Grow It, Protect It, Spend It, and Share It
Eight Principles of Strategic Wealth Management
Since getting wealthy isn’t an easy feat, hence, we need to learn how to grow wealth, protect wealth, spend wealth and sharing the wealth. To protect your family’s assets and make them grow, follow these guidelines:
- Take charge and do it early
Determine the values that will guide the family’s wealth management. This means digging into the details of the family’s financial condition, structuring goals that complement each other and devising a long-term strategy.
- Align family and business interests around wealth-building goals and strategies
Unified families can achieve some economies of scale, but that depends on both shared history and a shared view of the future. Aligning business and family interests will help ensure that any hired financial advisors work to advance the family’s common goal.
- Create a culture of accountability
Carefully define the wealth strategist’s responsibilities. Establish metrics to guide and assess the strategist’s performance. Objective metrics help take the sting out of criticism and keep peace in the family.
- Capitalize on your family’s combined resources
Pooling funds allows the family to access investment opportunities that would not be available if people managed their money in smaller bundles. Nepotism isn’t all bad because members of a family may have resources, networks and influence that can benefit everyone.
- Delegate, empower and respect the independence
Insist that younger relatives take opportunities to grow outside the family, so they will be able to stand on their own feet and add value to the family through what they learn and accomplish. Empowerment helps members of the wealth management team and family office do a better job. Make expectations, goals and strategy clear – but don’t micromanage.
- Diversify but focus
Diversification is a prudent risk management strategy. Because most family fortunes began in one business, and such concentration is extremely risky, it is crucial to diversify. The family’s wealth managers should focus on money management so they become more competent than the professionals they might otherwise hire.
- Err on the side of simplicity where possible
Keep a strategy simple to make its strengths and weaknesses more understandable. When families opt for complex strategies, at least keep everything transparent and visible to everyone so no one has doubts about anyone else’s motives or performance.
- Develop future family leaders with strong wealth management skills.
Pursue a multi-generational approach to wealth management. Nourishing and developing successors takes time and effort. Anyone entering the family business should have at least 10 years of successful performance outside so they add something of value to the family firm.
Wealth: Foundation of Values
Relatives need to know and understand their shared values if they are going to tackle wealth management in a coordinated way. Some of the most important values involve trade-offs:
- Address the trade-offs among priorities – Weigh your choices among retirement security, growing the fortune, spending, creating a family retreat, collecting art, giving philanthropy and so forth.
- Address the trade-off between long term and short term – Know whether you’re creating a culture that will endure for generations or simply providing for the present.
- Address the trade-off between risk and reward – No reward comes without risk, which may be nerve-racking. Know your risk tolerance; adjust your reward expectations accordingly.
The family should conduct a self-examination to identify any particular talents or competencies that can help secure its future. Encourage a culture of excellence and performance, no matter what a family member may choose to do. Thrift matters, even for the very wealthy. A family fortune can evaporate quite quickly. As the saying goes, “The best way to make a small fortune is to start with a large one.”
“In the wealth management industry today, having a little bit of knowledge can be a dangerous thing.”
The family as a whole should define its attitude toward the future of the economy, and to business and finance in general. All the relatives should understand that the family’s assets could be threatened, so the family should adopt a prudent protection.
Wealth Management Tactics
Broadly speaking anyone can pick between two wealth management approaches:
This strategy may protect purchasing power or income stability. Managing wealth for distribution means that there may be no wealth to pass on to future generations. Its advantage is that it allows the present generation to spend lavishly.
Earning a return on investment higher than the market average is extremely difficult, but you easily can increase the growth rate of your investment portfolio by cutting back on spending, especially on “leakages” that cost money but add no value. Leakages include, for example, losses from lawsuits, divorce, fraud, taxes and unnecessary expenses.
“The universe of hedge funds is reputed to include many that have ‘fat tails.’ This means that a hedge fund’s strategies can work well for years and then suddenly unravel.”
Anyone who seeks a killing in the financial markets faces an extremely difficult challenge. For most people, including the very wealthiest investors, the best investment approach is a passive strategy. Investors who are using a passive, or index, approach do not try to pick superior investments. Instead, they assemble portfolios of investments that track the market as a whole.
Why does index investing make sense?
It works because of the clear correlation between risk and reward. Although low-risk, high-reward investment opportunities sometimes present themselves, most of the time, investors who outperform the market index do so by taking a great deal of risk. And, a risk that pays off once may or may not pay off again. Thus, managers who outperform the market in one period generally under-perform in subsequent periods. Research demonstrates conclusively that few managers or strategies beat the market index over the long term.
“Everyone dreams of financial ease. It turns out that living with ease takes a great deal of work, discipline and planning.”
Therefore, the safest, sanest and most profitable strategy is to accept the market return and not seek to beat it. Index investors get better investment results than most other investors simply because they do not suffer the losses that other investors incur. They aren’t taking as much risk, so they don’t lose as much.
The index investor only needs to allocate assets to the appropriate sectors, choose the indexes, manage taxes and periodically re-balance the portfolio. An index investment program is financial management on autopilot.
Numerous investment alternatives are available to high net worth people who pursue an active strategy, including private equity, hedge funds, real estate, distressed debt, emerging markets, commodities and more. Some of these are extremely risky. They all take an enormous amount of expertise and are not for dabblers. Finding managers who add real value in such investments is extremely difficult. In fact, just developing the metrics to identify the investments properly is a job in itself. That’s why a good financial advisor is so important.
Financial Advisor Selection
The financial advisor’s main job is to enforce accountability. This means understanding the performance of each manager and of the whole portfolio. The financial advisor should know the metrics involved. Many firms lack the kind of tools that a family needs to assess investment performance correctly. Money management is not the financial advisor’s job. In fact, there is a conflict of interest between financial advisory work and money management. Think of the financial advisor as a referee, not a player.