by Frazer Rice
Determining Best Fit
As I previously mentioned, it’s important that your advisors understand you well and match your preferred level of conservatism or aggressiveness in wealth management and planning. People often say they want “the best,” but that is a relative term that needs to be defined. For some people, “the best” might mean the advisors with the most aggressive positioning. For other people, “the best” might mean the most expensive advisors, because they feel the cost is an indication of the quality of advice and expertise. For conservative people, “the best” might mean the advisors who are best known for managing risks and avoiding losses.
Good advisors listen, diagnose, and fix. They listen to you closely, diagnose the problems, and then fix those problems. They share their thinking with you as the client, then you execute corrections or realign your planning as needed. The best advisors also tap their skills and experience to anticipate problems.
Advisors who go through those specific steps—listen, diagnose, and fix—offer more value to you than advisors who come to you with a one-size-fits-all solution in mind. Good advisors know that jumping too quickly to offer solutions can prompt perverse outcomes, when the clients’ goals and issues aren’t fully understood.
You’ll need your advisors to understand that you need both structure and flexibility. When arranging your affairs, particularly in estate planning, you are dealing with scenarios that are not set in stone. There will always be a tension between structure and flexibility. It would be great if permanent solutions were possible, but unfortunately, change is the only constant. Life intervenes, circumstances change, laws get rewritten, and investments can blow up. Financial needs can shift.
You’ll need to revisit your plan at intervals. For some people, that may be every year. For others, it can be every five years or even every ten years if their overall circumstances remain stable. Planning is an ongoing process. One of the badges of wealth is that you get to think about these things. Others do not have that privilege.
Finding the Right People
I recommend interviewing three candidates for each advisory role before choosing one as the best match. My experience is that when you ask the best people for referrals, they tend to refer three candidates. This provides the opportunity to vet a candidate not just on their hard qualifications but also on how well their personality harmonizes with yours. It’s nice to have a solid match across the board, especially if you’ll be spending lots of time and money with the advisor. If you like an advisor on a personal level, goals are likely to be achieved more efficiently and enjoyably.
We discussed aggressive versus conservative mode. When seeking referrals, mention to the referrer where you think you are on the combativeness spectrum. This information is useful in seeking a good match-up. Are you itching for a fight with the IRS, or would you rather slink away and hope no one ever notices? If an advisor wants to hide your money offshore when you’d prefer a simpler, streamlined solution, that’s not a good fit.
If you find an advisor who matches your approach when it comes to being aggressive or conservative, the next consideration should be the advisor’s level of complexity. Again, it should match your preferences. Some people like things complicated while others strive for simplicity. Don’t set yourself up to be at constant war with your advisors. Strive to assemble a cabinet that shares your mindset.
There are significant upsides to having advisors who are younger than you are. Outliving your advisors can create its own drama in succession planning. If you’re sixty, and the advisor you have relied on for years is seventy-five and nearing retirement or showing signs of slippage, that’s a scary position for you to be in. The process of getting old is already stressful, and if your advisors are older than you, that can add another layer of tension.
Therefore, when you reach the point where you need to replace advisors, I highly recommend choosing someone younger than you. While the advisor may not have forty years of experience under their belt, they are more likely to be innovative and up to date, because their education is more recent. Choosing a younger advisor also offers some reassurance to your younger successors, both on the family and on the business fronts.
Choosing Your Wealth Manager
A good wealth manager will truly help you achieve the goals you have for your current and legacy wealth by applying their ability to anticipate, listen, diagnose, and fix. Using that approach, a good wealth manager provides four major pillars of oversight and advice: full-service wealth management, asset management, business ownership and succession planning, and risk mitigation. The full-service wealth management refers to a type of banking relationship that includes cash and lending at both the corporate and personal levels. Risk mitigation, by and large, is assigned to an insurance company.
In terms of age, wealth managers can be in their late twenties or older. Although I recommend choosing a wealth manager younger than you, I do advise working with someone who is old enough to have weathered through at least one full market cycle. When evaluating a wealth manager, I’d want to hear what strategies they employed in 2008, 2002, or even 1994. How did they address their clients’ concerns during those years?
I also recommend an advisor who has known some pain, who has switched firms or has been betrayed by the industry in some way and has learned from it. These are often advisors who know that it’s good business to protect clients from any inferior products or services being pushed by the wealth manager’s current firm or financial group. To test for this, ask a prospective wealth manager these two questions:
“What do you do?” The wealth manager will probably have a long answer for this question.
