Case Study: Enough Assets for a Financial Planner?

Like many people caught in market turmoil, Rich Neel decided he needed a financial planner to make sure his finances were on track. And like many people, the 26-year-old pharmaceuticals salesman had a hard time finding someone to help him.

Neel makes $65,000 to $70,000 a year and has $45,000 tucked away in his 401(k) plan. But that's not nearly enough to attract many fee-only financial planners in Los Angeles, who typically require that a potential client have at least $100,000 in assets. These planners usually want to manage their clients' money on a continuing basis in exchange for a percentage fee, rather than providing a one-time plan or working at an hourly rate.

Neel could hire a planner who is paid by commission, but he's leery of relying on someone whose advice might be influenced by what he or she sells. "I just wanted someone objective who could look at my investments and say, 'That's a good idea' or 'Maybe you should try something else,' " Neel said. "But I don't have enough assets to be taken seriously."

Fortunately, some financial planners do specialize in middle-income clients, including Margie Mullen, a fee-only advisor in Los Angeles. She was able to advise Neel that, while he needed to make a few changes, he was doing many things right.

"He's a perfect example of someone who started saving and investing early," Mullen said. "No matter what comes along, he's going to have that discipline of 'pay yourself first.' "

Neel tucks 15% of his salary into his company's 401(k), plus $2,000 a year into a Roth IRA. In addition, he puts $400 a month into a taxable investing account.

Neel is also debt free. He avoids car payments by using a company-provided vehicle, and pays off his credit cards in full every month. That's a lesson he learned from his parents, who lived well but conservatively in a Portland suburb and who talked to him about the importance of staying out of debt.

Neel's father also encouraged him to begin contributing at age 17 to an individual retirement account. Neel's dad presented him with a list of no-load mutual funds, and Neel picked one that had been performing well at the time.

Neel has continued the habit of selecting investments based on recent performance, rather than how the investments fit into his long-term plans. And that's unfortunate, Mullen said.

For example, Neel recently switched his 401(k) allocation out of two stock funds and into his company's stock because the stock had been performing better recently. But Mullen said having half of his retirement money and his salary riding on one company was too much of a risk.

Neel also was unhappy with the recent performance of his other investments, including two mutual funds and two stocks--Cisco Systems Inc. and Sun Microsystems Inc.--both of which have lost more than half their value since he bought them last year.

Neel's discontent with his investment performance drove him to seek the help of a financial advisor--only to find no takers.

Finding a planner has become increasingly difficult for people without a lot of money, said Pamela Christensen, a Sacramento planner who is active in the Financial Planning Assn., a membership organization for commissioned, fee-based and fee-only financial planners.

Most planners find it more profitable to serve wealthy clients, said Christensen. "People are becoming much more aware of the need for financial planning, but they're not able to find a whole lot of independent advisors willing to [serve less-affluent clients]," she said.

The economics and ethics of the financial planning business are part of the problem, Mullen said. Most good financial planners insist on taking a comprehensive look at their clients' finances--from their credit card debts to their insurance coverage--before discussing investments, Mullen said.

That takes time, and many planners say less-affluent people can't pay enough to cover the costs. Some offset the costs by accepting commissions from their investment recommendations, while others have become asset managers, charging about 1% of the client's investments annually.

The dearth of planners for people with few assets is particularly acute in Southern California, said Mullen, who charges $200 an hour and also manages assets for a percentage fee.

"Here in L.A., where you have such wealth, everybody's going after the big assets under management," Mullen said.

People with less money may need guidance just as much--particularly in a bad market, she said.

Neel, for instance, needs to learn a lesson in diversification, Mullen said. She recommends that Neel have no more than 10% of his 401(k) in company stock, and divide the rest among the plan's stock funds and "stable value" income fund.

Neel also needs to figure out his goals for the money he's investing outside his retirement accounts. He has $5,500 invested in two funds, and his stocks are worth $1,200.

Neel said the money probably will be used for a home down payment, although soaring Southland house prices have discouraged him.

Another issue, Mullen said, is that Neel isn't sure how long he'll stay in Southern California. Neel says he's ready to go anywhere a promotion or new job might take him.

Until he's clearer about his future, it doesn't make much sense to buy a home, Mullen said. Because Neel hopes to marry and have a family, he someday might be able to depend on another income to help with mortgage payments.

At the same time, he should take less risk with his non-retirement investments in case he does decide to buy a house soon, Mullen said.

"If he thinks there's greater than a 50% possibility he will need the money in the next three years, he should stick to investments that lack volatility," Mullen said. She recommended dividing the money equally among a money market fund, an ultra-short-term bond fund and a short-term bond fund.

If the possibility of buying a home within three years is less than 50%, Neel should put half the money into a short-term bond fund and half into a balanced fund that invests in both stocks and bonds.

Neel said he was relieved and happy to finally have some financial guidance.

"I'm definitely going to take her advice, diversify my portfolio and move some things around," Neel said. The process of discussing his financial goals also has made him determined to become a homeowner by the time he's 30.

"At least, that's the plan right now," he said.