Goals-Based Wealth Management E-Book

Jean L. P. Brunel

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 501

Veröffentlichungsjahr: 2015

Beschreibung

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.

Leseprobe

Table of Contents

Title Page

Copyright

Dedication

Acknowledgments

Preface

Introduction

Part One: The Integrated Wealth Management Challenge

Chapter 1: Many Interrelated Disciplines

Multiple Sources of Capital

Expanding on the Corporate Analogy

Multiple Interactions

Educating Future Generations and Wealth Transfers

The Make or Buy Decision

The Creation of a Wisdom Council

Summary and Conclusions

Chapter 2: An Example of a Crucial Interaction: Tax-Efficiency

The Tax Bite and Its Impact on Compound Returns

A New Analysis of Capital Losses

An Expanded Definition of Active Management

Applicability to Both Asset and Security Decisions

Abandoning the Murky Middle: The Barbell Portfolio

The Potential Role and Limits of Derivative Strategies

Summary and Conclusions

Chapter 3: The Need for a Financial Interpreter: (Given the Complexity of the Investment Process)

What Makes Markets Work?

Asset Classes, Sub-Asset Classes, and Strategies

Developing Reasonable Expectations

Performance Analysis and Reporting

Summary and Conclusions

Part Two: Investment Policy Formulation: Goals-Based Allocation

Chapter 4: A Brief Journey through Institutional Theory

Five Important Features of the Typical Institutional Investment Organization

A Quick Detour via Asset Liability Management

Summary and Conclusions

Chapter 5: Mapping Institutional and Individual Issues

The First Crucial Difference

A Second Important Difference

A Different Way of Defining Risk

The Law of Large Numbers

Implications

Summary and Conclusions

Chapter 6: Goals-Based Strategic Asset Allocation

The Basic Principle

Initial Theoretical Objections

An Academic Imprimatur

A Few Simple Principles

It Changes Everything

An Interesting Implication

Summary and Conclusions

Part Three: Goals-Based Wealth Management Implementation

Chapter 7: Dealing with the Implications of the Process

Covering a Set Number of Bases

Mapping Asset Classes and Strategies to Goals

Understanding Limitations

Dealing with Client Objections

A Three-Phase Process

Summary and Conclusions

Chapter 8: Creating Goals Modules

Developing General Capital Market Expectations

Describing Sufficiently Generic and Specific Goals

Creating Constraints Appropriate to Each Goal

Optimizing the Composition of Each Module

A Possible Example

Summary and Conclusions

Chapter 9: Working to Understand Client Goals and Goal Allocations

Identifying Crucial Initial Client Constraints

Determining Whether Any Constraint Is a Show-Stopper

Time Horizon and Required Probability of Success

Settling on the Appropriate Module

Sizing Assets Needed to Meet Each Goal

A Possible Example

Summary and Conclusions

Chapter 10: Finalizing a Goals-Based Policy Allocation

Two Possible Approaches

Working from Assets and Modules to a Whole

Description of Deviation Ranges

Our Original Example, Modified and Completed

Summary and Conclusions

Chapter 11: Managing the Portfolio Tactically

The Complexity in the Absence of a Systematic Tool

Introducing the Concept of a Tilt Model

Five Possible Variations on the Same Theme

A Major Pitfall

A Possible Example

Summary and Conclusions

Chapter 12: Portfolio Reporting

The Current Challenge

A Simple Analogy

Adding Taxes Makes Things Even More Complex

Summary and Conclusions

Part Four: Managing an Advisory Practice

Chapter 13: The Currently Typical Firm Structure

Many Chiefs and Few Indians

The Root of the Challenge

Contrary Examples in the Legal and Medical Fields

A Simple Illustration

Summary and Conclusions

Chapter 14: Teams Versus Individuals

Too Many Disciplines for Anyone to Master All of Them Fully

Specialists, When Left Alone, Lead to Silos

The Crucial Role of the Team Coach

Only One Individual Can Play That Role

Summary and Conclusions

Chapter 15: An Alternative Structure

The Primordial Role of the Advisor

The Missions the Advisor Should Not Accept

The Difference Between Must and Does Not Need to Be Tailored

Imagining a Different Firm and Process Architecture

The Kind of Leverage That Can Be Built

Dealing with Objections

A Difficult Decision

Summary and Conclusions

Conclusion

About the Companion Website

About the Author

Index

End User License Agreement

Pages

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

35

36

37

38

39

40

41

42

43

44

45

49

50

51

52

53

54

55

56

57

58

60

65

59

61

62

63

64

66

67

68

69

70

71

72

73

74

75

76

77

78

81

82

83

84

85

86

87

88

89

90

91

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

107

108

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

129

130

131

132

133

134

135

136

138

137

139

140

141

143

142

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

165

164

166

167

168

169

170

171

173

175

174

176

177

178

179

180

181

182

187

188

189

190

191

192

193

194

195

197

198

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

237

238

239

240

241

242

243

244

245

246

247

248

249

Guide

Cover

Table of Contents

preface

Introduction

The Integrated Wealth Management Challenge

Begin Reading

List of Illustrations

Figure 1.1

Figure 1.2

Figure 1.3

Figure 2.1

Figure 2.2