“What do you do well?” After answering the previous question, a great wealth manager will quickly reply with the two or three things on that list that are done especially well by the manager or the firm. If the answer to this is, “We do everything well,” that’s a bad sign. It’s also a bad sign if the manager needs time to think of an answer. That’s when your eyebrows should go up.
A moment will inevitably arrive when the products from your wealth manager’s firm aren’t the best ones for you and you need to go outside for help. It’s okay to ask your wealth manager to assist you with that, and a good wealth manager with a well-developed network will connect you with the experts who can offer appropriate solutions. A wealth manager can gain a lot of currency with the client by doing this, and ultimately, their clients will end up better advised. It boils down to the fiduciary notion that what is best for the client should trump everything else.
Being a Good Client
First, clients who happily pay their fees will make their advisors happy, and happy advisors go the extra mile for those types of clients. It’s tiresome for advisors when they must fight clients on fees at every step. Nobody wants to perform work for people who expect to receive value in exchange for nothing. That’s not to say clients should allow themselves to be bilked. If there is agreement on a fee and something is not delivered in the way it was expected, a client certainly has reason to complain.
Use your advisors in their areas of specialization. Don’t use your divorce lawyer as your psychologist. If you go to your investment advisor for financial planning and find out that’s really a secondary or tertiary focus of their office, that’s not great either. You want to stay in the areas of your advisors’ core competencies, and similarly, advisors should avoid taking assignments outside of their expertise—that’s not a recipe for customer happiness or long-term success.
Being respectful of timing and scope can also make for a good client. If you want to ask an accountant for advice on the bond market, don’t do it the first week in April at the height of the tax season. You won’t build any goodwill with your accountant that way. Regarding scope, it’s not a good idea to agree on a fee for specific services, only to demand later that additional services be included.
In your quest to be
come a valued client, it helps to meet or exceed the account size standards established by the wealth manager or wealth management firm. If you have a $6,000 account and someone else has a $50 million account, the advisor’s attention will normally be focused on the account that best aligns with the firm’s business model. These are considerations that go back to the initial question to ask your wealth management advisor during the interviewing process: “Am I good client for you?” If you have $400,000 and my firm’s minimum account size is $5 million, I may love you to death, but it’s simply not a good match. You’ll have an expectation of service that is not commensurate with what I’m able to provide for an account with assets below our minimum threshold. Clarifying this in the earliest stages when interviewing wealth managers will help to avoid future disappointment.
Finally, from the standpoint of an advisor, the more prepared a client is, the more I can flex my muscles when it comes to expertise and experience. When we can have a deeper discussion of the client’s history, current situation, and future concerns, it helps me provide the best advice. When someone walks into my office with a tangential understanding of where they stand financially, or they haven’t put any thought into what they want or need, that becomes far more difficult. I’d much rather serve people who have thought through their situation and goals, because it helps me do what I do best and get the client where they want to go. Ultimately, that feels great for both the client and the advisor.
Answering the Investment Banker
At the beginning of this chapter, we received a call from a high-powered (and terse) investment banker looking to embark on the next chapter of his life. He wanted to confirm his suspicions about his wealth needs, but he also needed to understand the importance of building his cabinet of advisors and relying on the specialized expertise required for his complicated situation and wealth.
My Answer
Think deeply about what type of team you want to have in place to achieve the goals that are important to you. Prepare an inventory of your current advisors. Note the issues that trouble you and the threats you worry about. Then begin to put together a cabinet of advisors who carry the experience, temperament, and knowledge you seek. Your goal is to assemble a team with a blended range of experiences and expertise. The cabinet members should be people who are good at what they do, and they should be people you trust.
The stakes are high when assembling a cabinet of advisors to manage your wealth. You want to receive the best advice possible, which requires a good working relationship with your advisors and a good working relationship between advisors.
Last, this is not a time to be cheap. Saving money on advisors creates a false economy, and your wealth will not be managed as well as it should be. You want to erect a dependable, sturdy-but-flexible wealth management foundation that serves you for the rest of your life and beyond.
Chapter Eight
8. Getting Your Plan Off the Runway
The biggest obstacle to intelligent decision-making for the wealthy is usually the decision to put plans into action. To illustrate this, here’s an exchange I had a few years ago with a client.
“Frazer, I just got back from playing squash,” he said in a dejected tone of voice. “Today, my opponent dropped dead on the court.”
“Good God!” I replied. “How old was he?”
“Only fifty-four years old,” he said. “Dead before he hit the floor.”
“Wow, I’m sorry to hear that,” I said.
“Yeah, thanks, Frazer, I appreciate that,” he said. “Well, the reason I’m calling is that I just learned how his affairs were all screwed up. He had an executor for his estate who is a guy he had a falling out with a while ago, so that’s a problem.”
