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

trust structures; but it certainly no longer applies when these financial assets were created by the current senior or immediately preceding generation.

       Multiple Interactions 9

      Now, if the challenge was simply to recognize that the problem is more complex and has more dimensions than initially thought, there would be little need to make dramatic change. Yet, just as is the case in a corporation, all these various “divisions” within the family structure do not exist in isolation. They have both their own issues that have to be addressed directly and a variety of tentacles that extend toward and into other dimensions. This is what makes it impractical for any service provider to the wealthy to argue that he or she can serve the family by simply focusing on a single aspect. I vividly remember the time when we first introduced the concept of tax-aware investment management to J.P. Morgan's clients: I could be my own wealthy client if I had a penny for each time I heard people tell me that “the tax tail should not wag the return dog.” Most individuals who were raised in a world where taxes did not matter simply could not understand that there was a need to change the traditional investment process if one was going to focus on maximizing after-tax returns or terminal after-tax wealth at some future point in time.

      1

      This is needed because some catastrophic event, such as a major health crisis, can quickly and irreversibly eat up their savings and make it impossible for them to sustain their lifestyle to the end of their lives.

      2

      Note that he was only echoing the famous quote by Henry Ford: “It's not the employer who pays the wages. Employers only handle the money. It's the customer who pays the wages.”

1

This is needed because some catastrophic event, such as a major health crisis, can quickly and irreversibly eat up their savings and make it impossible for them to sustain their lifestyle to the end of their lives.

2

Note that he was only echoing the famous quote by Henry Ford: “It's not the employer who pays the wages. Employers only handle the money. It's the customer who pays the wages.”

3

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

4

Brunel, Jean L.P. Integrated Wealth Management: The New Direction for Portfolio Managers. Institutional Investor Books, a Division of Euromoney Institutional Investors PLC, 2002. (2nd ed., 2006.)

5

Brinson, Gary P., L. Randolf Hood, and Gilbert L. Beebower. “Determinants of Portfolio Performance.” Financial Analysts Journal, 42(4), July/August 1986 or, Brinson, Gary P., Brian D. Singer, and Gilbert L. Beebower. “Determinants of Portfolio Performance II: An Update.” Financial Analysts Journal, 47(3), May/June 1991, pp. 40–48.

6

According to Richard M. Segal, “shirtsleeves to shirtsleeves in three generations” is an American translation of a Lancashire proverb, “there's nobbut three generations atween a clog and clog.” Some say that Andrew Carnegie, the famed 1800s industrialist from Scotland, brought the proverb's message to the New World. Further investigation proves that the adage is not unique to any one country or culture. In Italian, it is “dalle stalle alle stelle alle stalle” (“from stalls to stars to stalls”). The Spanish say, “quien no lo tiene, lo hance; y quien lo tiene, lo deshance” (“who doesn't have it, does it, and who has it, misuses it”). Even non-Western cultures, including the Chinese, have a similar proverb. This quote was authored in 2008; Mr. Segal is the chair of the Family Business Council, a membership organization of family-owned businesses. The Chinese version of this proverb mentioned above, but not quoted is: “wealth never survives three generations,” while the Japanese say “rice paddies to rice paddies in three generations.”

7

This is the point at which readers who are interested in detail might want to brush up on the differences between the concepts of total and marginal utility in economics. The simple insight is that marginal utility decreases as more and more of a good or service is consumed, while total utility is the sum of all marginal utilities for a given good or service. Thus, one can have a good that has a high marginal utility but a low total utility, as only small quantities of that good are purchased and vice versa. Ostensibly, the concept is applicable to financial wealth.

8

Gray, Lisa. Generational Wealth Management: A Guide for Fostering Global Family Wealth. Euromoney Books, 2010, pp. 11–13. Lisa Gray acknowledges that the term “Authentic Capital” was coined by James E. Hughes, Jr., and inspired her in the differentiations of the various forms of assets on which a family can draw.

9

The term “interaction” here and in subsequent occurrences within this book is meant to convey the idea that the various disciplines do not exist in a vacuum. Although a few of these interactions may be unwitting, most reflect the fact that what is done within one sphere has a direct – and often predictable – impact in another, in somewhat of an inevitable manner. A well-known Georgia family suffered from on such interaction, which did not have to be: the family hired two private jets to fly to a holiday event, and one of the two planes crashed. A wealthy family does not have to, but certainly may fly private. Yet, sticking to the example, the plane that crashed was said to have all trustees of all family trusts onboard; a different choice as to who sat in which plane might have helped avoid the catastrophe. This could, in the words of the Family Office Exchange founded by Sara Hamilton, have come under the “risk management” header.

9

The term “interaction” here and in subsequent occurrences within this book is meant to convey the idea that the various disciplines do not exist in a vacuum. Although a few of these interactions may be unwitting, most reflect the fact that what is done within one sphere has a direct – and often predictable – impact in another, in somewhat of an inevitable manner. A well-known Georgia family suffered from on such interaction, which did not have to be: the family hired two private jets to fly to a holiday event, and one of the two planes crashed. A wealthy family does not have to, but certainly may fly private. Yet, sticking to the example, the plane that crashed was said to have all trustees of all family trusts onboard; a different choice as to who sat in which plane might have helped avoid the catastrophe. This could, in the words of the Family Office Exchange founded by Sara Hamilton, have come under the “risk management” header.