom enlist the services of another planner, unless there’s a specific situation that falls outside their realm of competency. But in a rare instance such as the case study, the advisor could face a difficult client.

“You have to set some parameters at the beginning and be very clear with them,” she says. “Ultimately, it’s the same as with your other clients. I say, ‘Here’s what I think we should do.’ If they’re contrary to that, I give them my reasoning and challenge their reasoning. Then I say, ‘This is your money, direct me.’ You have a fiduciary duty to lay it out clearly, give your strong advice.”

Russell’s ego

“He has to say in his own mind, ‘Yeah, I’m getting out of the business.’” We advisors kind of hang around quite a bit longer than perhaps we should,” she says. “We’re kind of vague on when we want to go, because we love our clients, we’re worried about our own income stream, we feel so essential and that’s quite often part of who and what we are.”

Financial planners play an important role in the lives of their clients, and it’s not the sterile numbers game that outsiders might imagine it to be. They can find themselves entangled in both personal and professional relationships, says McMillan.

“That’s tough to walk away from, so Russell’s got to come to grips with that,” she says. “Number 1, it’s about him, his ego. Number 2 is about who inherits these relationships.” She says control issues are common in the industry, because advisors feel such a deep personal connection with many of their clients. “We hate to give up the reins; we don’t think anyone can do it as well as us.”

Russell needs to ask himself what he can do today to ensure he’s comfortable handing control of his practice over to Melanie in five years’ time.

McMillan suggests he hand over complete control of a portion of the book, and not intrude on her management of those client relationships. Even if he wasn’t planning his retirement, this would be prudent, as it would ensure the survival of the practice, should Russell suddenly become incapacitated or die unexpectedly.

Family matters

“As with any couple, [Russell and Diane] need to communicate a bit more,” says LaValley. “Russell is an older guy and he’s worked hard in his business, so he’s probably a type A personality. I expect he hasn’t been talking about emotions with his wife. So he needs to have some of those conversations, asking her where she sees their life in the next five to ten years, what does she want to do.”

Very often the goals and objectives of one partner don’t seem compatible with those of their partner, but with more open communication, they can find the similarities. While Russell may have a clear understanding of how he’ll spend his days in retirement, he needs to ensure Diane understands the impact these plans will have on her.

“Russell needs to have a discussion with Diane as to what she wants to do, where she sees their life going,” says McMillan. She says Russell’s advisor would be well served by having some training in mediation, as it would allow them to facilitate the discussion. “We can help by expanding upon the questions and answers.”

LaValley agrees that Russell and Diane need to ensure their goals are compatible, but they also need to maintain their personal friends and find their own hobbies, quite distinct from those they share. There’s a danger in retirement that a couple falls in on each other and intrudes on each other’s spaces.

“If you rely obsessively on your spouse, you’ll be devastated when the other gets sick, leaves or dies,” LaValley says.

Since Russell wants to spend much of his time at the recreational property on Vancouver Island, McMillan suggests he could free up capital by selling the Calgary house and downsizing to a condominium. At the same time, he must be mindful of the maintenance requirements of the recreational property. The property may lose appeal as upkeep becomes more physically demanding.

“He might want to enjoy it for another ten years, but we’re going to keep our eyes peeled to downsizing the recreational property at some point to something a little easier, and have Russell spend a little more time in the condo in Calgary, if it’s close to a shopping centre, dental and medical services.”

Even before maintenance becomes an issue, the cottage could still become an anchor around Russell and Diane’s necks. LaValley points out the vacation home could rob them of other opportunities. They might feel they’re wasting the cottage by not being there.

As the advisor to a fellow advisor, McMillan says she’d present the downsizing option in a dollars-and-cents context, lessening the focus on what’s being given up. Too often the decision to offload a recreational property comes after the owner has a scare of some sort — a break-in, a heart attack — and they’re making the sale from a position of vulnerability.

In Russell’s case, the cottage is in British Columbia, where probate fees apply; Alberta has no probate fees. To get around the probate costs, Russell might want to put his heirs on the title to the property, but this action itself could be considered a deemed disposition, triggering tax consequences.

“At the very least, you inform and you do a calculation,” says McMillan. “Maybe they don’t find it so tough to swallow.”

Of course, including heirs on the title exposes the client to a whole new set of risks: If Kathy’s husband has a gambling addiction or Melanie and her husband divorce, the cottage could be threatened.

The hand-off

While the recreational property could be a source of friction, Russell’s practice forms the largest portion of his net worth and thus his eventual estate. He’s toyed with the idea of selling it to a third party, but McMillan says he’s already decided to sell it to his stepdaughter — meaning his other children could get short-changed.

“The practice should have formed part of the estate, and it’s part of Kathy’s and Terry’s inheritance,” she says. “If he’s selling the business a little bit below value or giving Melanie long payment terms, you have a dollar issue there.”

Most at risk of being disinherited is Kathy, since she shares no biological bond with Diane.

“Russell could pass away five years from now and Diane, being only 61 at that point, might remarry. She goes on to have a marriage of 15 years and dies when she’s about 75 years of age,” says Patricia Daunais, partner at Calgary’s Daunais McKay Harms & Jones. “Meanwhile, she could lose contact with Russell’s child, Kathy, as the years go by.”

In her third marriage, Diane’s children and those of her new husband may become more important than Kathy, who has drifted further from her extended family since her father’s death and is now more attached to her natural mother.

Russell and Diane had originally arranged for their three children to receive equal shares of their combined estate, but after Russell’s death, Diane might reconsider that arrangement.

“What would Russell think about that? Does Diane have any obligation to Russell’s daughter?” asked Daunais. “A case that presents no conflicts now might 15 years down the road if dynamics change.”

To ensure the children are treated fairly after his demise, McMillan recommends Russell use a spousal trust.

This would allow Diane to live off the income generated by Russell’s assets, which could then be distributed to the children according to his original wishes upon Diane’s death.