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Advisers weigh in on income disparity

Financial planners share their concerns and actions for mitigating a slow-growth economy and the general trend of wage stagnation

Jan 27, 2014 @ 11:01 am

By Christina Nelson

Having read many of the articles and watched the TV segments examining income disparity/inequality in the United States, and in anticipation of President Obama's State of the Union address and the Republican response on Tuesday, our editorial team has been discussing for weeks what angle of this story is left to tell, particularly to our audience of financial advisers.

Like many of our readers, my background in finance, economics and even history is stirring up an interest to better understand what is really happening here.

When I read that wages have been stagnant over the past few decades while corporate profits have soared, and that this gap continues to broaden, I wondered what the upshot is for economic growth. Because all people, institutions and governments at every wealth level interact as players under the same umbrella economy, shifts in balance are felt by anyone in one way or another, not just the poor and not just the rich.

To find the immediacy in this issue for financial advisers, I reached out to a dozen planner friends and connections to gauge their thoughts.

It seems that their perspectives on the situation — advisers' role, client consequences and the bigger picture — vary as much as the solutions being suggested in Washington and around the country. But in general, the topic doesn't seem nearly as removed from advisers' concerns and conversations with their clients as some might think.

As C. Carter Boucher, founder of Boucher Capital Management in Anderson, S.C., put it during our phone conversation: “I used to have middle-income clients come to me at retirement with a quarter or half million dollars, now coming with $50,000 to $100,000. People talk about the divide in income, but that's understated; it's really about shrinking benefits: 401(k) matches, profit sharing, pensions."

And Mr. Boucher is seeing a pinch with his wealthier clients, as well.

“There's been a drop in investible assets for any demographic. Doctors and lawyers are telling me they're working twice as long for half the money,” Mr. Boucher said.

“It's discouraging," he said.

This trend isn't new, as it has been playing out for his clients over the past 10 to 20 years, Mr. Boucher said.

As to the effect on his business: “Now you need a higher percentage of upper-income clients in order to be profitable.”

Lazetta Rainey Braxton, founder and chief executive of Financial Fountains in Baltimore, M.D., also sees corollaries for the advice business.

“Income inequality changes the pool of available clients to serve based on the adviser's business model. This could influence the income we are able to earn,” she wrote in an e-mail.

“Also, we should be sensitive to increasing our pro bono efforts for communities that are more adversely affected by depressed economic conditions," Ms. Braxton wrote.

Ross Levin, founding principal and president of Accredited Investors Inc. in Edina, Minn., wrote in an extensive e-mail to me his assessment that the general “zeitgeist” is changing.

Before the recent real estate crash and succeeding recession, people rarely considered walking away from debt.

“While we don't have the Dickensian debtor's prison, there was a fair amount of shame that went with filing bankruptcy or not paying your mortgage,” Mr. Levin said. “Now this has become a strategy.”

Mr. Levin thinks that this turn of events has altered the “social contract,” and that income inequality will play out along the same lines.

He thinks about these issues in broad terms, but also in terms of how any “solutions” could affect clients.

Some of the “extreme” examples that Mr. Levin provided include: tax law changes (particularly a value-added tax in addition to income taxes, which could make Roth decisions, for example, more difficult), a continuing free-agent labor market "as those working become more dissatisfied with what they have when others around them have more," and efforts to further restrict intergenerational wealth transfer.

But the most damaging consequence he sees is that “community will continue to be whittled away.”

Mr. Levin has seen it in his own state in terms of clients trying to avoid Minnesota's estate tax by establishing homes elsewhere and spending increasing amounts of time away.

Because of all the uncertainty, he thinks that the key takeaway for advisers is: “Stay flexible with planning decisions. Irrevocable choices can lead to bad outcomes in an environment that is not necessarily on solid footing.”

Martin Kurtz, founder and president of The Planning Center in Moline, Ill., agrees.

“Where we used to be a source of knowledge and direction, the modern-day planner is spending more and more time helping the client deal with uncertainty and fear," he said.

Mr. Kurtz takes to task the belief that higher-income people are in fact wealthier.

“We have become addicted to the fact that higher incomes are better, but in truth, what you do with what you get is so much better of a discussion,” he wrote in an e-mail. “What we attempt to get our clients to focus on is what they can control, two simple things: their behavior and their decisions.”

Ms. Braxton has some suggestions in this vein: “We must continue to champion low debt (very difficult for millennials with high student loans) and high savings rates for families (to weather economic storms); encourage individuals to stay abreast of the changes in their professions (some are more sensitive to economic swings); encourage philanthropy for wealthy clients; and better assess the household sensitivity to risks that are not only market driven but also tied to the financial conditions of other family members who may need their support.”

It all comes down to good comprehensive planning, according to Jason Branning, owner of Branning Wealth Management in Ridgeland, Miss.

“The adviser community could offer help for those who are underserved because they can practically assess, manage and help mitigate risks for three kinds of assets: human (earning power), financial (marketable, liquid assets) and social contract (Social Security),” he wrote in an e-mail.

Mr. Branning suggests that advisers can help people frame outcomes by defining and prioritizing goals for any income level.

“For example, prioritizing consumption into base needs, contingency needs and discretionary needs prudently orders goals into an actionable plan. Every person's financial condition can be strengthened through frugality, budgeting, prudent use of credit and education that improves earning power,” Mr. Branning wrote.

Mr. Kurtz thinks that every person in the country would benefit from having a third party with whom to discuss life and money and that financial planners are best equipped to serve in this role.

“The spreading of income in America is not our concern, but our opportunity,” he wrote. “End of discussion!”

Don't let the conversation end here. If you have thoughts about the wage gap and any potential effect on your clients — even if you see no impact — please leave your comment here or contact my colleague, Liz Skinner, who is digging into this topic for a possible feature article.

Christina Nelson is series & features editor for InvestmentNews (Twitter: @NelsoninNewYork).


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