Severance planning is a strange dynamic for advisors, and it’s generally a negative and frustrating process for clients. For advisors, it creates a lump sum planning opportunity during a time when revenue opportunities are limited. If you’re not maximizing your clients’ wealth, be warned.
Peter Merrick, a CFP and president of merrickwealth.com, is an expert in exit planning and he stresses that advisors who prospect severance planning opportunities are stepping on potential landmines if they look at the situation as a selling opportunity and don’t take their fiduciary obligations seriously.
He spends many of his days now in courtrooms, as an expert witness on valuing severance plans for lawyers of aggrieved former employees. As a fee-for-advice advisor, he’s established a track record of valuing severance plans and employee benefits objectively as they pertain to an individual client’s personal wealth situation. Often severance packages can end up in the hands of lawyers, since there can be significant discrepancies between how an employer values a severance package and how a client does.
For this reason alone, Merrick says clients who come to their advisor with a severance package should call a lawyer before any financial plan is established.
“The first thing you should do is sit down with a lawyer to see if clients are getting the best value for what they are being offered,” Merrick says. “You can provide stock answers such as how you can roll over your group insurance to your private policy. To me that’s all about selling product.”
Merrick points out that much of the value of a severance package will be based on establishing a fair severance proposal to begin with. For example, there is a huge disparity between the cost of health and disability benefits offered by employers versus what they will cost an individual. Merrick say on average, a client will have to pay about 40% more for disability and health benefits with after-tax dollars.
Similar disparities may exist with the valuations of defined benefit pension proceeds.
A labour lawyer can work to settle a plan that attempts to fix these types of costly discrepencies.
“If I was let go from the business and I’ve worked there for 24 years, they may offer me an extra $24,000 dollars of severance to go out there and replace group benefits. If I was going to go out there and replace the same benefits, it could be $50,000 using after-tax money,” he says.
Once a plan has been settled, and the advisor offers advice on how to deploy the money, Merrick strongly recommends documenting all the actions taken in the plan. With buy-out and severance packages — it’s often a core piece of a client’s future savings — if something goes wrong they will go after someone, quite possibly their advisor, Merrick warns.
“You have to [consider] clients may decide to go after you,” he says. “If they decide to take action with the plan, I get clients to sign off on it. I also get them to sign off on things where we chose not to take an action. This way if they were going to take you to court, it’s as their trusted advisor. [If something goes wrong] the courts are going to treat you as a fiduciary who should have known better.”