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As Retirement Nears, Don't Forget About Succession Planning

Investors must consider bringing someone onboard who understands their plan and can step in, if needed, says Morningstar's Christine Benz.

Jeremy Glaser: For Morningstar I'm Jeremy Glaser. Our director of personal finance, Christine Benz, thinks that portfolio succession planning is often overlooked when thinking about risks for retirement. She is going to talk to us about it today.

Christine, thanks for joining me.

Christine Benz: Jeremy, great to be here.

Glaser: So people might spend lot of time thinking about estate planning, about who is going to get their assets, maybe less time about who is going to manage those--succession planning. Could you talk a little bit about why you think this is such an important risk?

Benz: As you said Jeremy, people do give thought to estate planning, they think about naming individuals who will have powers of attorney, privileges. They might think less about walking people through what sort of strategy they're using for their investment program, what sort of investment assets they have. So the idea behind succession planning is bringing someone onboard with your plan and the virtue of having that succession plan is, that there if for some reason, if you've been main financial decision-maker in your household and due to incapacitation or perhaps death, you are unable to provide those services, that someone else could step in and figure out what's going on with your program. I think that's a part of the retirement portfolio plan that a lot of people tend to overlook.

Glaser: If you're an investor, who is working with a financial advisor, is this already in place, could your financial advisor just step into this role?

Benz: Often times, the advisor can do just that and the process can be fairly seamless. But I sometimes talk to individual investors who have been primarily do-it-yourself type investors where they've been in charge of their own portfolios, but their plan is that if something happens to them and their spouse or significant other isn't particularly interested in financial matters that this advisor would step in at that point. My advice is, if that's your program, if that's your plan, pre-identify that financial advisor for your spouse or significant other. The reason is that it takes some knowledge to pick a worthy financial advisor. So if you've been that person in charge of the family finances, you probably are better situated to make good choices on that front.

Another key step in the process is, if you've pre-identified the financial advisor who will step in when you're not able to do so, make that step of introducing your spouse or significant other to the advisor. So that they can sort of form that bond, your spouse can decide whether he or she likes that advisor, whether they click together and think they'll work together well. So I think, it's good to do that vetting in advance, not rely on the spouse who perhaps has not been so involved in financial matters to make those important decisions.

Glaser: If you want to build this plan for yourself, you say there are four key steps. What's the first?

Benz: The first is simply taking a good look at your total financial plan and making sure that it's as streamlined as it can possibly be. I often talk to people who are well into retirement, and they've been avid investors throughout their careers, but they have plans that frankly are a little bit overwrought and a little bit complicated. So, the idea here is to look at your plan, especially if you are in retirement or later in retirement. Look at that plan and see if you can reduce the moving pieces in the plan. So, if you've been a dedicated individual stock investor, maybe it's time to start thinking about mutual funds, maybe it's time to even start thinking about taking some of those smaller accounts, moving them into all-in-one type investment funds, try to reduce the complexity of the strategy, try to reduce the complexity of the portfolio. I think that's really the key first step before you even get into crafting a succession plan.

Glaser: That's probably not a bad idea to do even if you're not worried about succession planning.

Benz: At any life stage. Right.

Glaser: So taking a look at second step, what should you do next?

Benz: This is documentation. So we have created on Morningstar.com, a master directory where people can document their key assets, you are committing to paper or to an Excel file whatever, specific document types you are using. You are specifying each of your assets where you hold them, perhaps account numbers, perhaps individuals you work with at each of the institutions, where you have financial assets parked. So you're simply laying out all of this information onto a document that you are keeping up to date and you're also keeping it safe, because if you've got account numbers or other identifying information on that document you want to make sure that you are putting it in a password-protected document or if it's a physical document that it's something that you're keeping in some sort of locked fireproof box or a safety deposit box.

Glaser: And then what's the next step?

Benz: The next step is to document your strategy for managing your assets on an ongoing basis. A few months back we went through a little bit of a program where we advised people to put their strategies on an index card, kind of a 3 by 5-inch card. The name of the game there, the goal there was to try to get people to winnow down their strategies and commit them to just a couple of bullet points. If in the process of documenting the strategy you're using for maintaining your portfolio on an ongoing basis, you need sheets and sheets of paper, many sentences, your strategy is probably too complicated, but you're simply distilling your investment strategy into just a handful of bullet points, so that if someone needed to take over your investment program for you, they would know how you've been operating.

Glaser: What's the final step?

Benz: The final step is identifying that individual who will serve as your portfolio successor, so that might be a trusted loved one, perhaps it's a financially savvy and trustworthy adult child. I think that's often kind of the classic example, the best case scenario really. Maybe it's a financial advisor who you have gone through the vetting process with. You simply need to let that person know that you've chosen them, make sure that they're comfortable with that arrangement and plan to keep them abreast of any changes in your investment program as they arise. Let them know where these documents live, where they can find them and stay in touch with them on an ongoing basis about your financial situation. That's the final step in the process.

Glaser: Christine, thanks for these tips in mitigating this risk.

Benz: Thank you, Jeremy.

Glaser: For Morningstar I am Jeremy Glaser. Thanks for watching.