YOUR PRACTICE-Clients' top worry: lingering dysfunction in DC

Fri Jan 18, 2013 3:09pm EST

Jan 18 (Reuters) - Dysfunction in Washington is the top concern for wealthy investors, trumping fears about their ability to retire and the economy overall.

That is what UBS AG's Wealth Management Americas found in a poll released on Thursday of over 2,000 of Americans who have at least $250,000 to invest. Similar trends were evident to many of the financial advisers - 19 in all - that Reuters recently interviewed about their clients' current state of mind.

Much of wealthy clients' frustration with Washington is centered on the end of 2012 "fiscal cliff" negotiations, which resulted in a last minute deal that raised taxes for the wealthy while maintaining lower tax rates for most Americans.

Only 15 percent of those polled by UBS, which conducted its survey in the first week of the year, said they were satisfied with the results of the deal, with many respondents frustrated that it didn't include cuts to federal spending. The majority of those polled also said they have low expectations that the U.S. will make progress on debt reduction in 2013.

This client anger, centered on lawmakers' inability to compromise, can cloud decisions and make wealthy investors reluctant to make investment choices. For advisers, navigating a fear that's not controllable starts with keeping clients focused on what they can control.

"If you live within your means or below your means, you can be more prepared for whatever storm Washington sends your way," said Lynn Ballou, managing partner and certified financial planner with Ballou Plum Wealth Advisors, a Lafayette, California-based firm managing $220 million in client assets.

WHAT ADVISERS CAN DO

The bright spot in the UBS poll was investors' attitude toward their personal finances, with 56 percent feeling "excellent or very good" about their own financial situations, up from 44 percent when UBS did a similar poll in September.

"One thing we know out of this survey is our clients actually want more advice," said Paula Polito, chief client strategy officer with UBS Wealth Management Americas.

That sentiment was echoed by an adviser to the ultra-wealthy, Wilmington Trust, whose family office advises people with $25 million or more to invest. Thomas C. Rogerson, senior managing director at Wilmington Trust said on a panel discussion in New York on Tuesday that the firm's clients have wanted more meetings and more advice in the past year, a trend the firm sees continuing.

That means ample opportunity for advisers to help clients determine just how much impact fiscal woes may have on their financial situations. But there's little agreement on what that impact might be among advisers.

David Edwards, president of New York City and Nantucket, Massachusetts-based Heron Financial Group, believes a lot of his clients' concerns about dysfunction in Washington are overblown.

"At my office we called it the fiscal bunny slope, that's how much we feared it," he said.

When a client recently told him she felt like a victim of class warfare, with her money covering the costs of other people's entitlements, Edwards reminded her of the government benefits that she gets, like for her mortgage interest deduction and tax-exempt municipal bonds.

Other advisers are much more troubled by gridlock in Washington and the impact it could have on the economy.

Carol Khouri, an adviser with Lexington Massachusetts-based Wingate Wealth Advisors, said these concerns have made her more conservative with financial plans for her clients, who are mostly retired or about to retire.

She has built a 3 percent to 4 percent rate of return on her clients' investments, down from previous assumptions of 7 percent to 8 percent growth. In turn, she is shifting clients out of small-cap stocks and high-yield bonds and into blue-chip, dividend-paying stocks and short- to medium-term bonds. She also assuming no growth in the values of her clients' homes.

Her clients may miss out on some returns, but that's okay, she said, because the goal is preserving retirement.

"If this plan is telling you you're okay for retirement, then you don't have to try and get market returns," she said.

Michael PeQueen, a managing director with the Las Vegas office of HighTower Advisors LLC, is also more conservative.

He's projecting clients will have a higher income tax rate in retirement than they initially planned - he's upped those projections by 2 percent to 3 percent for now, and expects it to evolve as tax policy changes. He's also taking a conservative view on social security income, making the assumption that his clients - many of whom are between 45 to 70 years old - may not always have that full benefit available to them.

This type of planning "doesn't give them comfort in our society that we're leaving to the next generation, but it does make them feel they'll be able to plan their finances a bit better," PeQueen said.

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