Holly Thomas, a CFP in Tampa, Fla., has a retired client who says shed like to travel to Europe and Asia. After a lifetime of planning and saving, this wealthy client could easily afford to travel. But is she buying tickets? On the contrary: She rarely leaves town.
She says that she cant leave the cat, Thomas says. Im trying to persuade her to go on a day trip here in Florida.
Most planners are familiar with clients who spend too much money, reducing the amount of investable cash that can work for them. But theres a second, smaller group: clients who have plenty of money, yet wont spend it.
These people have a variety of reasons for their frugality: a fear that theyll run out of money, an ingrained habit of saving rather than spending, a transition from salary to investment income, or personal quirks.
Understanding their rationales can help planners persuade tightwads to enjoy their wealth and, in turn, help deepen relationships with clients.
As a financial behavior specialist, I think we should be encouraging clients to live their best lives, even though clients who spend money reduce AUM, says Kol Birke of Commonwealth Financial Network in Waltham, Mass. These counterintuitive, unexpected conversations cost very little in terms of fee differential and provide a place where clients feel that you have their best interest not your best interest at heart.
Sometimes, the reluctance is tied to the source of the wealth. Jeff Dvorak, who is managing principal at 4D Financial Advisors in Naperville, Ill., has one client couple who were in their 50s, with middle-class jobs, when the wifes parents left them an inheritance of about $2 million.
To his surprise, Dvorak says, the amount they wanted to spend in their lifestyle was almost nonexistent. When I showed them what they could spend if they wanted to, they kind of looked at me with big eyes and pale faces, like I was a crazy man.
I had to show them that they were going to pass away with tens of millions of dollars, because they were refusing to use it, Dvorak adds. The wife finally confided that the money represented her memory of her parents, and that spending the inheritance would diminish the memory.
Dvorak says that insight was helpful. Im no psychologist, but I try to understand peoples emotions and personality, he says. We had a conversation about the memories that they could leave for their children. They could travel now, for example, rather than wait until theyre 80 and arent able to.
It took multiple conversations, he says, before they got comfortable with the idea. As they planned their first and second trip, they still seemed uptight, to a point. But by the third or fourth trip, he adds, you could tell that they had really digested the fact that it was OK to live like this.
Ron Pearson, a planner at Beach Financial Advisory Service in Virginia Beach, Va., recalls a client who arrived at his practice shortly after her husband died, carrying an old Samsonite briefcase filled with unopened statements. Because her husband, a physician, had handled their finances, Pearson says, she told me that she had no idea what or how much she had.
The womans portfolio was worth about $2 million, it turned out. She also owned a large, attractive house on the water, which she sold to buy a smaller home. Yet Pearson says she wouldnt spend the money. If you went to lunch with her, she never reached for the bill. She wouldnt buy new clothes. It took five phone calls to persuade her that she wouldnt be selling apples on the corner if she bought a new car, Pearson says.
Finally, with Pearsons encouragement, the client began giving cash gifts to her sons and daughters-in-law. (She stopped giving to one daughter-in-law when that woman used the gift to fund a breast augmentation my client was mortified that her money had been used for that purpose, Pearson says but is still taking the couple to Puerto Rico for a family vacation.)
The client also purchased U.S. Treasury inflation-protected securities for her grandchildrens education. When she got another surprise a $120,000 check from a Texas oil company, paying for mineral rights her husband had owned she decided to donate a big chunk of it. She gave $20,000 to a charity that flies wounded veterans to hospitals, Pearson says. Although shes not all that interested in philanthropy, she loved being the center of attention at their big annual event.
Now she buys clothes for herself and will pick up the lunch tab when she has lunch with friends, he adds. She still has the occasional panic attack, but Im able to talk her down by telling her that if she earned nothing for the next 20 years, shed still be fine.
Pearson has tried to switch his fee to a flat retainer from a percentage of AUM in order to remove any question of his own incentive, but the client resisted the suggestion. He takes satisfaction in having brought real value to the relationship. Its nice to have that kind of positive impact on someones life, he says.
Savers can be a planners dream clients until they cant stop saving. Rob Siegmann, who is chief operating officer and a senior advisor at Financial Management Group in Cincinnati, has a client couple who put aside $2 million from relatively modest government salaries.
They managed to save by being very frugal, but havent changed now that they are retired and can access both their investment savings and their government pensions. They dont want to tap the portfolio, leave money to the kids, leave money to a charity or pay the government, Siegmann says.
And theyre not the only such clients in his practice. We work with many diligent savers who seem to get more satisfaction from saving than spending, so we often have the problem of clients who arent able to throw the lever from 'accumulate to 'enjoy, Siegmann says.
