Advisers urge clients to bolster their cash reserves

The worsening housing crisis and unprecedented unraveling of the financial services sector is causing many financial planners to recommend to clients that they boost emergency cash reserves and, in some cases, delay retirement plans.

“In the middle of a liquidity crunch, cash is king,” said Gibran Nicholas, chairman and chief executive of the CMPS Institute in Ann Arbor, Mich., and a certified mortgage planning specialist.

Mr. Nicholas suggests clients keep enough cash in the bank or in money market accounts to cover their expenses for six months to a year. David Mendels, an investment adviser at Creative Financial Concepts LLC in New York, is more conservative, recommending that clients carry three to five years of cash in reserves.

Financial advisers are offering different approaches for building up those reserves and weathering the current financial storm.

Mr. Nicholas suggests clients stop making extra payments to pay off a mortgage early, and to max out their home equity lines of credit before their lender cuts or even pulls their line completely.

“We’ve seen large corporations, like General Motors and other companies, tap their lines of credit even though they don’t necessarily need the money right now,” to avoid losing the credit line if a troubled lender pulls it, he said. “I think consumers can follow the same strategy … Now would be a good time to tap it before that bank either goes out of business or shuts off your line.”

Also, he recommends clients take out as large a mortgage as possible to stay liquid and not pay it down early. “If real estate values continue to decline, and you want access to that equity, it’s pretty much evaporated,” he said. “You’re better off keeping that cash in the bank in case you need that money.”

Mr. Mendels said he recommends clients seek out the largest credit lines available, but doesn’t believe they should cash them out. “That’s an expensive way to go,” he said.

Tony Proctor, a certified financial planner at Proctor Financial in Wellesley, Mass., said he began moving about one third of his clients’ investments into more defensive positions, such as structured notes issued by investment banks, last fall. If a government bailout package isn’t finalized, he said he’ll likely increase the percentage of assets that are in defensive plays.

One of the biggest challenges Mr. Proctor faces right now is persuading clients not to make withdrawals from their investment accounts unless absolutely necessary. He manages about $190 million in assets.

Kim Dignum, a certified financial planner in the Fort Worth, Texas, office of Raymond James Financial Services Inc. of St. Petersburg, Fla., is recommending that most of her clients move 10% to 15% of their equity investments out of the market and into banks and money market accounts. “I’m not trying to time it,” she said. “I just think the market needs to settle down and we need some resolution on several things.” She’s been implementing this strategy over the past four months.

Ms. Dignum, who manages about $200 million in assets, said diversification is critical. “Money markets are trading below a buck for the first time in history. We have the stock market that’s deteriorating. We have the bond market, where the insurance companies backing them don’t have value, and we have the real estate market tanking,” she said. “So my premise is spread your eggs out into each of those baskets because [nobody knows] which one is going to go next.”

She disagrees with Mr. Nicholas when it comes to home equity lines of credit. “I would never encourage someone to incur debt to increase liquidity,” she said.

Ms. Dignum said the crisis has prompted a number of her clients to delay their retirement plans a year or two.

Larry Botzman, an independent certified financial planner in Somerset, Ky., with about $75 million in assets under advisement, said his biggest challenge over the past month has been what to tell clients whose grown children need a bailout due to a job loss or foreclosed home.

In some cases, helping out a child could put the parent’s retirement future in jeopardy, he said. Clients need to carefully scrutinize their holdings and determine if the child has the character and wherewithal to pay back a loan, Mr. Botzman said. “Unfortunately, not all children are responsible and that’s why they got into the problems they got into,” he said.

Mr. Botzman doesn’t recommend clients pay down a mortgage early unless they’re less than a year from retirement and have a small balance.

He still believes purchasing a home is a good investment as long as the client plans to live in the house. For clients interested in real estate as an investment, Mr. Botzman recommends they do so through real estate investment trusts rather than by purchasing properties directly.

E-mail Janet Morrissey at [email protected].