Goals-Based Wealth Management

An Integrated and Practical Approach to Changing the Structure of Wealth Advisory Practices

Jean L. P. Brunel

• Publisher: Wiley
• Year: 2015
• Print ISBN: 9781118995907
• eBook ISBN: 9781118995938
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Finanzwesen

Take a more active role in strategic asset allocation

Goals-Based Wealth Management is a manual for protecting and growing client wealth in a way that changes both the services and profitability of the firm. Written by a 35-year veteran of international wealth education and analysis, this informative guide explains a new approach to wealth management that allows individuals to take on a more active role in the allocation of their assets. Coverage includes a detailed examination of the goals-based approach, including what works and what needs to be revisited, and a clear, understandable model that allows advisors to help individuals to navigate complex processes. The companion website offers ancillary readings, practice management checklists, and assessments that help readers secure a deep understanding of the key ideas that make goals-based wealth management work.

The goals-based wealth management approach was pioneered in 2002, but has seen a slow evolution and only modest refinements largely due to a lack of wide-scale adoption. This book takes the first steps toward finalizing the approach, by delineating the effective and ineffective aspects of traditional approaches, and proposing changes that could bring better value to practitioners and their clients.

• Understand the challenges faced by the affluent and wealthy
• Examine strategic asset allocation and investment policy formulation
• Learn a model for dealing with the asset allocation process
• Learn why the structure of the typical advisory firm needs to change

High-net-worth individuals face very specific challenges. Goals-Based Wealth Management focuses on how those challenges can be overcome while adhering to their goals, incorporating constraints, and working within the individual's frame of reference to drive strategic allocation of their financial assets.

Part One

The Integrated Wealth Management Challenge

Part 1 of this book is dedicated to setting the stage pointing to the multiple challenges that wealth managers should expect to encounter and which are different from the institutional asset management norm. We look at the fact that managing wealth requires the applications of multiple disciplines and a solid evaluation of how they interact with one another; we illustrate one such interaction focusing on the issue of tax awareness and suggest that wealth management advisors should view being interpreters as a large part of their roles.

Chapter 1
Many Interrelated Disciplines

Crucial among these many challenges must be the notion that helping a family manage its wealth is much more than helping manage its financial assets. This misguided conception of the classical wealth management relationship is illustrated in Figure 1.1.

Figure 1.1 A Misguided Depiction of Family Wealth Management

This first chapter discusses the fundamental truth that family wealth management is broader than simple asset management and the difficulties this injects into the management process. Our point here is not to be comprehensive about these difficulties, as they alone could be the topic of another book. Rather, we mean first to take inventory and second to introduce a few of the alternative approaches which we have seen at work over the last twenty years or so. The serious student of these challenges should dig further.

Multiple Sources of Capital

At some elementary level, it is not hard to understand intuitively that there is more to any family than its bank or brokerage account. After all, if this is so obviously true for the average family, why would it be any different when the only change one makes from the average is to assume that the family is financially wealthy? No family can be simply reduced to its financial assets; if that were the case, why would it have occurred to anyone to create the phrase “from shirtsleeves to shirtsleeves in three generations?”¹ Money certainly is a part of what a wealthy family is, but it is only a part, and hopefully not the most important.²

Lisa Gray coined the phrase “authentic assets”³ to refer to the many different sources of wealth that exist within a family; her crucial point is to warn us that financial assets are only a part of the management challenge faced by the wealthy and their families. At a minimum, let's consider just a few: clearly, the wealthy do have financial assets. But human, intellectual, social, emotional, philanthropic, and artistic dimensions cannot be ignored; and there are others. Each has its own definition, which can be generally accepted or hotly debated and many have been studied in the halls of academe for quite a while. Whether a family is indeed financially wealthy or not, it is still a grouping of related individuals who exist within a broader social context. Maximizing their financial wealth is rarely enough for all members of the family to feel duly fulfilled. In many ways, certain families have even adopted a mental framework that is well worth considering: financial wealth is an enabler in that it facilitates family members to seek overall, complete fulfillment, while less wealthy individuals often cannot focus on much more than making financial ends meet.

Expanding on the Corporate Analogy

There is even more to the wealth management challenge than the fact that there are various sources or definitions of capital. Families must deal with a variety of issues that are common across the whole wealth spectrum, although financial wealth or social prominence tend to magnify them somewhat. They must pay taxes on their income and need to meet their ongoing expenses. They must pay transfer taxes when some of the wealth passes from one generation to the next or simply from one individual to another. They must comply with rules and regulations, whether in the management of financial assets or otherwise. They often have important philanthropic intensions that require planning and executing. Last, but not least, they must manage a wide range of risks for which insurance exists in certain cases and not in others, and which wealth can exacerbate, for instance with respect to reputation risk!