Figure 2.3

Figure 2.4

Figure 3.1

Figure 4.1

Figure 4.2

Figure 4.3

Figure 5.1

Figure 5.2

Figure 5.3

Figure 6.1

Figure 9.1

Figure 11.1

Figure 15.1

Figure 15.2

Figure 15.3

Figure 15.4

List of Tables

Table 8.1

Table 8.2

Table 8.3

Table 9.1

Table 9.2

Table 10.1

Table 10.2

Table 10.3

Table 10.4

Table 10.5

Table 10.6

Table 10.7

Table 10.8

Table 10.9

Table 11.1

Table 11.2

Table 11.3

Table 11.4

Table 11.5

Table 12.1

Table 12.2

Founded in 1807, John Wiley & Sons is the oldest independent publishing c mpany in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more.

For a list of available titles, visit our website at www.WileyFinance.com.

Goals-Based Wealth Management

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

JEAN L.P. BRUNEL, C.F.A.

Cover image: © iStock.com/George Pchemyan

Cover design: Wiley

Copyright © 2015 by Jean Brunel. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Neither this book nor the worksheets available on the publisher’s website are, or are intended to be, financial, trading, investment, or tax advice. Particular financial, trading, investment, or tax strategies should be evaluated relative to each person’s objectives and risk tolerance. Any graphs and charts are for illustrative purposes only and do not reflect future values or the future performance of any investment.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Brunel, Jean L.P.

Goals-based wealth management : an integrated and practical approach to changing the structure of wealth advisory practices / Jean L.P. Brunel.

pages cm. – (Wiley finance series)

Includes index.

ISBN 978-1-118-99590-7 (cloth/website) 1. Portfolio management.

2.Wealth–Management. 3. Investment advisors. I. Title.

HG4529.5.B777 2015

332.6–dc23

2014040792

To Léandre Eloise, Charlie, and Mason, and hopefully a few more still to be born!

Acknowledgments

I would first like to express my deepest gratitude to our clients, current and past. In the end, it is their kind pressure on me to help them find solutions to perfectly reasonable needs that has driven me to push the limits of whatever the envelope was. Without client pressures, I doubt that I would have done much with respect to goals-based wealth management. Admittedly, it was not clients—who would then have been clients of my employer—who pushed me to think of the need for wealth managers to think of tax-efficiency. There, I was compelled to move by academic literature and the obvious questions it raised. But the observation that traditional strategic asset allocation had serious limitations was directly suggested to me by clients who could not make sense of what their advisors were recommending. So, thank you, dear clients; you have indeed made me much better, and your pressure eventually led to the text within this book. What's next?

It also behooves me to thank you, our readers. Purchasing and reading this book is proof that the topic is important in your eyes, and that is already a great result. More importantly to me, I sincerely hope that you will allow me to achieve a crucial goal: making a difference and getting our clients—and yours if you are advisors—better served by an industry that is there to help them manage their wealth. Do not think that you have to copy the model I use to make my point. But please learn the principles behind it and then feel free to develop solutions that respect these principles and work even better in your own circumstances, whether you are a wealthy individual or family, or a professional wealth advisor.

I should also extend my thanks to the many authors who submitted articles to the Journal of Wealth Management and express my gratitude to Institutional Investor Journals. Authors, you have provided me with a unique opportunity to sit at the crossroads of many intellectual flows, and it has been a privilege. These many thoughts—quite a few of them ended up published as wonderful articles—inspired me to keep trying to innovate. Institutional Investor Journals also played a crucial role in the development of our industry by providing a forum where these thoughts could be shared: the Journal of Wealth Management. I want, therefore, to thank Gauri Goyal, who asked me to be the founding editor, and Allison Adams, who succeeded her, and with whom I have worked for the last ten years at least. The many members of our Advisory Board also deserve special thanks, as they have helped me discern those ideas that were worth exploring from those that were not. I should add the CFA Institute to those I thank in this section, particularly people like Stephen Horan, Charles Henneman, and too many others to name them all, but they know who they are, for their willingness to invite me to speak at too many CFA Society meetings for me to remember. Interactions with the attendance at these sessions also kept me driven to get better. Annie Wee, Cynthia Teong Boey Choo, and Joyce Lee, of the Wealth Management Institute in Singapore, also deserve special mention as they supported me in my endeavors to develop and share these thoughts, with a huge degree of faithfulness. Last but not least, Jos van Bommel and the Luxembourg School of Finance should also be noted, as they invited me to teach a class at the capstone event of the Executive Program in Wealth Management and thus fostered further research that resulted in quite a few of the insights that make up this book.

