A decade ago, Michael Haubrich, a fee-only financial planner in Racine, Wis., began noticing that many of his clients in their mid-50s or older were coming into his office to discuss the idea of early retirement.
“I wondered whether they really wanted to retire or whether they just wanted to retire from a bad job,” Mr. Haubrich said. “Why should someone grind their brains out in a job they hate with the idea they will start living once they retire?” he asked. “Yet, why throw away something that still has value?”
So Mr. Haubrich immersed himself in research about career dynamics and life stages, and developed working relationships with career coaches and counselors. The result was the innovative marriage of traditional financial planning and career counseling to help clients figure out a better way to align their work with their interests and desired lifestyles while staying on a healthy financial track.
“Many of these clients didn't recognize that retiring early was only one strategy for dealing with a dysfunctional career,” he said. “I started changing the conversation from "How much money do I need to quit this crappy job?' to "How do we figure out a better way?' “
(See also: Career = Reserve funds)
A NEW APPROACH
Managing a client's retirement savings in an era of disappearing pensions and increased emphasis on personal savings is an ongoing challenge for the financial advice industry. But, as Mr. Haubrich and other advisers have realized, the engine that creates those savings — a client's career — should not be ignored.
Mr. Haubrich's ultimate goal is to have “career” adopted as an asset class along with the more traditional standbys of stocks, bonds, cash, real estate and alternative investments. “I feel there is a place in the financial planning process to integrate the value of a person's career.”
He coined the phrase “career asset management” and incorporated it into the service delivery model of his firm, the Financial Service Group, and has been trying to spread the word about this inventive approach for the past decade — with mixed results.
While some financial planners and researchers agree with his concept, the Certified Financial Planner Board of Standards Inc. has been sporadic in approving his presentations for continuing education credits, sometimes approving them and sometimes rejecting them.
More from InvestmentNews contributing editor Mary Beth Franklin on the biggest asset advisers aren't managing.
“I think Mike's concept is spot on, but I don't think it's caught on widely because it's not part of the CFP curriculum,” said Rick Kahler, president of the Kahler Financial Group.
Carol Anderson, president of Money Quotient, agreed that career asset management is an important concept that hasn't gotten the attention it deserves. “Although we don't use that specific term, the idea fits very well into our concept of life planning,” Ms. Anderson said.
Noting that financial advisers often collaborate with other professionals, such as estate attorneys or tax accountants, Mr. Haubrich said reaching out to career counselors and coaches was a logical extension of that tradition.
Although career counselors and coaches are trained to help their clients find a job or forge a new career path, they are often ill-equipped to deal with clients' concerns about how to finance the transition. Financial advisers, on the other hand, may be masters at redeploying assets but may not know how to help a client rethink career options.
“I found tremendous opportunities for collaboration — and referrals,” he said.
LONGER PORTFOLIO LIFE
For older workers, a well-designed phased-in retirement can extend their earning capacity for years, which in turn can extend the life of their investment portfolio.
Consider an employee with peak wages of $150,000 who abruptly retires at age 60. Now think about what might happen if he could extend his career for an additional eight years through a phased-in retirement schedule, scaling back a work schedule to 75% during the first three years and tapering off to 60% for the next three, and finally to 40% over the last two years.
Assuming an average income and employment tax rate of 40% and a 6% discount rate, Mr. Haubrich calculates that the value in today's dollar of that increased income is nearly $350,000. In addition to the income, there are other benefits such as continued employee benefits and larger Social Security benefits. Beyond the quantitative factors, there may be other perks such as job satisfaction and social interaction.
“By reframing career as a financial asset, we can objectively advise and facilitate action-oriented discussions and changes,” Mr. Haubrich said. “We can help clients get past emotions that have the potential of hijacking effective decision-making related to their career asset.”
That makes sense to Ms. Anderson of Money Quotient, a nonprofit organization that focuses its research and training programs on a values-based and life-centered approach to financial planning.
“Boomers are rejecting traditional retirement, but they haven't quite figured out what they want to replace it with,” Ms. Anderson said. “We invite clients to look at the role of work not only during their traditional working years but also in retirement to provide a real sense of personal fulfillment.”
The career asset management concept is relevant, whether a pending retirement or job change is voluntary or involuntary, Mr. Haubrich said. He noted that when a large local employer announced its plans to lay off 400 workers, “a lot of people were filled with fear that their name might be on the list,” he said. “But it can be a good time to push people to reassess their overall career satisfaction and think about alternatives.”
Paula Hogan, a financial adviser at an eponymous firm who was an early adopter of the career asset management concept, said lifetime earnings represent the largest financial asset a client may have.
“Financial planning is at its best when it tailors financial capital to human capital,” she said. Although economists have always referred to an individual's lifetime earnings potential as “human capital,” it is not a common term used in financial planning.
“Goals-based investing, paired with a robust life planning process, shifts the planner's focus to the client's lifetime standard of living rather than wealth accumulation,” Ms. Hogan said.
Moshe Milevsky, a professor of finance at York University in Toronto and a prolific writer and researcher in the field of wealth management and retirement income, heartily agrees that “human capital” should be factored into any asset allocation, as he detailed in his 2008 book “Are You a Stock or a Bond?” (FT Press, updated 2012).
“Human capital is the biggest asset on your balance sheet,” he said.
“When I became a tenured professor, my job became more secure and I immediately changed my asset allocation,” Mr. Milevsky said. “The day I became a “bond,” I sold my bonds and loaded up on equities.”
Likewise, he said, those whose work is tied to Wall Street, including financial advisers, should reduce their exposure to equities, which are closely correlated with their earnings, and load up on other asset classes.
In a recent working paper, David Blanchett, head of retirement research at Morningstar Inc., and Philip Straehl, a senior research consultant and portfolio manager at Morningstar, agreed that “the optimal allocation to equities, as well as alternatives, is clearly affected by the riskiness of the industry-specific human capital.”
In the January 2014 paper entitled “No portfolio is an island,” the authors concluded: “This has important implications for investors, especially younger investors, where human capital is the dominant asset from a total wealth perspective.” They advised financial planners to “consider an investor's holistic wealth when developing portfolios, and not focus entirely on the investor's financial wealth.”
Financial advisers can offer additional value to their clients and prospects, and differentiate their practices from the competition by addressing and helping people manage the career asset, Mr. Haubrich said.
He has developed a fee model he calls “total wealth retainer,” which includes a fixed fee and a percentage of total net worth and adjusted gross income.
“Career asset management is included in the service model, and that is one reason we migrated our fees from AUM to our TWR model,” he said.
This added service requires clients to update their skills regularly, benchmark their salary each year to make sure they are being appropriately compensated and network continually to keep up on industry trends and opportunities.
Although Mr. Haubrich believes that younger clients particularly should earmark a portion of their savings to fund lifelong learning and cushion transition periods between jobs, other financial advisers may question the need to allocate a household's limited financial resources to yet another savings goal. (See the sidebar, Career = Reserve funds).
But even if an adviser doesn't want to go into great depth in this new area of planning, there is something every adviser can do. “Simply add it as a check-list item in a client's annual review,” Mr. Haubrich said. “Ask them how their career is going and if they have any concerns.”