Millionaire Needs to Tidy Up Her Portfolio

Self-made millionaire Kathy Axcell, 36, has plenty of money. What she needs now is some diversification.

Axcell is chief executive of two Molly Maid residential cleaning franchises in Long Beach and Torrance. She’s been making good money since she was 20, when she was doing so well selling real estate that she decided there was no point in sticking it out at Long Beach City College.

By the time Axcell was 25, she and her then-husband had already bought and sold four properties and were living in a $400,000 home in Huntington Beach.

Looking for a business that would allow her to “someday work my way out of working,” Axcell bought the Long Beach Molly Maid in 1990 and took on additional territory in Los Alamitos two years later. Axcell’s path to seven figures did have its bumps, however; she later divorced, and her husband got one of the franchises as part of a settlement.

She later bought him out, and today the franchises are worth nearly $800,000. Add to that the equity in her home and in the office building she purchased to combine the Long Beach and Los Alamitos operations, and she probably has a net worth of more than $1 million--although most of it is in illiquid assets.

“You have nice financial assets for someone who’s been in business for a relatively short period of time, but you can’t touch them,” said Lewis Wallensky, a certified financial planner and founder of Wallensky & Associates in Los Angeles. “You have to start from the bottom up to build some basics in your portfolio.”

Wallensky began by identifying what Axcell should focus on, according to Axcell’s goals and plans. Axcell would like to remarry and have children, and is prepared to adopt a child even if she doesn’t find a new husband.

That means Axcell must plan for a life she doesn’t have, a life whose details are a mystery to her.

Axcell works about 25 hours a week, but would like to stop going to her office regularly when she has children--or within 10 years if she doesn’t. Although she expects to rely on the business for income and retirement savings in the future, Wallensky wants Axcell to diversify by putting more money into financial assets.

Wallensky outlined a plan to fill in the holes in Axcell’s finances, regardless of whether she marries or has children.

The first component is life insurance, even though it appears that Axcell doesn’t need any--she has no dependents--yet.

“Usually people buy life insurance to protect their heirs against economic loss. In your case, you should obtain insurance to protect your insurability for the future.”

Wallensky pointed out that because of her age and good health, Axcell can get an inexpensive 20-year level-term policy--one whose premium won’t change for 20 years--for a nominal charge per year. That way, an unexpected health problem won’t hinder her buying life insurance later, when her family situation might require her to have some.

Life insurance is just one of three policies Axcell should have as a hedge against potential change.

Another key need is insurance to fund her plans for the business if she dies. Axcell’s will leaves her business to her controller, with a clause stating that Axcell’s sister is to benefit from the business’ earnings. This way, Axcell thinks the business will retain its value after her death, because her franchise is valuable only as long as it is in the hands of someone who knows how to run it.

Wallensky suggested making this arrangement as simple as possible by funding it with insurance in the amount of the value of the business. If Axcell dies, the insurance would go to her sister, and the controller would take over the business without Axcell’s sister having an interest in its management. Such insurance costs less than $500 per year.

Lastly, Wallensky said Axcell needs disability insurance, a suggestion she resisted. “It never made sense to me. If I were incapacitated for some length of time, there’s nothing I do at my office that someone else can’t do,” she said.

But Wallensky pointed out that some disabilities are serious and may prevent her from doing any work. “We’re not interested in the short term--if you break your leg skiing,” Wallensky said. “We’re interested in the long term and in keeping your options open.” Also, Wallensky noted that Axcell’s corporation can pay for the policy, which means it becomes a pre-tax expense. Axcell already has liability insurance for her business.

The next priority after insurance, Wallensky said, is creating liquid assets and retirement money.

Axcell now earns approximately $150,000 in salary from her business, but this year she may be able to pay herself much more. That gives her the opportunity to put a significant sum into tax-deferred retirement accounts. The only retirement money Axcell now has is $34,000 in a Simplified Employee Pension individual retirement account invested in a Schwab money market account.

A SEP IRA, like other retirement plan options for small businesses, requires Axcell to include direct employees of her business, but Axcell leases her staff from an employee staffing company, which provides separate benefits.

The SEP allows her to make larger contributions and is about as easy to set up as the most likely alternative, a Savings Incentive Match Plan for Employees IRA, or a SIMPLE IRA. A Keogh or formal pension plan would allow even larger contributions, but the SEP IRA is less complicated, less costly, less restrictive and, in Axcell’s case, is already set up.

Wallensky recommended that Axcell contribute the maximum of $24,000 to her SEP this year, preferably early in the year to allow the money to grow. This money, as well as future savings, should go into the stock market.

The first fund he suggested was Janus Worldwide, which invests in both U.S. and foreign stocks. Such investments should be aimed at long-term results, but the fund’s recent performance is promising--it has a five-year annual average return of 35.62%.

The rest of Axcell’s retirement money should be split between two no-load mutual funds that are a bit more volatile--a risk she can tolerate because of her youth and the long timeline the money will have to grow.

The first fund Wallensky suggested is Gabelli Growth fund, a large-cap blue-chip fund with a five-year annual average return of 35%. The second is the even-riskier Firsthand Technology Value fund, a tech-sector fund with a whopping 59.9% five-year average return.

After reallocating her retirement account, Axcell should transfer at least $1,500 per month into each mutual fund, no matter what the market does. This dollar-cost averaging means she buys more when the fund price is lower, which makes the funds’ volatility an advantage.

Wallensky’s plan aims to position Axcell for whatever her next life cycle may be--and in style.

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Stephanie Losee is a regular contributor to The Times. To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053 or to money@latimes.com. You can save a step and print or download the questionnaire at https://www.latimes.com/makeoverform.

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This Week’s Make-Over

* Investor: Kathy Axcell, 36, owner of two Molly Maid franchises

* Gross annual income: About $150,000, but varies based on her franchises’ income

* Goals: Diversify net worth with financial assets such as stocks and mutual funds

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Current Portfolio

* Cash: $46,000 in checking account

* Simplified Employee Pension plan: $34,000 in money market fund

* Stocks: $50,000 in individual stocks

* Franchises: $800,000 (approximate value)

* Equity in home: $200,000

* Equity in commercial building: $100,000

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Recommendations

* Buy life insurance to protect future insurability and to fund beneficiary agreement for business.

* Buy disability insurance.

* Invest current retirement plan funds and maximize future contributions to three mutual funds: Janus Worldwide, Gabelli Growth and Firsthand Technology Value.

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Meet the Planner

Lewis Wallensky is a certified financial planner and founder of Lewis Wallensky & Associates in Century City.