A number of people were kind enough to agree to review the manuscript and to offer comments. They were chosen among friends who neatly fell in two categories: several of them believed in the concept of goals-based wealth management, but others were openly skeptical. They all, however, provided very insightful and useful comments without which the text would be less interesting, quite a bit poorer, and much harder to read and follow. So thank you, in alphabetical order, to Thierry Brunel, Mark Cirilli, Vera Cvijetic-Petrovic Boissier, Kevin Irwin, Jean Karoubi, Mel Lagomasino, Jack Parham, Todd Pines, Kevin Prinsen, Vincent Worms, and Michael Zeuner.

I should obviously thank Wiley for their willingness to support and publish this text. Laura Gachko, senior editor, Digital Business Development, Professional Development, stands as the first person I should thank, as she was the one who negotiated the contract that led to this book. Judy Howarth, senior development editor, helped me manage the writing schedule, gave crucial feedback along the way, and captained the team as the book went from manuscript to published book. Finally, Tula Batanchiev, associate editor, Professional Development, was always there to make sure that everything ran smoothly, from designing and selecting a cover to setting up the website. I could not imagine working with a more professional and helpful team.

Last but not least, I must thank my wife of forty years and business partner of almost fifteen, Debbie. She went through numerous iterations of the manuscript with an eagle eye for typographical or grammatical errors, but, more importantly, for flow and even contents as well. She tolerated my “mental absence” while we were entertaining friends in our home in the south of France last summer, as I would only appear at meal time and spend the rest of the day holed up in my office working at the keyboard. Without her patience and understanding, I surely would not have met the deadline we had agreed to meet with Wiley & Sons.

Preface

I have spent the last thirty-eight years in the world of investment management and the last twenty-three dealing with the people we all call “the affluent.” Although I do not want to cast aspersions on anyone, I feel that we—as an industry—have not done the best job serving them, in part because we have not sufficiently adapted our processes to their specific needs and in part because the affluent have not always taken the time to discern what they really needed. My point in this Preface is to take our readers through the evolution of our industry and its market over the last forty odd years, to describe the way our industry is currently structured and operating, and to identify the mission I feel it needs to fulfill. I also want to discuss the three areas of focus that should help me achieve my goal of contributing to the further growth of the industry: (1) recognize the need for humility, (2) promote a sharper focus on the definition of the goals of our clients, and (3) discuss the potential for a restructuration of the typical advisory firm so that it can better serve its target market. But, first, we must define what we mean by “the affluent.”

There are about as many definitions of that group of people as there are people trying to serve them. They can be described by the financial assets they possess, but this can be misleading, as assets can be income-producing or not; they can be owned or in some form of generational wealth transfer structure; they can be liquid or illiquid; they can even cost more to maintain than they produce in terms of income! Think of the aristocratic European families, for instance, who conduct guided tours of what is left of their castles or estates because that is the only income they have to live on and maintain these massive structures!

I define the affluent as a group of people who have liquid assets of at least $5 million and who could maintain their lifestyles drawing income and principal from these assets, even if they do not earn material outside revenue. Thus, a family with $5 million, where both husband and wife are in their early sixties and semi-retired and spend $250,000 a year would qualify. By contrast, a single individual—a young man, for instance—with $10 million who spends the same $250,000 a year and is in his thirties would not be affluent, by my definition. Our semi-retired couple does not have to change their lifestyle to enjoy a high likelihood of not running out of money in the next twenty-five or thirty years, which corresponds to their current life expectancy, if they have taken the precaution to buy appropriate catastrophic insurance.1 By contrast, the young man in his thirties has a sixty-odd-year life expectancy; unless he is an excellent investor, he could well run out of money spending about 2.5 percent of his assets each year, particularly if inflation was to play dirty tricks on him. He could run out of money in two different ways. First, he could run out of money by taking too much risk that does not pan out into higher returns if he simultaneously tries to grow the assets while being unwilling to cut his spending. Conversely, he might run out of money by being too conservative in his investments, which would then not earn enough of a return to carry him through the balance of his life, let alone the possibility that his spending might change as and when he decides to marry, start a family, and raise children! In short, you have to look at assets, running spending rates, and required horizons before labeling someone—a family or an individual—affluent in my definition.

Over the last twenty plus years, I have had the luxury to follow the evolution of this industry with a serious dose of fascination coupled with cynicism. When I first started to work with the affluent, as the chief investment officer of J.P. Morgan's (JPM) Global Private Bank, the vast bulk of the industry's assets, at least in the United States, were comprised of inherited money. JPM at the time had to be one of the largest players in the industry globally, and probably the largest in the United States; we used to figure that 80 percent of the financial assets entrusted to us were either in trust or inherited. Our clients trusted their portfolio managers and trust officers, and these people truly tried to do what was best for their clients, rather than for themselves or their employer. In fact, I vividly remember our “big boss” reminding us at every opportunity that “clients pay your salaries, not the bank!”2 Fiduciary responsibility—putting client interests ahead of our own, duty of care and loyalty, avoiding conflicts of interest, and managing costs and expenses for the benefit of the client—was our sole guiding light. In truth, the processes we used were, with the benefit of hindsight, somewhat simplistic, but some of that was driven by the law. Would you believe that we were told then that hedging currency risk in foreign equities, for instance—which required us to buy foreign exchange contracts—was a speculative activity?

