Do-it-yourself investors must plan for investments after death

By Dan Hallett, CFA, CFP on October 31st, 2014

Many DIY investors act as ‘family money managers’.  Most that I’ve met are men married to spouses with little or no interest in investing.  These DIY investors often risk predeceasing their novice-investor partners.  So with many issues to deal with post-death, these DIY investors should consider how to plan the transition of portfolio management duties after they depart this life.

Many savvy DIY investors that I’ve met are scientists – boasting more technical knowledge than many investment advisors.  They are often well-thought-out, disciplined and wealthy – with most making extensive use of exchange-traded funds.  But most underestimate how challenging and intimidating it is for a novice investor to do ETF trades online – particularly when there are big dollars at stake.

Accordingly, I see three options for those wanting to ensure that their family portfolios continue to be well-managed after they’re gone.

The simple and efficient solution

A great option is a good, cheap balanced fund.  It is low-maintenance with automatic rebalancing – important at times when few investors actually buy stocks after they’ve been halved.  Another simple option is to set up (or leave instructions for the purchase of) a life annuity to provide for a base level of cash flow regardless of how the remaining funds are invested (which could in theory go all into a single global equity fund).

There are challenges to these strategies – such as when to transition the existing portfolio and how best to deal with the associated costs (e.g., trading, capital gains) – but both are simple and elegant solutions.  These options also require the DIY investors to relinquish control while they’re still alive and well.

Choose a family adviser or investment counsellor

This is a nice solution because transition issues can be addressed post-mortem by qualified professionals.  This is admittedly a bit self-serving since our firm is sought out to play this precise role for some wealthy families.  Choosing an adviser (and perhaps a back-up) with the involvement of the potential surviving spouse can give peace of mind.  And in the meantime the DIY investor can simply carry on with the chosen investment strategy.

Manage it from the grave

I see this as the least feasible option.  This can work if the existing portfolio is low-maintenance and generates enough sustainable cash flow to satisfy survivors’ needs.  But leaving any structure that requires real maintenance is likely to fail.  An elderly couple I helped years ago serves as an example of how this can go wrong.

The couple approached me in 2007 to help with their portfolio – which was invested in a bank wrap program with 200 stocks and dozens of bonds.  Performance was poor and fees were high.  (Back then I provided advice to investors who wanted to continue managing the account at their discount broker.)

I transitioned them to a simpler portfolio – keeping the bonds and replacing stocks with a few cheap funds and ETFs – while cutting fees from 2.5% to 0.8% per year, which contributed to improved performance.  They grew tired of the modest work required to maintain their simple portfolio as they aged.  Then they met a friendly full-service broker who offered to administer their account according to my recommendations.

But when I reviewed their portfolio a year later for an update I noticed that the cheap bond fund I’d recommended to round out their bond exposure was gone – replaced by a similar fund costing twice as much.  The couple said it was their broker’s recommendation and that he said his choice was “just as good”.

If this couple – with the household’s DIY investor alive and well – could fall for a thinly-veiled attempt to boost commissions then it’s an even greater danger for a grieving, novice-investor spouse.  These are not pleasant scenarios to think about but it’s incumbent on each household’s more investment-savvy spouse to include this as part of their broader estate planning.