“Yikes,” I said. “His wife and family have to get that figured out. That could be complicated and expensive.”
“I know!” he said. “He just got divorced and remarried five years ago, so who knows what was in place when he died. I guess some of his assets had his ex-wife as a beneficiary.”
“Ugh,” I said. “Now I think I’m getting a headache just thinking about this.”
“It gets worse—his family business is going to be an issue,” he said. “He and his two sisters didn’t get along. My guess is that the new wife owns his shares now. How would you like to suddenly be in business with your sister-in-law?”
“Now I definitely have a headache,” I said.
“Well, me too. My question is this: what do I need to think about now, in case something like that happens to me?”
My Initial Answer
Sometimes it takes a jolt to get people to start (or revisit) their wealth planning. Many people think about creating a long-term plan for their wealth, but they often don’t act on that thought until something happens to them (or to a friend, in this case) and they are abruptly reminded of their own mortality. It’s critically important to take stock of yourself and establish a long-term plan that features short-term, actionable milestones.
Further to that point, one of the most critical elements to remember is that plans should be revisited periodically. The only thing worse than not having a plan is having a plan that is woefully outdated, as the family of the recently-deceased squash player is about to find out.
In this chapter, we will go through the thought process of fleshing out your long-term plan. We will think about the effective communication and administration of that plan with the relevant parties. Finally, we will outline the importance of having a process to make sure that the plan is current with your needs and the state of modern planning. The goal is to ensure that your wealth plan continues to be rigid enough to provide the structure and protections you want while being flexible enough to adapt to the changes that will inevitably come to your doorstep.
Long-Term Wealth Planning
In planning for the long term, you should use your cabinet of advisors to identify the type of wealth you have, how you want to use it, and how you want to manage it to reach your goals. Your advisors will help to allocate the right type of expertise to take advantage of opportunities or ward off risks. Done well, wealth management addresses business succession and estate planning as it shapes what to do with your wealth, whether it’s linked to a business, tied up in securities, or linked to intellectual property.
Many decisions will be influenced by the constituencies your wealth impacts. Will your business be handed down to your family? Is the family prepared to own and operate the business? If not, should the business be sold to management, other employees, or outsiders? You want to have a framework in place to guide the succession of your business, which will help to make the process as smooth and seamless as possible.
When building a succession plan for a business, you should communicate with your family members so they understand what you’re doing and why. This will provide a deeper understanding of the values you wish to transmit to your family, community, and charities. Estate planning may be developed in conjunction with your business succession planning or entirely separate from it. In both succession and estate planning, the balancing of structure and flexibility will take center stage.
You want to create a planning structure that provides guidance and identifies avenues for transferring both your wealth and your values to the next generation. However, life is ever-changing and unpredictable, and unimaginable circumstances can present themselves. You want a planning structure that advances your ideas and ideals but is also readily adaptable.
Appoint Your CFO
The idea of appointing a personal CFO to help oversee your planning structure can be useful. Aside from being an efficient, singular point of contact, a personal CFO can help to account for your assets’ location, performance, and tax ramifications. This person could also double-check to make sure the structures you have in place are strong and continue to function effectively. The CFO role can be carried out by a member of your advisory cabinet. They ce
rtainly should be able to work with your cabinet effectively. However, I like the idea of this person having a little distance from your existing team of advisors. Ideally, they should be able to understand the concepts of your wealth plan from the thirty-thousand-foot level, be able to understand the family dynamics and deal with other qualitative issues where judgment and wisdom are helpful. They should also be able to help you step in, evaluate, and replace cabinet members as needed. This extra set of eyes can help keep things honest and can protect you against fraud or incompetence. This is a notion born in family offices, where a major role is to track and safeguard assets while mitigating against risk.
Structuring Your Long-Term Plan
The long-term structure you put in place should be designed to protect, preserve, and grow your wealth. You want to protect your wealth, but you also need it to grow to outpace the costs of taxes, fees, inflation, and spending. Those four forces are always nipping at your wealth.
Although we began the chapter talking about the common but unexpected scenario of sudden death, there are many other unpredictable events that necessitate building flexibility into your long-term planning and structures.
Flexibility for Unplanned Events
Whether it’s a cataclysmic tidal wave from a hurricane, a massive cyberattack, or a terrorist attack like September 11, there will be events that jeopardize your wealth or your ability to access it in a time of emergency. It feels like something cataclysmic seems to happen about every seven years, and because of that, I find it useful to game out some of these scenarios to determine what type of flexibility to build into your planning. In some cases, it might even make sense to carry insurance against some of these risks and unexpected events.