Back in the late 1960s, the industry experienced a first important change, which affected both private and institutional wealth management, although it is fair to suspect that private clients might not have totally accepted or even understood it. The advent of modern portfolio theory that resulted from the work of Nobel Economics Prize laureates Harry Markowitz and Bill Sharpe led us and many others to begin to view the investment “space” as a two-dimensional affair that comprised both return and risk. Hitherto, the principal focus had been on return.

Then two other changes impacted directly the private wealth management industry. First, the make-up of the clientele began to change. With the substantial equity market rally that followed the success experienced by Fed Chairman Paul Volker fighting inflation and with investment bankers much more diligent looking for mergers and acquisitions or initial public offerings, self-made money was becoming a much more important source of clientele for investment managers. These clients were different from inheritors in several ways. The two main differences were that they were less educated in the behavior of financial markets—their experiences were with creating and running businesses—and much more demanding of their financial advisors—they had achieved their status of financial wealth through and with the help of advisors and were not afraid of being tough with them. They quickly found trust officers too sleepy—little did they know that those officers were by and large simply doing their jobs and following the rules that were laid down for them. In addition, having dealt with investment bankers and brokers when selling their businesses, they were more inclined to hire them rather than those bank trust departments when it came to choosing a wealth advisor!

The second change was the growing recognition, which JPM pioneered in the United States, that individuals were very different from institutions in that they had to pay taxes. The phrase was coined: “It's not what you get, but what you get to keep that counts!” This moved us from our two-dimensional space to one that had a third dimension, tax-efficiency. It would prove to be an important source of innovation starting in the second half of the 1990s. Although that focus has not been universally accepted, in part because absolute levels of returns in the 2000s were often low enough to allow tax-efficiency to appear unneeded, it is one of the two innovations I fully expect will define our industry in the years ahead.

This was but the first step in a process of deepening our understanding of the needs of the wealthy, which has now expanded into many directions. We now recognize that wealth management is about much more than managing assets: the mission of the wealth management industry has thus been more broadly defined. We indeed “discovered” that capital can be financial, but also includes human, social, artistic, philanthropic, and emotional dimensions. We “discovered” that individuals do not typically have single goals and single risk profiles: they have multiple goals, each goal usually has a different time horizon, and they have different required probabilities—or levels of certainty—that each goal will be reached. We “discovered” that there are important—and quite complex—interactions between the various dimensions of the wealth management challenge. We explicitly set out tax-efficiency as a crucial interaction between investment and tax planning; but there are similar interactions between investment and financial planning: Who should own what and how liquid do I need my investments to be? Similarly, philanthropy interacts with investment, estate, and tax planning. Estate planning is another obvious dimension that cannot be taken up outside of a serious discussion with investment managers and other advisors.

Charlotte Beyer, who founded the Institute for Private Investors, used to compare each affluent individual or family to a company, which she called “My Wealth, Inc.” Taking her point a bit further, you can observe that there has hardly ever been a successful chief executive officer of a successful large company who was not aware first that the company comprised many divisions—each focused on some different aspect of the business, such as research, engineering, production, marketing, client service, legal and regulatory, human resources, and the like—and second that these divisions had to be efficiently coordinated so that the whole was more than the sum of the parts. The same construct can be imagined for a wealthy family, even if wealth is modest, in that individuals need to be aware of the several issues on which the family, the head of which could be called the “CEO of My Wealth Inc.,” should focus.

Today, the industry neatly divides into three general categories of providers. First, you have the manufacturers; their function is to create the products and services the affluent and their advisors need to use. Second, you have advisors who have elected to focus on only one or two of the many dimensions of the problem faced by their clients; they may be tax lawyers, estate lawyers, certified public accountants, investment advisors, philanthropic consultants or managers, family education or governance specialists, and many others. Finally, you have a wide variety of advisors and consultants who try to take a holistic view of the overall problem, effectively seeking to make money sitting next to the client, on the same side of the table as the family. That they are not all equally successful should not surprise; what may, however, be surprising is that quite a few of them naturally believe that they are exactly what the doctor ordered, when in fact the problem is quite a bit more complex than their current understanding of it.

