Extra Cash Means Extra Work for Advisors

U.S. workers aren’t exactly getting wealthy on the job, with the average wage hike in 2017 coming in at 3 percent, according to new data.

Beyond that, workplace bonuses are up, as are expected inheritances across the U.S. Forty percent of U.S. adults expect an inheritance from aging parents in the next decade – if not sooner, a study by Arlington, Va.-based Willis Towers Watson found.

All told, a “generational transfer” of $30 trillion in financial and non-financial assets is expected to change hands from U.S. baby boomers to their children over the next few decades.

Consequently, with all that near- and long-term extra cash in play, an interesting scenario is developing for financial advisors. As the economy improves, what financial moves should an advisor recommend to a “windfall-recipient” client?

“First, everyone should have a cash reserve,” said Bill Elson, a financial planner with Spectrum Advisory Services in Des Moines, Iowa. “If your client doesn’t have one, use the windfall to establish three-to-six months' worth of living expenses in reserve for emergencies.”

After that, your next move depends on your client’s situation and cash flow.

“If cash flow is poor, or you are going to invest it in bank accounts or other low-returning (but relatively safe) investments, you should pay down the debt,” Elson said. “This will help cash flow and the client can potentially save more in interest than a safe investment would earn.”

Before investing the cash, Elson recommended establishing the following personal financial criteria first:

1. Your client’s cash flow is good and you have a cash reserve.
2. Your client is a long-term investor, willing to invest at least a portion in stocks.
3. Your client doesn’t have any high interest debt.

“If you can tick those items off, then by all means, invest the money,” Elson added. “Consider tax-advantaged savings options such as a Roth IRA, 401(k) plans, and college saving plans first.”

Windfall Size Matters

Advisors would also do well to evaluate the actual size of any financial windfall, as a small raise or bonus needs to be handled differently than a six-figure inheritance, or a $50,000 profit from a home sale.

“An individual should sit down with a financial professional to look at their whole picture if the windfall is of any size,” said Alexis Hongamen, a money manager at Federal Retirement Investment Advisers in Orlando, Fla. “For small windfalls, it may be best just to pay off credit card debt and promise themselves never to fall into that trap again.”

No matter what the size of an unexpected cash landing, eliminating debt seems to be a big deal with advisors – at least as a starting point.

“The best thing to do with a windfall is to pay down debt,” said Mike Scanlin, chief investment officer at Born to Sell, an investment website in Las Vegas. “About the only acceptable debt is a home mortgage, because of the tax benefits. Pay off all other debts.”

If there is money left over from a financial windfall, adopt a conservative, long-term, income-focused investment strategy, such as covered calls, said Scanlin.

“Buy a diversified portfolio of blue-chip, dividend-paying, large-cap stocks (think Dow 30 type companies), and then write covered call options against them for recurring monthly income,” he said. “You can make 1-percent to 2-percent per month (that's 12- to 24-percent per year) in passive income with this strategy.”

'Get a Little Fun'

If there is money left over after paying off your debts and after attending to investment and retirement needs, then things can “get a little fun,” said Alexis Busetti, owner and financial coach at Cistern & Grove in Houston. “I think a vacation or luxurious purchase at this point is completely acceptable.”

However, if you know you have other financial goals that could use a boost (think college or retirement savings) “keep the frivolous spending low so you can invest wisely next,” she added.

Overall, advisers should use a client financial windfall as an opportunity to either begin or continue healthy financial habits.

“The idea with a windfall is this - decrease your risk, and increase your savings,” Busetti said.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected]

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