FYI: Copy & Paste 5/20/14: Kelly Kearsley: WSJ
Regards,
Ted
The couple had been investing and saving for years, accumulating $4 million.
However, they had been too busy with work and travel to manage their investments according to an organized strategy, and as a result had 18 different accounts that held 150 mutual-fund positions.
They planned to retire within three years, but they couldn't decipher whether their assets would support this next life stage.
"They needed us to look at their entire portfolio, analyze it and then figure out if it was appropriate for them." says Marilyn Plum, director of portfolio management for Ballou Plum Wealth Advisors, which manages $273 million for 180 clients in Lafayette, Calif.
Ms. Plum's analysis revealed that the couple's accounts included old IRAs and 401(k)s that hadn't been monitored for decades, as well many underperforming mutual funds.
Most of the accounts were allocated primarily to stocks and far too aggressive for clients who were now more concerned with preserving their assets. Additionally, the couple had both nontaxable and taxable accounts, which meant that Ms. Plum had to pay attention to potential capital-gains taxes as she consolidated those investments.
So she crafted a plan that turned their scattered assets into a strategic portfolio, spreading the capital gains over three years to minimize taxes. "We had to develop a battle plan for moving from point A to point B," Ms. Plum says.
The first priority was to get rid of the funds that were severely underperforming. The adviser jettisoned several funds that had been high-performers years ago, but now provided lackluster returns. Ms. Plum also sold funds that were too volatile for the couple's needs.
"Portfolio management isn't set it and forget it," she says.
Next, she focused on eliminating several small holdings that had little to no impact on the couple's portfolio. The positions accounted for less 2% of the couple's investments, with most just languishing inside old 401(k)s or IRAs. Eliminating these holdings made the portfolio easier to manage and freed up cash for Ms. Plum to invest in funds that were better aligned with the couple's investment goals.
Within the first year, Ms. Plum reduced the couple's accounts from 18 to five and eliminated more than half of their 150 mutual-fund holdings. Throughout the process, the adviser worked closely with the couple's certified public accountant, who had determined that the couple needed to keep their capital-gains income under $80,000 to avoid climbing into a higher tax bracket and creating other additional taxes.
To that end, Ms. Plum timed fund sales with the couple's tax picture in mind, knowing that she must divest more of the holdings in another year or two. In the meantime, Ms. Plum is letting the dividends and earnings from those funds go to cash so that it can then be reinvested into funds that fit better with the couple's portfolio.
She also sold bond funds with no gains, or with losses, to diversify the couple's fixed-income holdings. Then, she added municipal-bond ladders to their non-retirement accounts to lower their risk and add more tax-free income.
All told, the adviser's moves generated only $36,000 in capital gains in the first year. And the couple's revised portfolio allocation is now a more appropriate 65% stocks and 35% fixed income.
Ms. Plum's work isn't done, and she'll continue refining the couple's asset mix in the two years remaining until their planned retirement. But now, they at least have a portfolio with a strategy that matches their life goals.
"Sometimes people just need help looking at the big picture," she says.
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