In this book, my desire is to contribute to the further growth of the industry in at least three areas. First, I continue to think that the affluent need to know more about the questions they should ask and the issues they ought to feel are important. The initial insight must be a recognition that our industry—with respect to both advisors and clients—suffers from an imperfect ability to predict and thus deal with the future. We will go into this in more depth in the book, but I am still flabbergasted by the fact that so many people do not appreciate that God created weather forecasters to make investment managers look good! The late Sir John Templeton, an icon in the industry who died well into his nineties, once said that he had never seen an investment manager who is right more often than 65 percent of the time. Now, think what this means: the best managers are wrong at least 35 percent of the time! Most investment managers do not (or should not) have more than a modest confidence in their expectations: diversification matters, hubris should be out! Yet, how many individuals are still mesmerized by pronouncements of talking heads and expect their advisors to know when to be 100 percent in cash and 100 percent in equities? A corollary of this is that individuals should know that what is hard for trained advisors to do must, almost by definition, also be very hard if not harder for them. In short, a healthy dose of humility should permeate the thinking and dealings of industry participants and of their clients.

Second, I continue to think that a lot more progress is needed in the discernment of individual goals and in the formulation of the appropriate investment policy. Sure, this may not be an exercise that individuals enjoy—advisors do not often enjoy it any more than their clients. Yet, as Yogi Berra is quoted as saying: “If you don't know where you're going, you might not get there!” If you do not have a target asset or strategy allocation that is designed to meet your goals over time, what are the odds you will, in fact, meet them? Thus, individuals must recognize the importance of serious introspection to formulate their goals with some degree of granularity; correspondingly, advisors need to feel responsible for helping individuals in that endeavor that is not natural to many of them. In short, I feel it is important to recognize that the current tendency is fraught with danger: one misses the point when considering some form of “average” goal, rather than a list of actual goals, and constructing an “average risk profile” from the top down, rather than a bottom-up formulation of risk based on the risk associated with each goal and each time horizon. It exposes the industry to the real risk of not satisfying its clients. A corollary is that clients, too, must require their advisors to recognize that they, the affluent, are different; that they are no single-purpose institution; and that they need a tailored approach. It would really be too bad if individuals and families were to keep missing their goals and failing to “connect” with their wealth, simply because their advisors prefer to remain in the comfortable preserve of institutional asset management rather than adopt a framework explicitly designed around the specific nature of individual wealth management needs.

Third, I feel that the industry needs to consider restructuring. This may be the most controversial part of this book. Consider the difference you observe when comparing a lawyer's office, a medical practice, and the office of an investment advisor. The former two appear quite leveraged, with very few people at the top of the pyramid and a number of associates helping with the tasks that can be delegated. The latter typically comprises a number of senior people, the advisors, and very few other people. Not surprisingly, advisory practices tend to suffer from very low margins. As such, this gives rise to the obvious temptation to add to revenues by receiving various forms of supplementary fees, for instance. Steve Lockshin, in his book Get Wise to Your Advisor,3 offered the thought that these could easily be called kickbacks! Now, how can an advisor claim to be fully objective and solely dedicated to the client—each client—if he or she is receiving some compensation from people he will recommend to be hired? How willing will they be to recommend that someone who has paid them in some way be fired? Others try to raise profitability by degrading the client experience or by starting to accept certain forms of conflicts of interest; both should be viewed as highly unsatisfactory, as profitability is increased at the expense of the client, rather than by active internal management efforts. Consider an alternative that is equally potent and much more intellectually satisfying: How about an approach to raising margins that would rely on creating more internal operational efficiencies within the firm?

In conclusion, let me make two quick points and offer a disclaimer. This is an industry in transformation. In fact, you could even argue that this has been an industry being created before our eyes; in that frame of reference, creation continues. Thus, I certainly do not want to impugn the motives of certain actors and set them up as contrary examples vis-à-vis others who would be viewed as the pious alternatives. Second, industries that suffer from relatively poor profitability will naturally find it harder to change: change costs money and they have little excess money to spare to finance change and to live through the initially adverse consequences that might result. In short, I offer opinions and thoughts here that I have had a chance to test in the field. Yet, because of the very limited nature of the list of clients that we have served over the last fifteen years or so, and because of my strong belief that Templeton's comment extends way beyond investment management, I want to offer these thoughts with a great deal of humility. I am convinced that they are taking us in the “right” direction, but if I am wrong, I must honestly admit that it will not be the first time I was wrong!

I wanted to write this book because I feel that a lot more is needed to help individuals manage their wealth. I think that a crucial first step is to help individuals understand the relationship between their wealth and what it does for them, and this may well be the most important failing I noticed in our industry over the last twenty-five years or so. The next step relates to creating a process that allows that relationship to prosper and develop, with all the necessary feedback loops so that individuals can avoid the pitfalls that await them at each turn in the road. Finally, I strongly believe that this will likely lead to changes in the way the industry structures itself so that clients can be effectively served while other stakeholders can earn the rewards they deserve.

I therefore invite you, each reader, to make up your own mind. A lot of considerably more academic literature has been written on a number of these issues. Not all of it is unilaterally in agreement with my views. It takes more than one to make a market. Thus, read the book, ponder the insights, consider how they apply to your own circumstances, and then decide whether and, if so, how much of them make sense and should be integrated into whatever part of the integrated wealth management process most directly concerns you.

Jean L.P. Brunel, CFANovember 2014

1

 This is needed because some catastrophic event, such as a major health crisis, can quickly and irreversibly eat up their savings and make it impossible for them to sustain their lifestyle to the end of their lives.

