One of the buckets, he related, was for non-liquid income-producing alternative investments. As part of it he proposed a business development company (BDC).
Lewis explained, “She was concerned about the lack of immediate liquidity in the investment. She lives in a rural area and I asked if she ever raised chickens. She said 'yes' so I asked why she kept chickens. 'For the eggs,' she said. Asked if she ever liquidated a chicken and cooked it for dinner, she said, 'No, because then I wouldn't get the eggs.' I responded, 'That's what the BDC is for...financial yard eggs.' She understood.”
The example was part of a larger conversation about managed solutions and how they've helped his clients – and consequently his business.
“The wife had come to me with her husband a few years earlier, before he passed away,” Lewis noted. “He had been diagnosed with cancer and given five years or so to live, so the couple wanted end-of-life planning and to ensure she was taken care of. They were confident she would be okay because I had their retirement assets and other investments in managed solutions. They also had a life insurance policy they bought from an agent on which they were making premium payments.”
They didn't realize, he noted, that the policy was about to “blow up.” They weren't paying enough in premiums and the cash value was “dropping like a rock.”
“We prevented that from happening. Unfortunately the husband died 18 months later. We took the life insurance proceeds and placed them with the widow's other assets in managed accounts. That allows me to manage her complete financial situation through the use of the four buckets: the paycheck bucket, a reserves bucket, one for growth and income, and lastly one for non-liquid income-producing alternatives.”
Lewis recalled the 1980s when the 10-year Treasury note rate topped out at 15.8% and added, “Those days obviously are long gone. With bond yields rising from basement levels, the question becomes how to get the necessary return to ensure clients don't run out of money while managing risk.”
For the widow, he put a portion of the insurance policy proceeds in a fixed-income separate account. Lewis is happy to leave the bond research and management to the professional portfolio managers and he can get on the phone and talk to them as needed.
“The low duration, high quality nature of what's in a separately managed account is great for her situation. Unlike a bond mutual fund, no one is throwing money in and out of the bucket, so the managers aren't forced to sell when they'd prefer not to. Rates might rise and we would theoretically have to sell at a discount, but we're not selling and we can wait for the bond to mature.”
What managed solutions allow for clients, he says, is “a better focus on their particular situation,” freeing time to deal with the “life transitions side of the equation.”
“We have a lot of retirees in the Atlanta area who have low basis stock from Coca-Cola and companies like that. They don't want to sell, but need more income. We're able to write covered call options for added income with the managed assets and harvest capital gains every once in a while. The separately managed accounts also allow us to restrict certain investments if the client is already holding them or if they object for religious, social or political reasons.”
One last benefit – Lewis made sure to involve the couple's daughter along every disciplined step of the way, and she is happy about mom's security and now is a client of the firm.
“Considering that 70% of widows move their assets upon the death of a spouse, managed solutions have helped me immensely with asset retention,” Lewis concluded.
This profile appeared in the March 31, 2014 special supplement to InvestmentNews “Managed Solutions: Meeting today's challenges.” This supplement was written by InvestmentNews Custom Media with support from the MMI and partner firms. To download the full supplement, click here.
This content is made possible by The Money Management Institute; it is not written by and does not necessarily reflect the views of InvestmentNews' editorial staff.