Clients With Boom-Or-Bust Incomes Need Special Planning, Advisors Say

Brad Feldman, JD, CLU®, featured in Financial Advisor Magazine

Musicians, athletes and social media influencers are among those with boom or bust incomes, and their advisors need to understand the unique nature of their lifestyles in order to guide them through the good and bad times, a group of advisors and coaches said.

Most clients of financial advisors have a pretty predictable life path from accumulation in their younger years, through growth to peak earning years, to decumulation in retirement; but there are some who have a lumpy financial paths that may include great wealth in younger years followed by years of no or little income. These are the ones that are more difficult to plan for, experts say.

“I frequently use professional athletes as examples of people with uneven incomes and the need for planning while the clients are young,” Bobbie Meola, managing partner at Stratos Wealth Partners, a national financial services and wealth management firm based in Beachwood, Ohio, said. Meola, who is based in Scottsdale, Ariz., works with influencers—people who garner enough followers on social media.

“These are people who have 50,000 to a million or more followers and make money on endorsements and for advertising other people’s products,” Meola said. “There are challenges to managing their uneven incomes. They have a lot of influence in their given fields, but they often do not have financial knowledge. Some manage their finances themselves for a while, get hurt, and then decide they need help.”

To start the planning process, the advisor may want to hone in on the immediate goals at the same time he or she starts planning for saving and guards the client against outside influences.

“You have to allow them to buy some toys, but there is always someone in the room talking about the latest craze that the client should get involved in,” said Jeremy Paul, president of Perigon Wealth Management, a national firm based in San Francisco with about $8.2 billion in client assets. Perigon works with songwriters and musicians who may not have steady incomes, among other clients.

“It is our job as advisors to tell clients what can go wrong and to inform them of the possible risks, but in the end it is their decision,” Paul said.

The approach needs to be different for each client who has unusual financial trajectories, Meola said. “The younger generation is a ‘right now’ generation,” she said. The advisor’s job is to get them to think long term. “It is that simple and that complicated for serving these clients,” she said.

For some of Perigon’s clients the income stream is very lucrative when they are on concert tours, or when they have a hit song, but less so when they are relying on royalties or when they are involved in the creative process, Paul said.

“This is an interesting time for some of these clients because young audiences can have short attention spans that can dictate your clients’ income streams,” Paul said. “For clients with an established career, we can plan around those ebbs and flows, but for people early in their careers it is more problematic.”

“When the income is flowing, two keys to successful planning are to diversify the client’s assets and to make plan for efficiently paying taxes,” he said.

Brad Feldman, a financial advisor at Schechter Investment Advisors, a full-service financial firm based in Birmingham, Michigan, has dealt with these same issues for his client, which include musicians and others with mercurial incomes and significant expenses that come in waves.

“These clients can have lots of income for a few years, followed by large expenses,” Feldman said. “An advisor cannot be afraid to have tough conversations about spending with these clients. The lifestyles of the rich and famous, by their very nature, can be dangerous financially.”

“If you have an icon as a client, which we do, he or she can count on a continuing income stream, but if you have a lesser known musician as a client, he or she can go for some time without an income stream. You have to create a living, breathing financial plan that provides liquidity but also investments for the future,” he said. A client like this may want to hold less in public equities and more in safe assets, he said.

The advisor in these cases also will want to consult a tax planner so that royalties can be reported in the most advantageous way, Feldman said.

Advice to these clients often needs to go beyond the immediate client to other family members and multiple generations, according to Megan Slatter, a wealth advisor at Crewe Advisors, a fee-based RIA with offices in Salt Lake City and Scottsdale.

“Advisors can approach clients with unusual and highly specialized needs by having a thorough understanding of family governance so all members of a family can be educated on the family's estate planning. The important thing is to ensure that awareness of the family's wealth extends past generation one,” Slatter said in an email.

“Part of this often involves designating specific trusts for various purposes,” Slatter said. “An advisor who is experienced in specific areas, such as creating special needs trusts or in family governance issues in general, is going to benefit a family with highly individualized needs. Having one advisor in a team-based firm serve as the touchpoint for the family's finances and related matters is key to the family feeling confident about their financial health and that their finances are organized and handled with care.”

Advisors themselves can be among those who have specialized needs, according to Jesse Kurrasch, chief operating officer at the AmeriFlex Group, a Las Vegas-based advisor-owned hybrid RIA with $15 billion in client assets, which supports advisors in monetizing their firms. Kurrasch works directly with advisors to help them answer some of their own financial questions.

“Advisors have unusual needs and they do great work for clients, but sometimes neglect their own businesses,” Kurrasch said.

For instance, one advisor client of AmeriFlex thought he was grooming a colleague for 20 years to take over when he retired. However, that advisor not only ended up not taking over, but leaving the firm and taking clients with him.

“We stepped in and now the owner has a viable succession plan that maximizes the value of the firm and takes care of the clients,” Kurrasch said.

The article can be found on Financial Advisor Magazine