Thus far, 2016 has been marked by the kind of economic uncertainty that tests the nerves of even the most steadfast investors. And unstable markets are particularly difficult for people with erratic incomes — tech entrepreneurs, business owners, actors, and others who can’t rely on a steady paycheck or a consistent annual salary.
“People with erratic incomes or who have uncertainty in their professional lives are the most vulnerable to these wild swings in the market,” says Brock Moseley, founding partner of Los Angeles-based Miracle Mile Advisors, which manages just north of $500 million.
The key to working with such clients is consistency — and staying on top of their constantly changing finances.
Moseley meets with his clients, who include tech entrepreneurs and actors, on a quarterly basis. Regular check-ins help him keep abreast of upcoming changes in his clients’ lives, including anticipated expenses, bonuses and paychecks, so he can plan accordingly.
The strategy is particularly important for clients whose financial futures are unpredictable and who might need a larger-than-usual amount of cash on hand to smooth over any bumps. In these meetings, Moseley stresses the importance of a budget and paying attention to spending.
“Many clients don’t want to know what they spend — it’s that whole ‘what you don’t know can’t hurt you’ attitude,” he says. He often counters that mistaken belief with Murphy’s Law — anything that can go wrong, will go wrong — to convince clients of the benefits of sticking to a budget.
Kevin Dorwin works with many clients in the tech world as managing principal of San Francisco-based B|O|S, which manages $3.5 billion. Dorwin says many tech jobs come with base compensation that may be below market value but is augmented by stock option grants that vest over a multi-year period.
Because the price of a company’s stock is often quite volatile, Dorwin helps clients project different levels of cash flow based on various anticipated stock prices. That way the client gets a sense of what an appropriate level of spending looks like.
“Tech clients often have inflated views of their stock potential,” Dorwin says. With these clients, advisors need to plan potential negative scenarios so clients can establish a lifestyle that’s congruent with their current income, rather than one that’s based on a potentially inflated view of a future stock value.
Some clients with uneven incomes might be tempted to compensate by investing for growth. But a riskier portfolio is generally not a good bet for such investors, particularly in the period before they’ve realized their stock options.
“Given the inherent volatility in their company stock, these clients might actually consider being more conservative with their long-term savings,” Dorwin says.
David Wirth, a Mclean, Va.-based CFP with Savant Capital Management, which manages $4.1 billion, has worked with numerous clients who have irregular cash flows. Because these people live in a world of financial unpredictability, he believes an advisor’s role is to create structures of stability that can help clients feel more secure. An important part of that structure is setting a clear budget baseline.
“Once we know their core expenses and day-to-day needs, as well as the anticipated funding for their long-term goals like retirement or college planning, we can develop a baseline minimum cash flow they need in order to cover their current obligations without any real risk of compromising their future,” Wirth says. Once a realistic baseline is in place, clients tend to feel more confident weathering the short-term bumps along the way, assuming their average level of income at least meets this baseline threshold.
And if the client is unable to meet that baseline, that’s useful information to have too: “While on the surface it can seem daunting, it’s actually far better to make adjustments and reduce expectations for future goals now, rather than finding out at a later date that those goals were unattainable,” Wirth says.