Illustration by Christophe Vorlet
Much like wild beasts circling each other warily in shared but unfamiliar territory, the IAFP and ICFP came together as the FPA for the first official time during Retreat 2000 in Phoenix. It was an uneasy joining, as evidenced by comments from a number of members, but it was also a gallant effort to find common ground and a broader understanding of different methods of conducting a financial planning practice.
Kicked off by Roy Diliberto, president of the new association, and Ben Coombs, dean of the retreat, the opening session was long and apparently somewhat tedious to many attendees, who grew restive throughout the considerable number of staff introductions and anecdotes about the history of various past retreats. Coombs, who had been dean of the second annual retreat in 1982, had many stories to tell about the way the organizations had grown and the way retreats had advanced since their inception, and while the history was interesting, those in the audience were anxious to get on with things.
And just what was it that they were so anxious to get on with? The advanced planning conference, with a new format and a new organization acting as host, was taken to new levels with scenario learning, a technique first used by the military in the wake of World War II. Scenario learning involves alternate views of a future reality - and if you think that sounds too much like science fiction to be useful, think again (and remember, too, how dependent most of us are these days on the Internet, a science fiction concept itself not too many years ago).
Earlier expert conferences, whether Masters' Retreats or CAPs, offered panel discussions or heavily detailed discourses by experts in which speakers would take on a pithy subject, offer a wealth of information on it, and then open the floor to penetrating questions from the audience. In the very earliest conferences, that floor might have been the grass beneath a tree on a college campus. But the basic format this time revolved around the case histories of four "clients," each of whom had a plethora of planning problems - everything from dysfunctional family relationships governing how (or whether) funds were disbursed to questionable strategies employed by other advisors such as CPAs and attorneys. Each of these complex case histories, previewed on the FPA's Web site before the conference so that attendees could prepare in advance and detailed in a massive reference manual in the registration packet, involved everything from succession planning to gifting, bequests to entrepreneurial strategies, counseling to insurance, and more.
All the situations were real: Some were composites of real clients and some were the actual case histories of clients (with pertinent details changed to protect identities and privacy). Each provided valuable insights on a wide variety of planning dilemmas, and the fact that all were real problems meant that there had to be "real answers" for each.
Each of four case studies was presented in its own track, and the one serious disadvantage to the conference was the inability for an attendee to attend all four tracks. But documentation and tapes of the sessions helped those who were trying to fill in the gaps.
Control issues, succession planning, trusts, tax issues, cash flow, decisions based on emotion rather than on common sense, philanthropy, and so many other issues were involved in each of these scenarios that any one of them by itself could have provided a full weekend's worth of study. Once the basic issues of each case study were defined, then the scenario learning came into play.
According to Dennis Stearns, of Stearns Financial Group in Greensboro, North Carolina, who explained the new learning technique to attendees, the earliest known instances of scenario learning were in the invention of the game of chess in India and in the military strategies of Sun Tzu in China. Scenario learning, or SL for short, didn't come into popular usage until post-World War II, primarily in the Air Force. Following that, it saw limited service in the business world. Perhaps the most notable use by a company was that of Royal Dutch/Shell, which used SL to anticipate conditions that occurred in the wake of the 1973 Yom Kippur War. Royal Dutch/Shell, at that time the weakest of the seven largest oil companies, used its SL to enable it to react to the war and its repercussions to its long-term benefit.
Scenario learning consists of envisioning futures other than the "expected" one, and planning accordingly. In other words, rather than assuming that market and economic conditions will stay approximately the same and basing strategies on those conditions, planners were asked to develop strategies based on other predictions. The Retreat offered three scenarios on which to base planning solutions to the case study problems: a future economy mostly the same as it is now; an economic boom; or an economic collapse. Specific guidelines were given for all three, and planners were asked to develop strategies that would be viable no matter what the future held, or to rate their strategies based on which vision of the future came about.
After the details of client case histories were presented, planners were broken into small groups to discuss strategies for resolving all the planning problems. Then the groups reassembled to relate what solutions they had chosen, and to learn what solution had actually been used. Each session examined a different aspect of the case history, and the workbook contained specific questions to consider. The discussion groups also had to rate their solutions based on how safe or dangerous they felt those strategies would be in times of a severe downturn in the economy, or how unhappy clients would be if those solutions failed to provide a good return in a booming economy.
Attendees seemed quite satisfied with the conference in general, although there were several relatively minor complaints. Some people were concerned that in the small groups, one person had dominated the conversation and singlehandedly "decided" what strategies should be employed. The more charitable of those complaining about this occurrence pointed out that it was only natural to expect a certain amount of that in a field filled with strong-minded entrepreneurial types in charge of their own practices.
Several attendees felt that there should have been an introductory session to explain the concept of scenario learning. They agreed that SL was a useful technique, but felt they would have gotten more out of it had they understood the concept better before the sessions began.
There was a bit of grumbling about conference attendees who were not advanced planners and were perhaps only working on their CFP designations. The earlier ICFP Masters' Retreats had asked that attendees have at least six years of experience, while the IAFP CAPs had only specified that attendees be "advanced planners," with no other specific requirements. According to a show of hands in the general session, perhaps a third of the attendees were at their first Retreat.
Total paid attendance at the 1999 IAFP CAP was 219, while at the 1999 ICFP Masters' Retreat the count was 172. The joint FPA Retreat in its first year drew 286 paid attendees. Of those attending, 150 had belonged to both organizations, while 70 came from the ICFP and 66 were from the IAFP.