2

 Note that he was only echoing the famous quote by Henry Ford: “It's not the employer who pays the wages. Employers only handle the money. It's the customer who pays the wages.”

3

 Lockshin, Stephen D.

Get Wise to Your Advisor: How to Reach Your Investment Goals without Getting Ripped Off

. Hoboken, NJ: John Wiley & Sons, 2014.

Introduction

The first book I wrote on the topic of Integrated Wealth Management was published in 2002, with a revised edition in 2006.1 In truth, it was a textbook whose audience turned out to be chiefly comprised of students of the industry. One day, I actually told a friend who had asked me to sign a copy he had just bought that the best use I could think of for the book was as a means of propping up a table that had one leg shorter than the other three. Another joke I probably overused was that it should be prescribed to people who had trouble sleeping!

Clearly, I only half meant those jokes, as it had taken me quite a bit more than a year to write the book and I had poured everything I knew—or knew of—into the effort. I was quite pleased (and proud) of the end product. I saw it at the time as a bit of a reference book to which one could go to see not only what one person (me) thought about a particular issue, but, probably more importantly, what the current leading thinkers in the industry thought. I received some praise for it, and it was mentioned as a reason behind an award I received from the CFA Institute in 2011, which is quite close to my heart. Therefore, I still look back on the effort as both useful and quite worthwhile. With the second edition nearly nine years old, I could simply have endeavored to bring the text up-to-date, called it a third edition, and left it at that.

Yet, I decided to take a completely different route. I decided that the experience—quite a bit of it practical—gained over the last fifteen years or so required me to take a different tack. In truth, the theory behind our industry and its day-to-day activities has evolved somewhat, but the change has not been radical. Even something as “big” as goals-based wealth management, which was pioneered in 2002, has really not caused massive change in the last few years; we have seen slow evolution, at best. Goals-based policy formulation itself has only seen modest refinements, arguably in large measure because it has yet to be broadly adopted. We first need to see what really causes practical implementation challenges and what works well as is before we can finalize the full specification of the approach. In short, you could argue that the baby has been born, but that it still needs to go through many of its normal growth phases.

This book is, therefore, about sharing that experience, with the main focus being on what I see as the cornerstone: goals-based wealth management. The vast majority of people who know something about managing assets or wealth agree with the simple statement that the key to long-term success resides in having the right strategy. This truth has often been phrased in ways that obscure rather than clarify the point: “Asset allocation is the main contributor to long-term returns.” In fact, the statement is only partially true and, more importantly, is missing a key word. The correct formulation2 is that one's “asset allocation is the main contributor to long-term risk.” In fact, I take this one step further; I add the word “strategic” so that the phrase becomes: “Strategic asset allocation is the main contributor to long-term risk.” This allows one to distinguish between the long-term investment policy and tactical portfolio rebalancing or tilting. The former is what drives the long-term performance expectations for the portfolio in terms of both return and risk. The latter involves the activities associated with shorter-term portfolio moves either to bring a portfolio that has drifted away from policy—as a result of market performance—back to it or to take advantage of occasional, perceived market opportunities. These rarely generate more than a minute portion of total return and, if properly managed and executed, return volatility; in fact, rebalancing or tactical tilting often fails to generate extra returns when it is executed in a tax-oblivious manner and taxes are taken into consideration. So, in short, the fundamental element of our thinking should be that strategic asset allocation drives long-term expected risk and, thus, returns.

Experience has taught me that goals-based wealth management is the best way to deal with the formulation of that strategic asset allocation, at least when it comes to individuals with more financial than human capital. Clearly, the experience I want to share does not exist in a vacuum. I will have to recall certain facets of theory from time to time; if only to stay grounded. Yet, I will refrain from detailed exposition of theory and will rather strive to keep linking it to what it means to the affluent and their advisors alike, in a very practical way. In fact, the conceptual framework used in each of the four parts of the book will involve setting out the issue with a sufficient recall of theory to provide the base on which and the principles with which we can build. I will then translate this base and these principles into day-to-day language, illustrating one of the most important lessons I have learned in the last fifteen years: clients do not ask advisors how to make a watch; they ask them what time it is! To wit, they ask us to translate for them the stuff we learn in our jargon, which I have come to dub “financialese.” Being a client certainly does not absolve any affluent individual from his or her share of responsibility in the joint enterprise in which we cooperate: the management of their wealth. However, these responsibilities do not extend to the need to learn a foreign language. Clients should feel able to rely on advisors to translate their needs into the realities of capital markets and to explain to them what is possible and what is not, how one can proceed and what to expect.

