Financial Quagmires: Where Smart People Get Stuck

by Robert DeLucca , Founder and Managing Director

There are times when a client comes to us with a plan and, somewhere along the way, the plan changes. A different opportunity comes along, circumstances shift, or something that seemed relatively straightforward becomes more complicated once we begin looking at the details. Those situations require us to understand what the client is trying to accomplish, organize the pieces and adapt as the facts change.

We sometimes call these situations financial quagmires. Over the years, we have seen enough of them to recognize that each one is unique to the person involved, but the situations themselves are often familiar. That experience helps us identify questions a client may not even know to ask and potential consequences that deserve consideration before a decision is made.

When a Client Changes Direction

We recently worked with a client who had plans to use a portion of his assets for an investment related to an existing business. As we worked through the details, his plans changed and he decided to pursue a different business opportunity.

That change required us to reconsider how the transaction would be funded and identify issues that were not part of the original plan. We worked with the client to evaluate the financing appropriately, help him understand the implications, and support the direction he ultimately chose to pursue.

As the opportunity developed, our role was to help the client understand what would be required to move forward and where potential issues could arise. We worked through the financing, considered how it fit with his existing resources, and helped him navigate a process that was unfamiliar to him. Ultimately, he was comfortable with the opportunity and wanted to pursue it. We helped him find a workable path forward while making sure he understood the implications of the decision.

Helping Clients Understand the Answer

We will sometimes look at a client’s situation after the facts have been laid out and have a good sense of where the analysis is going to lead. However, what we think the answer will be is less important than what the client ultimately understands.

That changes the way we approach the conversation. We explain how we reached a conclusion and why it matters. Getting our clients to the answer is only part of the process. We also explain why the answer matters to their financial life. That process is closely connected to the trust we build in our client relationships.

The same principle applies when the conversation is uncomfortable. There are times when the facts lead somewhere a client may not have expected. Having the information is important, but helping them understand what it means as well.

Sometimes Paying Taxes Is the Answer

Taxes are another area where we see people make things more complicated than they need to be. Guess what? It’s okay to pay taxes.

People sometimes consider significant hurdles or complicated strategies to avoid a tax bill. At that point, we need to look at what is being saved and whether the strategy makes sense. We can help manage taxes through techniques such as harvesting losses, and we can be deliberate about when gains are realized. We can also prepare clients for the tax liability so the eventual bill is expected.

A large capital gain can occur because an investment has appreciated substantially over a long period of time. Eventually, an adjustment may need to be made in the portfolio. That can create tax liability. Through ongoing discussions and planning, we can prepare for it rather than allowing a client to reach April and suddenly discover that a large check has to be written.

These situations may look very different from one another, but they require many of the same things from us. We need the facts. We need to understand what the client wants to accomplish. We need to recognize where problems could arise, and we need to communicate clearly enough so that the client understands the choices in front of them.

That is usually how we begin finding our way through a financial quagmire.

Questions We Often Hear

What happens when my plans change after we’ve already done the planning?

Plans change. In the business acquisition example, the client’s objective changed significantly while we were already working with him. We adjusted to the new circumstances, evaluated the financing issues and considered how his trust assets could support what he wanted to do.

Does avoiding taxes always make financial sense?

Not necessarily. There are strategies that can help manage taxes, including loss harvesting and being deliberate about realizing gains. There are also situations where paying the resulting tax is appropriate. The important question is what a more complicated strategy accomplishes after its tradeoffs are considered.

Why is it important to discuss a decision before making it?

The earlier we understand what a client wants to do, the more opportunity we have to evaluate how it can be accomplished and identify potential problems along the way. In the acquisition example, that included helping the client navigate commercial lending and structure collateral before the transaction moved forward.

---

Investment advisory services offered through Granite Islands Private Wealth, LLC, a registered investment advisor with the U.S. Securities and Exchange Commission. This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor. The information contained may have been compiled from third-party sources and is believed to be reliable. Investing involves risk, including possible loss of principal. This material contains a hypothetical planning scenario for educational and informational purposes only and should not be construed as a guarantee of future results or financial outcomes.