by Frazer Rice
Similar parameters should be applied to proposed investment products, which should undergo group scrutiny. In the investment community, many advisors are paid to sell products, so make it clear that you want to entertain only ideas and products that make sense in a fully integrated way. Setting that expectation in advance can avoid wasteful investment decisions and prevent purchasing products simply because they’re popular.
Optimizing Communications: Family Matters
When communicating within your family about your wealth, there can often be tension. Perhaps there are concerns about one person getting preferential treatment over another or confusion over family members who head off to pursue their own interests and ideas. For these tensions and many more, it can help to have a third party who can serve as a beacon for communications with family members. This person (or group of people) could help family members with their own decision-making, investments, and philanthropic interests. Or they may focus on educating family members on how the family’s trusts work. For each family, the communication needs will be different. If you have a relationship with a local banker, that person might serve in this role.
Family foundations can also assume the responsibility of family communications. These foundations are a great conduit for educating family members and developing good habits within the family. Family foundations can transmit both lessons and values, especially in communicating the purposes behind the family’s trusts and other planning. This tends to strengthen the buy-in that family members have with your goals for the trusts and your legacy wealth.
These interactions with the banker or family foundation can be with individual family members or with the family as a group. Usually the patriarch or matriarch will decide which works best based on the circumstances at the time. If you’re dealing with fourteen-year-olds, for example, you’ll likely approach them differently than mature adults. An annual family retreat might also be an option. This would allow you to bring in a roster of speakers to address multiple issues. These are gatherings where values can be transmitted and tested, where people’s strengths and weaknesses can be identified, and where group dynamics are laid bare. The result can be greater efficiency and understanding going forward. There is an entire industry of consultants and event planners who can help create these types of learning scenarios for a family retreat.
When it comes to children, it’s essential to teach them how to absorb and process world and business news. This can be done in a more formal setting with teachers or tutors, or done privately with you. This is especially important today, when there is real conflict and confusion around the validity and sources of information. Additionally, exposure to world affairs builds a more well-rounded view of how the world works from a social, political, and economic perspective. Having that broader background brings a greater understanding of the world around them and the role of money in their life, which can increase their appreciation of wealth before they inherit it and need to participate in wealth decisions.
Many people want to raise their children without establishing a sense of entitlement. For people who suddenly come into a large amount of wealth, I’ve seen a growing trend of maintaining relatively simple homes, as a way of remembering where they came from and instilling those values in their children. The parents can still enjoy their wealth (perhaps at an opulent vacation home or on their luxury vacations), but at their primary residence and in their daily lives, they transmit the values important to them.
You can also anchor values in your children by providing real-world experiences for them, such as volunteering or other levels of involvement with philanthropy. You could also encourage them to get regular, old-fashioned jobs. We live in a competitive world where it sometimes feels like if you’re not Mark Zuckerberg, you’re nobody. You can elevate the idea of creating real value in a setting with actual people, where one is paid for the value they create. These types of experiences can be formative. There are also international work experiences like Doctors Without Borders that can provide valuable teaching moments.
Last, I once heard a story of a professional golfer giving advice to his son, and the advice went something like this: One of the most important things in life is to not have your self-esteem rooted in your golf score, because things happen. If that’s how you see your value, all it takes is a slump or a bad day to crush you. This is advice that can also be given to children of the wealthy. By transmitting the idea that self-esteem and success are not linked to money, you increase the odds of raising grounded children who measure achievement by criteria that go beyond the size of their bank account. You’ll increase the odds of raising kids who can enjoy the simpler pleasures in life.
Much ink has been spilled on how to raise wealthy children to be responsible self-sufficient adults. As you would expect, there is no silver bullet. You do the best you can. Life can intervene and scuttle the best-laid plans. However, by thinking ahead about the ideas and characteristics that underpin your legacy, you can set up the structures to maximize your chances of success in transmitting your values to the next generation and the community.
Responding to Our Poor Squash Player
In response to the question we began this chapter with:
“What do I need to think about now, in case something like that happens to me?”
My Answer
First: more salads, fewer steaks!
Second, keep that appointment with your doctor that you canceled three times in a row to make sure you don’t have any congenital heart defects yourself!
Third, by asking the question, you’ve already taken the first uncomfortable step by thinking about your mortality. It’s not fun to muse about what your kids will do when you die. That’s how life works, though, and the benefits of dealing with this eventuality now are far better than ignoring it and hoping you will live forever. You won’t.
Address this problem the same way you would in your business or profession. If you’re an athlete, treat it as if you’re a left tackle and you’re going up against an all-world wrecking machine who is bigger and faster. How do you deal with this obstacle and succeed?
