Come into money? Tips for avoiding common mistakes

Monday, March 02, 2009

By DAVID PITT, AP Personal Finance Writer



Investment advisers are seeing something new _ people coming through the door in droves with cash they're afraid to invest. Some of these new clients have inherited money, others have sold businesses and a few are people who've liquidated their 401(k) or some other account that has suffered losses. Regardless of where they acquired the lump sum, they all have one thing in common _ a pile of cash they don't want to lose.

"When people are scared and they have money that they've earned, they are going to protect it in any way they see fit," said Joseph Leonard, chief executive of Coastal Investment Advisors in Southport, N.C. "Put it in their mattress...simply have it in checking," he said. "They're going to put it someplace where they know they won't lose their physical dollar."

Leonard said that the volume of money placed with his company has multiplied eight-fold in the current quarter over the same period a year ago. His firm currently manages $100 million in assets. What's more, he's seen attendance at the financial planning meetings he organizes balloon from about 50 to 150 people in recent months. He's had to go so far as to set up a waiting list.

Symbolic of what's likely playing out across the country, Leonard recently spoke with a 74-year-old woman who has $1 million invested in certificates of deposit. After loosing about 30 percent in a brokerage account, she pulled the money out and it's been stashed in CDs for months. The national average yield for a 5-year CD is 2.67 percent according to

"She's not making anything, but it's safe," Leonard said. "She said to me, now I need to know what to do with it."

What's more, Leonard is also working with a 54-year-old man who sold his manufacturing business for $1.6 million. Along with other savings, his client has just over $2 million to live on for the rest of his life. "He came to me and said what do I do not to ever lose it," Leonard said.

Such experiences are shared by Joe Spada, a financial planner and principal at New Jersey-based Summit Financial Resources, which works with high net worth clients. Spada said the focus for many has turned away from getting a return "on" their money to getting a return "of" their money.

He's seen many clients turn to certificates of deposit at federally insured banks, annuities that guarantee a return and Treasury bills.

"Everybody's concerned. It's all bad news right now," he said. "More and more people thought they could stomach the risk, now more and more are finding they can't."

Some other options people are choosing include high grade corporate and municipal bonds and Treasury inflation-protected securities, investments on which the principal increases with inflation and decreases with deflation. When they mature, TIPS pay the adjusted principal or the original principal whichever is greater. TIPS pay interest twice a year, at a fixed rate, which is added to the adjusted principal.

A fundamental anxiety is how long a possible recovery might take. "We've had to do quite a bit of hand holding with clients through this whole event and we've gotten more conservative with all our portfolios," said Ron Roge, who runs R.W. Roge & Co. a fee-based wealth management company in Bohemia, N.Y.

"The markets can snap back dramatically," Roge said, noting that in the near future we may see a 1,000-point rapid rise in the Dow Jones industrial average. "It will take a lot of confidence, though, for people to do that. That's when you know people are starting to pile back in again."

So if you come into a lump sum of money, how should you proceed? Here are a few tips to avoid potential pitfalls:

1. DON'T RUSH INTO ANYTHING. Leonard's 74-year-old client moved her money into CDs, but recognized that's not a long term solution given the low return on CDs could easily be outpaced by inflation. Instead she bought herself some time while she sought professional help in creating a plan.

2. GET HELP. It's important to get qualified financial and legal help to ensure that you create a solid plan, and avoid any missteps. Make sure you get an appropriate specialist, such as a tax adviser if an inheritance tax may be due.

3. REVIEW YOUR FINANCES. Don't just focus on the lump sum, but assess how it fits into your overall financial picture. For instance, it may be advisable to put some of that money to work to pay off debts, or bolster your insurance coverage.

4. PUT PLAN INTO ACTION. Once you're comfortable with the plan, see that it's implemented according to your specifications. In addition to an investment plan, you should establish or update an estate plan.

5. PAY ATTENTION. Though you may be paying a financial adviser, you need to remain an active participant to ensure that your investments remain appropriate for your goals and risk tolerance.

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