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Investing Specialists

How to Create a Succession Plan for Your Portfolio

Even dedicated do-it-yourselfers should follow these key steps.

Note: This article is part of Morningstar's Retirement Matters Week special report. A version of this article appeared on Sept. 23, 2016.

In a presentation I often give to retired investors, I discuss the key ingredients for successful retirement portfolios. As I talk, I can see attendees mentally sizing up whether their own portfolio plans contain the components that I'm discussing. Stocks for longevity potential? Yes. Inflation protection to help preserve the portfolio's purchasing power? Check. A cash component for near-term living expenses? Got it.

But one ingredient invariably piques their attention more than the others, perhaps because many never give it much more than a nervous thought: a succession plan for their portfolios. Most of these investors have put together savvy investment programs, and many of them have crafted costly estate plans with the help of attorneys. But as do-it-yourself investors, they have no clear road map for what should happen to their portfolios if they become incapacitated or predecease their partners. Would the spouse have a precise inventory of all of the couple's assets? Would he be aware of the strategies in place to keep the whole thing up and running? Where to go for cash? How much he can safely spend each year? Or whom to turn to for financial advice? What about people who are single--who would run their money if they couldn't do so themselves?

Of course, one simple way to address these questions is to turn the whole thing over to a financial advisor straightaway. That's the best method to ensure there's no jarring transition when the first partner dies, and having a trusted advisor can provide a lot of peace of mind while both spouses are living, too. Ditto for single people. But I also often hear from individual investors who say they're not sure how to find a good-quality advisor, or that the fee-only advisors they'd like to work with have minimum investment amounts that put them out of reach. Even more common, I meet investors who are enjoying managing their own portfolios right now. They can't see themselves delegating that task to anyone else, or they don't want to spend money on advice until they really have to do so.

If any of the above descriptors fits you, your portfolio needs a succession plan--a road map for your partner. Here are the key steps to take.

Create a Master Directory
This is a basic document you should prepare no matter your life stage, serving as an inventory of each asset you own. Here you should include a brief descriptor ("Jill's Roth IRA"), the financial provider, account number, URL, password, and so forth. Also indicate the beneficiaries for each of these accounts. This document can serve as a template, but you can easily create your own spreadsheet along these lines, too. Once you've drafted such a document, you have two key jobs: to encrypt it (or otherwise keep it safe) and alert your spouse or another trusted loved one of its existence and how to gain access to it.

Draft a Short-Form Explanation of Your Investment Approach
Perhaps you've prepared an investment policy statement documenting your asset-allocation parameters and policies on matters such as rebalancing and selling. That's important. But chances are you wrote your IPS to keep yourself on track, not inform your spouse of what you're doing. If your spouse finds your IPS inscrutable, it's time to go back to the drawing board and draft something more succinct, in plain English rather than investment jargon. Think about the basic questions you would ask if you took over someone's financial plan without much (or any) advance preparation. Headings might include:

  • How much you can safely spend each year without running out of money
  • Which accounts to tap for living expenses on an ongoing basis
  • The basics of required minimum distributions and which accounts require them
  • Which accounts to tap as a last resort or that you have earmarked for heirs
  • An outline of the three or four most important financial-planning tasks you handle each quarter and each year (Forget anything that's in the category of "nice to do"; stick to the basics.)

Automate What You Can
To help ensure none of your usual financial-planning to-dos fall by the wayside, consider automating the most important ones. For example, you can make sure that distributions from your income-producing securities get spilled directly into your bank account, thereby providing cash for near-term living expenses. You can also automate your required minimum distributions from your IRAs and 401(k)s, and use the auto-payment feature on your online banking platform to ensure that you don't miss your most important bills, such as your health and auto insurance. If you pay quarterly estimated taxes, and most retirees do, you can use the Electronic Federal Tax Payment System to make those payments electronically.

Begin Building Your Team
If your partner has no interest in or aptitude for financial matters, it's unrealistic to expect he will know how to identify an appropriate financial advisor. The financial-advisory landscape is a jumble of designations, and business models and can be off-putting even to investment-savvy individuals. As a result, people without a lot of financial knowledge often choose advisors based on their interpersonal skills rather than making an objective assessment of the individual's financial acumen and whether the business model is a good fit. Even if your plan is to not hire an advisor right away, the onus is on you to vet some advisors for your spouse to ensure their investment approach is palatable, their fee structure is fair, and that you can meet the minimum initial investment amount. Start with some introspection; this checklist can help you figure out what type of financial advice you're seeking.  I'm a believer in asking for referrals from related professionals--such as your accountant or your estate-planning attorney--rather than relying on the friends and family network for recommendations. Once you've found a short list of financial advisors that could be a fit, don't be shy about asking plenty of questions about their areas of expertise, training, and how they charge; this article discusses some of the key questions to ask.

Do all of the above steps make your head hurt? If so, the best way to reduce your succession-planning workload--and the potential workload of your spouse--is to streamline your portfolio. You can reduce the number of moving parts by collapsing multiple accounts of a given type into a single account at one firm--for example, merge multiple joint taxable accounts into a single one and purge your portfolio of so-called onesies, which are small pools of assets held here and there. True, there's no single firm that's the absolute best at every investment type, but a handful of firms (such as Vanguard and  T. Rowe Price Group (TROW)) field solid options in all of the major asset classes. In addition to streamlining the number of accounts you hold, it's also wise to switch to lower-maintenance options, such as index funds, and away from higher-maintenance options, such individual stocks and bonds, as you get further into retirement. In so doing, you'll reduce your own portfolio-oversight obligations and simplify life for your spouse if he eventually inherits those duties.

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.