Advising clients with pension worries

(May 30, 2005) Advisors have always accepted responsibility for clients’ portfolio assets within their control. But in recent years, they have found themselves offering advice on assets usually beyond their purview, such as company pension plans.

A client realizing that the phrase “unfunded pension liabilities” means that his or her employer-sponsored pension plan has more liabilities than assets needs both financial stock-taking and lifestyle advice when the news sinks in.

Even when a pension plan’s solvency is assured, its ultimate benefit to the employee can be uncertain since benefits from, for example, defined contribution plans can vary widely with market performance and fund manager expertise.

Moreover a rock-solid pension plan does not mean a rock-solid employer-employee relationship since sudden downsizing also means an interruption in pension buildup.

These scenarios mean the advisor ends up counselling the client on a kind of damage control. This starts with viewing employment as an investment and making a change when the investment starts to go sour, said Jay Taparia, Managing Director of Chicago-based Sanskar Investments and a finance lecturer at the University of Illinois in Chicago, at a recent retirement conference in Washington, D.C.

Handled carefully, issues surrounding a client’s pension reinforce the advisor’s place in their lives, said Taparia, a former portfolio manager at Bank One. “How have the rich gotten richer?” he asked rhetorically. “They’ve not only been able to pick out the right investments but they’re not doing it by themselves. They have surrounded themselves with smart people.”

The process starts with getting the client to ask himself or herself, “How do I maximize my value?” he said. “When I’m talking about investments I’m not always talking about stocks, bonds, mutual funds or real estate. I’m talking about career as an investment,” he said during his presentation.

This can mean going as far as advising the client to consider changing employers before matters worsen. “Sometimes the strategy of the company is your biggest investment.”

Career changes triggered by pension worries can mean re-training to increase one’s value (and therefore indirectly pension benefits) to a new employer. Pension concerns also trigger harsh questions about savings, such as “How do I save more?” he said, adding that clients often cannot explain exactly how they use disposable dollars and need help in shoring up savings to compensate for endangered pension income.

“Financial advisors in general are sometimes hand-holders. They should also sometimes be hand-slappers,” he suggested.

This may mean telling the client “No, you can’t spend that money.” It can also mean reducing debt costs. In one example he suggested that a debt-burdened client reduce both her credit exposure and credit costs by having her sons take out student loans and use the proceeds to pay off loans she had made for their tuition.

Potential pension anxieties can sometimes be avoided with careful use of the “stitch in time saves nine” strategy, explains Roy Vokes, president of Vaughan, Ont.-based Agora Financial Services. This can mean heading off future problems by taking action in the present. Where a client has been downsized from a company, it might become advisable to transfer pension dollars to a locked-in RRSP, he says.

“If the client has been let go from the company due to downsizing then that’s when I take a serious look at pulling it out,” he said. “If the company is downsizing, why is the pension going to stay perfectly stable when the company may not be?” he asks.

Al Emid is a Toronto-based freelance writer

(05/30/05)