The goal here is to focus on the most important issue affecting the affluent: how their various goals, constraints, and preferences should drive the strategic—or policy—allocation of their financial assets and how the process has to take into account the very natural fact that we are all subject to a variety of emotions. Will these always help us? The effort must, therefore, reflect all of the client's personal circumstances to allow the advisor to feel safe that he or she does understand what he or she needs to do before actually doing anything. It should also allows the client to feel equally safe so that he or she can accept that there are emotional elements at play and that he or she has to learn how to deal with and control them. Last century, at J.P. Morgan, one of our standard lines was that we would not touch a penny of our clients' assets until we knew exactly what the client needed. This was not a principle limited to the Trust and Investment Division; the classic JPM advertisement, which displayed a blank mirror and stated that “Some time, the best thing to do is to do nothing,” illustrates that it applied to the institution as a whole. The main message there and in what we told clients is that we would not start work and charge a fee if we did not think that the client's goals were feasible. And before we could tell whether these goals were feasible, we had to understand them. In the Preface, I mentioned the case of a young man with $10 million in assets who spent $250,000 a year. I stated that I would not consider him affluent because he could not maintain that level of spending unless he quickly got a job to add wages to investment income. I am sure that more than one family patriarch or matriarch will immediately think of this or that descendant who needs to adjust their lifestyle to be sure that some of the capital that the individual inherited is left for his or her own descendants; similarly, I am sure that a few of our readers within the wealth management industry will recognize real-life circumstances when they had clients who were trying to achieve the impossible. Just as no medical doctor would try to “sell” some expensive treatment or surgery to a terminal patient he or she knows will not benefit from it, advisors owe it to their clients to be honest. That one will almost inevitably lose prospects over that honesty is unfortunate; but one must believe that what goes around comes around: there is not a much better reputation than that of being honest!

I also said that we would discuss four issues. Ostensibly, one could write a tome that covered many more than these. It could be so long that few people would be prepared to labor through it. Alternatively, it could stay at such a level of generality as to be of limited use to practitioners and their clients, both of whom constitute our intended audience. I hope that students and members of academia will find a few snippets or insights in this book. Most often, I believe that it might stimulate further research, rather than provide the proverbial light bulb. Yet, I am ready to accept that many of them will find the lack of academic references—such as the massive bibliography found in the earlier book—and the much plainer language to be a bit disappointing. I sincerely apologize to them; the earlier book addressed the problem and many of its challenges from their perspective. We now must focus on the places where the proverbial rubber meets the road: the affluent and their advisors.

The first part of this book returns to the complexities of the many challenges experienced by the affluent and the wealthy. I feel that this is an absolutely crucial piece of the puzzle, as it is needed to remind all of us—practitioners and clients alike—that managing wealth involves more than managing financial assets. Being able to put the asset management piece—what the book eventually addresses—into the proper perspective is essential. In fact, were we not required to deal with this issue, we could simply take institutional asset management processes and tweak them for taxes. I suspect that this first part will be more interesting for service providers than for the affluent themselves. Indeed, many of the latter do know the multiple dimensions of their problem and understand them very well. They may at times—we have seen many instances of this in the last fifteen years—be frustrated that they cannot have these needs served effectively, but it is usually not for a lack of awareness. They are often frustrated because of their advisors. First, the industry—and its many participants—still suffers from a silo mentality. While there are many exceptionally knowledgeable and well-intentioned providers, they often reside in sub-segments of the industry. There are fabulous estate lawyers; but how many of them truly understand the investment business sufficiently? There are many great investors; but how many of them understand the implications of their actions on tax and estate issues, and vice versa? There are many financial or philanthropy planners; but how many of them understand the crucial interactions between what they do and what other service providers do? Second, almost perversely, it often appears that the better advisors are at their specialty, the less concerned or aware they are about the way they should cooperate with other advisors in different disciplines to ensure that their clients receive the best overall advice. Often, the market seems to reward the brilliant specialist more generously than the exceptional generalist!

The second part of the book delves more specifically into the issue of strategic asset allocation or investment policy formulation; although we are still conscious of the complexity of wealth management, we narrow our focus on asset management, understood within a wealth management framework. We start with a description of how that very process actually takes place in the institutional world. At some level, it may look anachronistic to discuss institutions in a book focused on individuals. I believe this to be very important because the bulk of the theory of asset management was developed and written with respect to institutional investors. This should not surprise as, at least until relatively recently, there was little dedicated research to the individual field, most probably in response to the simple fact that the individual space was not “where the dollars were” and the complexities created by trust law made study of the field rebarbative.

The key here is, thus, to bring out the assumptions that underpin the institutional investment management process and to show how these must be changed when dealing with individuals. Once we complete that step, the need for different solutions becomes both clearer and inescapable. This second part would not be complete without an honest exposition of the complexity that comes with having to deal with individuals. Although intellectual laziness at times explains why certain change has not yet been implemented, the more realistic and objective explanation simply is that advisors can feel lost in the face of the complexity that true customization would bring to their practice. We will come back to this point in the fourth part of the book.

