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Posted: October 29, 2013

Big cash, big questions

An action plan for liquidity events

Marti Brust

There are many occurrences in a professional’s life that can result in liquidity events. Whether it’s selling a business, earning a large commission or accepting an executive buyout, these are milestone events that provide individuals with a significant sum of money. With that influx of cash comes numerous investment questions and options—particularly when current employment is affected, but retirement is not the end goal.

Understanding and evaluating the different personal and professional areas that may be affected by a liquidity event is extremely important, as individuals will have many financial decisions to make once the event occurs. Career desires, economic activity, day-to-day finances and employer-provided benefits are a few items to consider.

Determine Next Career Step

In many cases, these types of liquidity events may signal an exit out of a current job or profession. If this is the case, individuals need to know what their personal short and long-term goals are for subsequent employment. Are they going to take some time off? Do they want to start a new business? Do they want to venture into an entirely new profession?  Understanding where they are currently and where they want to land 12 months or more from now will help provide a framework for strategic planning and decisions.

Evaluate Market Environment

The market has changed dramatically over the past few years, and these shifts are expected to carry on for the foreseeable future. The current interest rate environment continues to provide challenges that didn’t exist for investors five and 10 years ago. For example, fixed income assets such as long duration bonds were previously popular options for investors, whereas today many have more exposure in equity portfolios. Understanding current market conditions and how they will likely affect an individual’s investments is critical.

Establish a Cash Flow Plan

Once timeframes have been established and a market assessment has occurred, cash flow needs should be analyzed to determine if there is a gap or an income to expense deficit. If there is, asset allocation inside current portfolios becomes extremely important, as there will be a need to fill the deficit without eroding the portfolio’s principal. For example, if an individual is making an annual salary of $100,000, a goal might be to replace that money with the interest gained from the portfolio as opposed to taking direct withdrawals. Advisors can provide recommendations and options on how to achieve these goals, while continuing to position the portfolio for long-term needs as well.

Evaluate Ancillary Benefits

Next, individuals need to evaluate if other benefits were affected by the liquidity event. Items such as health care, life insurance, savings vehicles and so on are oftentimes tied to employment and either cease or need to transition when current job service ends. Advisors can help identify areas to review and provide recommendations on the best ways to proceed based on the strategic plan.

Liquidity events can provide individuals with a variety of exciting opportunities, but those come with challenges as well. However, taking the time to evaluate and plan how to proceed, both personally and professionally, is extremely important. A trusted advisor can work with individuals to navigate these different areas so they can help ensure desired outcomes are realized.

Marti Brust is a senior vice president and wealth advisor for UMB’s Investment and Wealth Management division in Denver. Marti may be contacted via email at marti.brust@umb.com.

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