Take the time to analyze where you came from, where you are now, and where you want to go. Then take this information about your family’s situation to diagnose the issues, fix them, and put in place your wish list for the future. You should assemble people around you who can help you put your affairs in order and take the steps needed to put your wish list in action.
Reach out to a wealth manager or a financial planner to help you organize your thoughts, and choose one you trust for an initial conversation. You could also talk to your friends beforehand to gather your thoughts and get some recommendations or advice. The important thing is that you get started. It scares me when people say they’ve talked to a lawyer but haven’t done anything yet. The first step is always the toughest, and it’s even tougher when it arises in the context of your mortality.
Your long-term wealth management plan may never be finished if you don’t start the process soon. Remember that a simple plan could be finished in only a month, and you don’t have to figure everything out in advance. Once in place, revisit your plan periodically so you don’t have second thoughts while clutching your chest on a squash court.
Conclusion
The Future of Wealth
The surest way to get laughed out of a room in five years is to make a set of big, bold predictions that will be galactically wrong. Even Nostradamus had some clunkers. However, the future will bring a multitude of issues and trends that will affect your wealth management planning. To the extent that I can, I’d like to finish the book by looking into the future of wealth management as I see it and help you prepare for the uncertainties of tomorrow.
Compression of Fees
First among the future trends in wealth is the compression of fees in the financial industry. This trend will largely be driven by the empowering effects of the internet.
Using the internet, music-streaming services like Napster and Spotify removed the traditional barriers to the flow of music to consumers. As a result, expectations of consumers permanently changed and the entire music industry’s business model was disrupted. The increased and inexpensive flow of information—music, in this case—resulted in lower costs for the delivery of music and increased pressures for the music industry to provide value in new ways. It still hasn’t adapted.
Wealth and investment management companies have been uniquely resistant to change. Chalk up the “stability” to regulation, entrenched cultural traditions, and low levels of consumer education and information. Those days are coming to an end. The disruption is already under way.
Using the internet, consumers can now access financial information that was previously unavailable to them or was difficult and timely to gather. They can quickly and easily go online to compare the performance of investment products and services, along with the fees being charged for them. Consumers no longer assume that an investment product or service is superior based on its well-known brand name and parent company. In fact, as people become more accustomed to receiving advice online, advisors for many clients won’t need to be in the same city any more.
In the aggregate, name-brand exclusivity will carry less mystique and perceived value, especially in light of the Bernie Madoff scandal. The concern for personal information security and privacy and the proliferation of information on the internet will allow people to comparison shop.
Consumers will analyze each product’s performance and fees and demand a succinct value proposition. I think that value will come in the form of personal advice. That advice is difficult to scale at the firm level, and big firm business models are under attack as the value proposition is scrutinized. Think of the hours needed to game out every client’s individual situation and contrast that against the heavy competition that exists for client assets. With such heavy competition and declining costs, we will continue to see fees being compressed in one way or another.
The scale of this change has firms looking hard at what fees they are charging and what people are paying. In a world of investment management commodification, there is an idea that firms will have to provide value beyond investment management. Estate planning, business succession, and tax planning could be among the additional areas embraced. Value could also be added in financial planning, spending management, and providing overall discipline and oversight for the portfolios of the wealthy (particularly legacy wealth). An advisor may continue to be able to charge 1 percent (or more) to manage clients’ wealth, but there will be a relentless push from consumers to see evidence of the value added in exchange for those management fees. Clients are likely to be accepting of higher management fees if they receive wealth management services that transcend one person or one generation.
Looking to the future, you should expect your wealth manager to speak to everything we’ve talked about in this book. Different wealth managers will be better at some things than others, and I wouldn’t expect every wealth manager to have expertise in every product and service. However, they all should be knowledgeable enough to speak to the entire spectrum. If they don’t provide all the services themselves, they should have a deep enough network to connect clients to the needed expertise.
Impact of the Fiduciary Approach
The fiduciary standard entails that an advisor should put their client’s interests above the interests of the advisor and his or her firm. However, as of the time of this writing, much of the financial industry currently operates under what’s called the suitability standard. The suitability standard dictates that investment products and services must merely be suitable for a client. Suitability is a much broader measure of acceptability, and an investment would need to be extremely unsuitable for this standard to offer any protection to a client.
There is a prominent push toward a fiduciary standard in the financial industry. The US Department of Labor has put forth the idea that the fiduciary rule should apply to consumers’ retirement accounts. The discussion of this topic is currently reverberating across the industry. As consumers begin to question whether their retirement accounts are truly in their best interest, it’s only a matter of time before people start asking that same question about the overall management of their wealth. Firms of all sizes are gravitating toward this concept.