Former ICFP members were outspoken about their feelings that the joint organization would have some work to do to maintain the "higher standards" of their old organization (one California planner said that where she practiced, all the IAFP members were insurance people or brokers, and she didn't want to be identified with them). One planner who had belonged to both organizations and made a living from a combination of fees and commissions was not happy with how commission people had been "demonized." On the whole, the IAFP folks seemed happier with the merger than the ICFP people. But when push came to shove, as the California planner said, "I said my piece, I was very outspoken about not wanting this merger, but it's done and now I'm going to support it."
The meeting on the last morning of the conference highlighted the fact that there are some very different points of view among members about such issues as whether the FPA should be politically active, what issues it should assert itself about if it decides to take an active role, and how members should be able to voice their opinions about the action the organization takes.
Some concerned comments were also offered about the so-called Merrill Lynch Rule (see "Indecent Proposal" in the May 2000 issue) and how it will affect members. There is definite friction among those who make up the new organization, but there is also an outspoken determination among the officers to resolve these issues to the majority's satisfaction and to the profession's betterment.
It may not be a perfect merger, but the joining of the IAFP and the ICFP has resulted in a new Retreat that educates in a new and different way. If the cautious optimism expressed by members throughout the conference is any indication, perhaps the organization itself will be able to apply the same strategy to its own transformation.
The Plot Thickens |
A major educational tool used at Retreat 2000 was scenario learning (SL). In SL, participants are asked to develop strategies to meet each of several anticipated occurrences in the future. Below is one of the scenarios (Scenario B) that was presented at the conference, and the strategies that the attendees reccommended.
Scenario: Not all the financial difficulties facing Dan and Patti Johnson were their own; some belonged to Dan's mother, Helen. Dan was concerned enough to ask that his mother be brought in for a consultation to resolve some of these issues, which he felt were substantial.
A 74-year-old widow with a total estate of $4 million, Helen is generous and gives $10,000 per year to each of her three children and their spouses, and to each of her five grandchildren.
But Helen has been having a few problems lately. First of all, her accountant told her that her estate taxes will run more than $1.6 million. Dan is pretty upset by this and wants to know how the tax bill can be reduced. Then there's the little matter of Helen's gifting. She'd been selling assets from her living trust to fund the annual gifts, but those assets are now almost depleted, and when she tried to take money from her marital (Q-TIP) trust to fund her gifting, the bank (acting as trustee) told her that "the [trust] document requires that principal distributions be for your 'health and maintenance.' The trustee does not believe that reducing your estate for estate planning purposes qualifies as maintenance." Helen had been the trustee of the marital trust her late husband Frank left her, as well as the trustee of her own living trust, but on the advice of her attorney and accountant, she resigned as trustee "since the bank was doing all the work of a trustee anyway."
Helen's $500,000 IRA account is invested 100% in Treasury notes, on the advice of Frank's old stockbroker. He believed in a conservative approach, and he has since retired.
Last but not least, the brokerage firm has been miscalculating the minimum amount Helen must withdraw from her IRA every year. Her accountant apparently did not notice.
There's also a side issue that is at least as much emotional as it is financial. Dan's younger brother Bill, who has a bit of a problem with making his way in the world (he has recently quit his 23rd job), is in his third marriage. He pretty much lives off a trust fund set up for him by Helen and Frank years ago. In an effort to make things even among the children, Helen and Frank had given Dan and his sister Linda (who are both financially successful) shares in two limited partnerships that were originally bought as tax shelters. Needless to say, this rankles both Dan and Linda, since they have never seen a penny from these LPs and indeed could incur a tax liability if the partnerships dissolve any time soon. Meanwhile,Bill still has his trust fund.
How do you fix all this? Starting with the last item first, the minimum IRA withdrawal must be calculated according to MDIB rules, because Helen's beneficiaries, her kids, are more than ten years younger than she is. Once that is done, Helen must withdraw more from her IRA, and she can use that to help fund her gifting.
Next, the IRA should be reinvested in an asset mix more suited to Helen's needs as a 74-year-old active retiree.
With regard to the marital trust, Helen should (and can, because of the way the trust is structured) resume trusteeship. Then she can determine what is appropriate to withdraw. In addition, her estate tax can be reduced should she choose to gift a larger amount--the $650,000 exclusion--to her three children.
An advisor must also consider several legal and psychological aspects. First, Helen is not the client: Dan and Patti are. Discussion can only proceed in a general way until some sort of representation has been agreed upon, but at the same time the advisor cannot consider Dan and Patti's well-being above that of Helen when reccommending what would best serve Helen. In the actual case, this was not a problem, as Dan's first priority was to help his mother. Second, the advisor must consider whether the original advisors should be present for the consultation, since he will be giving advice that is contradictory to what she has already been told. This is Helen's decision, and in real life she decided that she did not want them present. And third, the advisor must be prepared to approach these issues in a way that will allow Helen to make her own decisions about judging the advice she previously received. Presenting the new advice as alternative options can accomplish this, without blaming previous advisors; this allows Helen to decide for herself whether the quality of the earlier advice was all she would wish it to be.
Oh, and the trust fund/LP issue? In real life, Helen did not wish to "equalize" things any further. The initial effort was made based on what she and Frank thought at the time was the best course of action, and she has no wish to change it. And that's solely her decision to make. --MYS