Goals-Based Wealth Management. Jean L. P. Brunel

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

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Lockshin, Stephen D. Get Wise to Your Advisor: How to Reach Your Investment Goals without Getting Ripped Off. Hoboken, NJ: John Wiley & Sons, 2014.