Part of the compression of fees will occur as consumers and advisors begin to understand and apply the new fiduciary standard. Whether legally required or not, there will be an expectation from clients that their wealth manager’s advice comes without any conflict of interest. Clients will expect products and services to be recommended because they are in the clients’ best interest, not because they are profitable for the investment firms or advisors. Those will become the table stakes when competing for wealth management mandates. Now that this fiduciary standard has crept into the financial industry, firms will begin to reexamine how they can operate in a way that is both good for the client and good business for the firm.
It’s likely most firms embracing the fiduciary model will earn less in fees, and that will allow more clients to have an increased amount of money available to build their wealth. However, keep in mind that if you spend less on fees, you can expect to receive commensurately less customized and individualized service. If you want a higher level of personalized and customized wealth management, you may not see a reduction in fees, but you can expect an increasing level of value for the fees you pay. With that in mind, you should feel perfectly comfortable asking your advisors for examples and demonstrations of the value they provide in exchange for their fees.
Luckily, the fiduciary approach comes naturally to me because of my background in the legal industry, where the fiduciary standard already applies. When lawyers go into practice, they’re required to serve the client’s interests, and it’s often done to an extent that can exceed a fiduciary standard. In many situations, I served my clients’ interests to the detriment of my own. I believe that it is both right and good business to put the clients’ interests first.
Technology
Beyond the internet, technology in general will continue to revolutionize wealth management. It will replace much of the manual work in analyzing markets and investments. This will make analysis and reporting more efficient and scalable, and you’ll need fewer interactions with fewer people. Firms will try to replace much of manual back office work with technologically-driven solutions to increase efficiency and reduce costs. The downside of this feature is that it will necessitate turnover with the human beings and increase the odds you’ll be calling an 800 number when you need help. You’ll need to upgrade your devices and technologies to monitor your accounts. There will be a constant tension between customized advice and the efficient and profitable delivery of scalable (and automated) services.
The good news is that for those who can access the advice, technology will enable deeper conversations and more granular investments. When you go to a firm with major resources behind it and ask how your stocks and bonds are doing, you’ll find yourself in discussions about asset classes and sub-asset classes. Technology will drive more granular (and complicated) strategies.
Firms will be willing to invest heavily in creating a positive investment experience for the client. They will also be scrambling to demonstrate value for the fees they’re charging. The increase of granularity and detail of the investment process will be most firms’ strategy to demonstrate added value for the client if they don’t have the broader capabilities of a full-service firm. Relationships will continue to matter, but the days where charm and a golf swing are enough to woo and keep clients are coming to an end. If the technology is inferior, the clients will eventually leave, especially in the case of next-generation clients who do not value the pedigree of their parents’ institution or the gray hair of the advisor that has been in place.
I predict a battle in the near future
over the massive new availability of data and its use in making prudent investment and wealth decisions for clients. Wealth firms will no longer be able to rely on clients to “trust” them. With the recent scandals at the major banks and the Madoff experience, clients have already developed suspicions about the financial services industry. Tech-savvy prospective clients don’t trust that financial institutions can deal with technology and data. Clients will force firms to provide verifiable data to validate the safeguarding and performance of assets.
Firms will have to be able to prove (and reprove) their value proposition on an after-tax, after-fee, after-inflation basis. Granularity can be useful in helping firms tell their story, but don’t let complexity take the place of effectiveness. If an investment concept can’t be reduced into a simple, cohesive statement, it should be questioned thoroughly.
The ability for technology to find and serve overwhelming amounts of data will lead to consumer demand for data that is relevant for their unique goals and needs. The art of being a good wealth manager includes the ability to extract the appropriate data and apply it in ways that are meaningful for the client. Technology can drive better decisions when used in that manner. As conflicts of interest become even starker, it’s vital for wealth managers to overlay a fiduciary advice approach where the data is presented in a way that underpins the client’s best interest.
Future technologies will drive a greater emphasis on after-tax returns. Advice will have to focus on this metric to justify wealth management fees. With information so accessible and greater competitiveness within the industry, firms will have to do a better job of demonstrating their value and performance on an after-tax basis. I expect that clients—especially those who are paying a “1 percent fee” for management—will expect their advisors to reduce the tax bite of their investment portfolio. At minimum, an investment advisor should have a read on an investor’s income, capital gains, and estate tax situation. A good advisor will welcome this type of request and will offer broader insights into a client’s tax situation to improve their after-tax investment returns.