Figures 1.2 and 1.3 help put this notion in the proper perspective by drawing on the comparison once suggested by Charlotte Beyer, whom we already met in the Preface. The first step in our logic is to illustrate the broad management problem facing the chief executive officer (CEO) of any corporation. Figure 1.2 provides a graphical depiction of the issue. It is mighty hard to think of the successful CEO of a successful company who only focused on a single dimension of his or her job: the business world is littered with failed companies where the CEO only had time for research, engineering, finance, or marketing—to pick four areas at random. While not a totally inescapable proof, as there must be an exception to any rule, this helps set the simple proposition that a corporation is a complex assemblage of multiple functions and that the person at the top of the ladder must understand both how each of these functions operates individually and how they all work and come together to create the business of the whole firm for which he or she is responsible.

Figure 1.2 The Multiple Dimensions of Corporate Management

Figure 1.3 The Multiple Dimensions of Family Wealth Management

Now, let's apply the same analytical framework to a family, assuming that a family is no different than a corporation. Making this assumption requires us to leave aside a number of important considerations, but the case can simply be made that these are not crucial to our point here. Let's imagine the head of the family as the CEO of his or her family's wealth, a company Charlotte Beyer calls My Wealth, Inc. Just as was the case for a corporation, there are multiple dimensions and the successful high net worth individual must first realize the multiplicity of these dimensions, and, second, be able to deal with all of them. Figure 1.3 illustrates this point and recalls a number of the dimensions we mentioned in the introduction for this chapter.

Just as it would be silly for a corporate CEO to focus on a single aspect of the business, it is equally misguided for an individual to consider just one aspect of the wealth management challenge. And yet, the traditional approach would be exactly that. For years, the industry had us and many of our clients believe that their focus should be solely on managing their financial wealth, their financial assets. This may have made sense when financial wealth was primarily inherited and in the form of stand-alone trust structures; but it certainly no longer applies when these financial assets were created by the current senior or immediately preceding generation.

Multiple Interactions⁴

Now, if the challenge was simply to recognize that the problem is more complex and has more dimensions than initially thought, there would be little need to make dramatic change. Yet, just as is the case in a corporation, all these various “divisions” within the family structure do not exist in isolation. They have both their own issues that have to be addressed directly and a variety of tentacles that extend toward and into other dimensions. This is what makes it impractical for any service provider to the wealthy to argue that he or she can serve the family by simply focusing on a single aspect. I vividly remember the time when we first introduced the concept of tax-aware investment management to J.P. Morgan's clients: I could be my own wealthy client if I had a penny for each time I heard people tell me that “the tax tail should not wag the return dog.” Most individuals who were raised in a world where taxes did not matter simply could not understand that there was a need to change the traditional investment process if one was going to focus on maximizing after-tax returns or terminal after-tax wealth at some future point in time.

Similarly, I was recently involved in a panel focused on asset allocation issues; it was sobering to observe highly gifted and successful people who principally operated in the world of institutional investors seemingly become “frazzled” when individual investor-related “complexities” were brought into the picture. Years ago, this was understandable to the extent that the bulk of the financial assets to be managed were owned by defined benefit pension funds. Now, with individuals owning more than 50 percent of all financial assets and with several institutional markets sharing “individual complexities” (Australian pension funds are taxable, for instance), what could uncharitably be viewed as a myopic inability to look beyond the theoretical and into the practical is rather surprising… Yet, their hearts are definitely in the right place; it is just hard for them to accept that some cherished framework might need to be amended.

There are many other interactions beyond the simple integration of taxes into the investment process.⁵ Consider philanthropy, a very important activity for both wealthy and less wealthy families, particularly in the United States.⁶ Let's limit this discussion to the idea of giving away financial assets, be they money or securities, although the rarest and most precious asset that families often have is the time of their members. Clearly, giving away cash will achieve the purpose of benefiting the philanthropic activity chosen by the family and may well provide the donor with some tax benefit. How much more powerful, from the overall wealth management standpoint of the family, might some different form of giving be? Giving away appreciated securities might provide the same ultimate philanthropic impact at a lower real cost to the family, as it might avoid their having to pay taxes on the unrealized gain. Assuming that the family has both some cash available for giving and appreciated securities within an equity portfolio, for instance, a smarter strategy emerges: the family may give the appreciated stock, thus satisfying its charitable intent. It can also use the cash that it has available to top up the equity portfolio (some part of which has just been given away). This could provide an interesting additional benefit: it might lower the ratio of the market value of the portfolio to its tax basis (the stock that was given away had the most imbedded unrealized gains, while the new stocks purchased with the cash have no unrealized gain). This increases the flexibility of the manager to be tax-efficient in his or her handling of that portfolio. Although beyond the scope of this book, one might also mention other routes, such as charitable lead or charitable remainder trusts as a means to achieve either tax or transfer benefits.

So far, we have discussed interactions between investment management and income taxes, between philanthropic and tax planning, and between these last two and generational planning. We have also discussed interactions between philanthropy and investment management. The list does not stop here. Consider interactions be...

Table of contents

• Cover
• Title Page
• Copyright
• Table of Content
• Dedication
• Acknowledgments
• Preface
• Introduction
• Part One: The Integrated Wealth Management Challenge
• Part Two: Investment Policy Formulation: Goals-Based Allocation
• Part Three: Goals-Based Wealth Management Implementation
• Part Four: Managing an Advisory Practice
• Conclusion
• About the Companion Website
• About the Author
• Index
• End User License Agreement