The third part of the book is specifically dedicated to a model that allows one to deal with the individual strategic asset allocation process, despite the complexities described at the end of the second part. The model is not described here in a bid to find buyers for some related software. In truth, that software has yet to be written; the model currently operates within our firm in an Excel format—those readers who know Excel will recognize its features in the figures or charts presented. One hopes that readers will not cynically be asking the usual: “What's in it for him?” Although I certainly would love for some software package to be developed one day, your humble servant is neither a software developer, nor in the business of selling and maintaining software. Further, extrapolating a thought by Steve Lockshin in his book, there must be many ways to develop and sell software that are simpler and less time-consuming than writing a book!!! My goal here is simply to present one solution, showing the nature and sequence of the interrelated pieces and processes with the hope that this will encourage others to develop their own solutions, preferably well-adapted to their specific client circumstances.

The fourth part of the book deals with the structure of the typical advisory firm and the need to change it; it should be of the most direct interest to advisors, but clients will find interesting insights that should help them seek and reward those advisors who can serve them best and in a sustainable manner. It starts with a short diagnosis of what has challenged the industry: although most often well-intentioned, the industry as a whole has failed to create sufficient operating leverage within the typical firm to earn a decent return on equity. The wealth management industry—more specifically, fee-only advisors or multi-family family offices—often maintain a structure, as they have grown, which suits a single practitioner practice. They have not evolved from that to a more comprehensive advisory structure that is dedicated to outlive the founders. We will be showing that they should understand that, in reality, as they move from a simple individual practice to a business, they should rethink the way in which they are organized. Hitherto, by and large—with a few welcome and notable exceptions—firms grew from one to several advisors seemingly by replicating with two or three or four people the same processes the individual advisors had when they operated independently; the process repeats itself even as firms grow to ten, twenty, or even thirty advisors. This is not conducive to profitability and is made even more challenging as the straightjacket of regulatory compliance and information technology requirements become more demanding. Thus, many end up succumbing to the siren's song of product creation, where fees are no longer solely earned on advice, but also generated by selling products, which can destroy the integrity of the client experience.

There is a better way. We develop and describe simple solutions that might allow those advisors who want to do the best for their clients, all the while not losing their shirts meeting their clients' goals. In short, it revolves around the notion that, as they grow, they should think of mass customization as their goal, rather than Saville Row–like absolute customization to each client. In a mass customization model, each client feels that the service is truly custom-designed to his or her own needs, when, in fact, it is custom-designed, but comprises certain parts that are common to all. Think of a high-end, “custom-made” racing bicycle. The frame may be truly designed to your exact measurements. Yet, the tubes from which your own frame is cut are mass produced and the various mechanical parts, from the pedals to the brakes, to the gears and ball-bearings, are the same for all generically similar bikes. We will come back to that example later. The ultra, ultra-affluent may require the services of the equivalent of a Saville Row tailor; but there are very few such clients and, in fact, they most often operate their own single-family offices.

When you finish reading this book, my most sincere hope is that you will realize that this remains a work in progress. With the change still needed in our industry, it is inevitable that certain ideas will prove either impractical or at least too difficult to implement until either they have been simplified or some form of change has occurred in the landscape. Being involved in a consulting role, my focus has always been to think of what the world could and should be. I am sure that there are quite a few operational aspects of this revised set-up I do not fully understand in their true detail or complexity. I also know that I am not the one who might have to accept lower profitability in the short term in a bid to raise profitability in the long term.

Yet, I also hope that you will realize that each of us needs to broaden our horizons. Most of us have approached this mission of ours from the perspective of a small fraction of the universe. I started life as a security analyst, became a portfolio manager, and then a strategist and member of senior management. Whatever I had to learn about taxes, behavioral finance, non-traditional investment strategies, transaction flows, client communication, and the simple discovery of multiple goals, multiple risk profiles, and multiple time horizons occurred through chance and experience. I would love to say that progress was always linear and in the right direction! That would be the biggest lie. I learned through trial and error—as we all do—always putting the best interest of the client first. I hope this book will allow readers to sidestep a few of the traps into which I fell. Perhaps it will confirm a few intuitions as well as relegate others to the “doomed” bin, thus speeding up the learning process. Most importantly, I hope it will convey the notion that this is not a job, but a profession, and that success will not come without passion. That passion must be geared toward our clients, who, as I was told many times when I was younger, do pay our salaries!

1

 Brunel, Jean L.P.

Integrated Wealth Management: The New Direction for Portfolio Managers

. Institutional Investor Books, a Division of Euromoney Institutional Investors PLC, 2002. (2nd ed., 2006.)

2

 Brinson, Gary P., L. Randolf Hood, and Gilbert L. Beebower. “Determinants of Portfolio Performance.”

Financial Analysts Journal

,

42

(4), July/August 1986 or, Brinson, Gary P., Brian D. Singer, and Gilbert L. Beebower. “Determinants of Portfolio Performance II: An Update.”

Financial Analysts Journal, 47

(3), May/June 1991, pp. 40–48.

Part One

The Integrated Wealth Management Challenge

Part 1of 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 1Many 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 1.1A 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