The nation may be mired in a painfully slow economic recovery, but Jim Oliver, founder of Financial Life Advisors in San Antonio, feels as if he is sitting in the middle of a boom.
The good times are largely attributable to the nearby Eagle Ford shale rock formation, where the introduction of fracking - the process of creating fissures in underground formations to allow oil or natural gas to flow - has revitalized extraction activities. And a broad swath of South Texas seems to be benefiting: Roads are under construction, new hotels are sprouting, so-called man camps are supplying oil workers with temporary housing and retail outlets are tempting people to spend their unexpected money.
"Banks down here have more cash than they know what to do with," Oliver says. "Nobody needs to borrow that money."
But Oliver, whose firm has $42million in assets under management, says the sudden wealth created by the fracking boom has also created a heap of potential challenges for financial planners. These include the tax consequences of fracking, the lack of an income track record (for forecasting purposes) and its potential for causing emotional upheaval among families.
NEW MONEY, NEW PROBLEMS
The overarching issue, however, is how to advise clients to deal with more money than they had ever expected to have. One client got a royalty check for $800,000 from a company mining on his property for gravel needed for road construction to accommodate oil and gas crews' transportation needs. They also have new tax burdens. "Suddenly, they are faced with paying a huge amount of income tax," Oliver says.
To cope with the unpredictability of fracking-related revenues and the tax consequences, Oliver advises clients with such interests to start sending him monthly oil or gas production and income reports in October, so the advisors can forecast year-end figures accurately. By making such predictions in October, Oliver says, the clients gain an opportunity to adjust their quarterly tax payments at least twice, rather than discovering right before April 15 that they have drastically underpaid or overpaid.
Oliver says he eventually expects to encounter turmoil among family members over long-held but only recently valuable mineral rights. One client, now elderly, remarried after his first wife died and raised a second family with the second wife. He opted decades ago to give the ranch he owned to the children he had with his first wife; he told them that the ranch represented their inheritance, since he now had a second family to provide for. But the man didn't give those children the mineral rights tied to the land.
Fast-forward: Fracking has now made oil production economically viable on the ranch, and the man and his second family are reaping the benefits. But the children who own the ranch aren't. "You can anticipate there are going to be hard feelings," Oliver says.
In general, in advising clients who have come into fracking wealth, Oliver says, he encourages them to be who they were before the heyday commenced. "There is a small-town atmosphere down here," Oliver says. "People are very conservative" about spending - and "just because they are wealthy, it doesn't mean they've changed."
Even in California, where the impact of fracking is muted because of strict environmental regulations, planners report having some clients benefiting from fracking.
In Bismarck, N.D., James Frigstad, a financial planner for Thrivent Financial for Lutherans, operates squarely in what's known as the Bakken zone, named for the nearby oil-producing formation. Frigstad, whose company has $120 million in assets under management, says dealing with higher taxes is a high priority for clients who have mineral rights in areas where drilling takes place.
"Those royalty checks for $20,000 to $240,000 put them into whole new tax brackets," Frigstad says. Many of his clients have never considered tax-free investments like muni bonds, he says.
Like Oliver, Frigstad says a majority of his clients are conservative, especially the farmers. Slick marketing would not be a productive way of finding new business. Instead, clients find him "by talking to friends and family," he says.
FAR FROM TEMPTATION
In Alpine, Wyo., retired certified financial planner Henk H. Drenth advises other planners, including many whose business is booming because of shale revenues from the southwestern part of the state. Drenth says that for beneficiaries of the boom, whether landowners or rig workers, financial planning could lead to long-term security. Wyoming residents can squirrel more money away because they confront few of the expenses of big-city life, he points out.
But Drenth says planners may have trouble reaching the fracking fortunate who could use their help. "These people are very often blue collar," Drenth says. "They are very often distrusting of the white collar work- force. Even if they go see a planner, it's really difficult to build up trust. They don't want to be pushed."
Peggy Eddy, a planner for San Diego-based Creative Capital Management with $240 million in assets under management, says some of her clients have had their fortunes changed. One client recently learned that she and her sisters had inherited mineral rights to land in Texas; another gained similar rights to land in Oklahoma.
Eddy advised these clients to seek revenue estimates from the energy production managers on their properties. But the estimates from Texas were very sketchy and the income stream from the mineral rights has been so erratic that Eddy has suggested the client and her sisters take a road trip to see the property for themselves and get a better fix on the precise conditions of the fracking activity.
Fluctuating income streams are a common problem for fracking beneficiaries. Because the technology is so new, with a short track record, "no one has a clue as to what the reliable cash flow will be," Eddy explains. So Eddy advises her clients with fracking wealth to "not count on a steady stream and to not become dependent on or complacent about that money."
Tim Gooch, a CPA with ParenteBeard in Philadelphia, says fracking revenues from the nearby Marcellus shale have fallen recently as natural gas prices have dropped, making extraction less profitable. But one thing the financial planners at his firm have learned, he says, is that the newly wealthy typically seek tax help first.
Gooch also cautions about the uncertainty that surrounds mineral rights royalty checks. "Until you actually receive the check, you don't know what you are going to get," he says. That creates planning conundrums for advisors.
Back in San Antonio, all the unforeseen wealth has given Oliver some real-life stories that might serve as plot lines for The Beverly Hillbillies. His favorite: A friend, who is a banker, rode shotgun in the beat-up pickup of a rancher who has begun to receive royalty payments from oil and gas companies for the mineral rights on his land.
The rancher hit a bump in the road and the truck's rickety glove compartment popped open. Out fell a half-dozen uncashed royalty checks, written for amounts that would purchase a brand new truck. "Oh, just put those back," the rancher told Oliver's friend. "I gotta get those to the bank."
Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.