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

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