For one such client a single, older woman with adult children Siegmann found a way for her to give to her family. The client has a lot of inherited stock and is herself a diligent saver; although both she and Siegmann were concerned about her concentrated stock positions, she didnt want to sell and pay taxes on the gain, particularly given the stocks very low cost basis.
Instead of selling the stock, she is giving it to her adult children in annual transfers. The children, whose professional lives put them in much lower income brackets than their mother, can sell the stock and pay lower taxes than she would. The money then supplements their income and lets them save for a grandchilds education.
Siegmann hasnt had as much luck with the first clients. They take trips, but they use pension income and cut back in other areas, he says. The less they spend, he acknowledges, the higher his annual fees. He tells them: 'As your friend, Im asking you: What are you waiting for? I dont think theres an easy answer.
When one half of a couple is a saver and the other would like to spend, its a recipe for conflict - and advisors can get stuck in the middle.
There are very few occasions where Ive seen a relationship work out where spouses are completely polarized on their spending habits, says Robert Hayden, chief wealth advisor at Total Alignment Wealth Advisors in New York. Sometimes they blow up before my eyes.
One husband sought to put his wife on a budget. I said that I cant do that, because I cant impose my own value judgment on what spending is appropriate, Hayden says. Instead, I created a what-if scenario - [it] showed them that, if they scaled back expenses by 15%, everything would be OK. But they couldnt see eye to eye at all on spending, and they ended up getting a divorce.
Another of Haydens clients actually loosened up after entering a new relationship. A very frugal client met someone and really opened up the spending, primarily because he was so happy and wanted to keep her happy. ... Their cash flow could support it and I was happy to see him so happy, Hayden says, adding that the couple is now married. He actually thinks his client is wealthier now after spending more. Being happier has made him more productive at work, and thats increased his bonus, he says.
Sometimes an advisor can create a specific budget that addresses a savers concerns. Planner Lori Embry, at Hamilton Capital Management in Columbus, Ohio, built a travel budget for one couple, earmarking half of their investment income for travel and home improvement. Theyre comfortable with that because their principal is still growing, Embry says. If the market were down, then maybe theyd forgo a trip.
FORMER BUSINESS OWNERS
Entrepreneurs who own businesses are typically happy to spend money. But after they sell, its often difficult for the former owner to deal with a sudden change from a salary to a lump sum of money, says Susan Dsurney, senior manager for family office services at Truepoint in Cincinnati.
Moreover, many entrepreneurs may not have a strong sense of how much they spend in an average month because they route so many expenses through their businesses. That makes the transition from owner to former owner even more difficult.
Im dealing with one now, Dsurney says. He wants to sell his business, but his accounting shows that hes run everything through that business. He doesnt understand his actual fees or why this is a problem when it comes to selling the business. Yes, this guy is great at IT but from an accounting standpoint, he is totally lost.
That client is in his 40s, so hell probably start or buy another business, turning his confusing, stressful lump sum into a familiar salary. Older entrepreneurs, by contrast, may sell a business and then retire, not knowing how to best handle their windfall.
For these clients, Dsurney finds that helping them get a realistic handle on their expenses is crucial. After that, she sets up charitable remainder trusts as needed. They feel better when they see money coming in, she explains.
PLANNING FOR CHARITY
Sometimes frugal clients actually would happily part with cash to support a charity, but remain afraid of running out of money. One solution, says Peter J. Miller, president of Zoe Wealth Management in Charlotte, N.C., is to scour clients portfolios for non-critical assets that could be used to generate additional cash flow. He looks for an inherited home thats vacant, for instance, and could be rented with the proceeds donated, or money that can move from a CD or savings account into an income-generating portfolio.
Its a reversible way to increase their giving without affecting their principal or regular monthly income, Miller says. Clients could even take proceeds for themselves, but Miller says this type of client do that would rather help others.
Of course, sometimes clients have no good reason to part with their money. Embry has one client couple with sizable pensions, Social Security income, $2 million in the bank and a very modest lifestyle. Theyre happy. They enjoy their standard of living, she says. They like walks, a local park and an arboretum. The husband is not in the best of health, so they are not big travelers.
They like playing cards with friends.
For some fortunate clients, decades of discipline mean they can spend more or not, whatever makes them happier. These people wanted a particular standard of living and they got it, Embry says. If youre happy, theres no need to go out and spend.
Ingrid Case, a Financial Planning contributing writer in Minneapolis, is the author of Your Own Two Feet (and How to Stand on Them): Surviving and Thriving After Graduation.
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