The Taxable Investor's Manifesto. Stuart E. Lucas

management; doing it right will help you grow your assets faster and with less effort.

Managing taxable wealth well can be powerfully simple: lower friction costs, raise return potential, and extend your time horizon (in the context of this book, friction costs are the combined drag of fees and taxes). Armed with a few key tools for success – clear objectives, aligned interests with your advisors, a decent system of accountability, and the discipline to persist with your game plan – your money will work for you, not the other way around. Then you can focus most of your attention on what really interests you and what you're really good at. A straightforward strategy is the right answer for most people who have full lives, are leading rewarding careers, and whose careers, families, and other callings are deserving of full attention. This integrated approach to taxable investing is a step-change in thinking that can help you build a more secure future and a more meaningful livelihood in an uncertain world. Nevertheless, because inertia is powerful and people don't change easily, unless you push for change and remain vigilant, change won't happen.

You can also make wealth management really complex. Complexity can add additional value, especially when managing on a multigenerational basis. But the hunt for superior investment returns – the place where most investors and most financial advisors focus their attention – is an extraordinarily competitive zero-sum game. You are competing against, or trying to align with, hundreds of thousands of well-trained professionals, most of whom extract high fees for uncertain value. Those who extract high fees have the resources and incentives to craft highly persuasive marketing efforts.¹ Is it their marketing or their skill that makes you think that by hiring them you will outperform? Can you tell the difference, especially after tax?

Adding to the challenge, good estate planning can create more value, more predictably, than investing. Good planning requires experienced, interdisciplinary talent and finely crafted strategy. Good estate planning also often leads to splitting assets into many small, legally distinct components and then needing to reassemble them to make the whole worth more than the sum of the parts. One friend calls it trying to put Humpty Dumpty back together again. Governance and administration become really complicated without good systems to manage all the disparate bits, individually and collectively. To pursue this complex path, it really helps to have large-scale, uncommon insight, shrewd hiring practices, and strong discipline. You will need help; the right help is essential.

      In this book, I explore both the straightforward and the more complex path. Fortunately, any family investment office, business owner, successful career builder, or young professional, regardless of the size of their wealth, can achieve success using either path. They simply need to match skill with strategy, build the right support structure, and follow the guideposts in this manifesto. Either path creates multiple ways to add value and does so with high odds of success; neither one embraces the traditional “holy grail” of “beating the market,” upon which most wealth advisors market their wares.

      For those readers who are interested, the manifesto cites academic and other well-researched literature to supply you with supporting data for key concepts. There is good research about taxable investing out there, but it is diffuse and hard to find. This manifesto aims to provide a single, comprehensive, accessible guide that taxable investors and their advisors can use to sharpen their own thinking, align interests, and improve results over decades, even generations, by millions of dollars.

      The Taxable Investor's Manifesto is organized in a straightforward manner. Chapters 1 to 7 describe seven value drivers that pertain to everyone and that are straightforward to execute. They should be approached as a coordinated strategy, not something from which to cherry-pick one or two ideas. Each component adds value. Collectively, they are at their most powerful and profitable; if one component fails, you still have multiple ways to win. One can sum up this advice as a Hippocratic Oath for taxable investors: First, do no harm.

Chapters 8 and 9 describe opportunities for those with greater scale and the inclination for complexity to add incremental investment value net of taxes. In addition to considerable analytical skill, this requires excellent judgment about people and opportunity – judgment born of experience and independent thinking. Possibly the most difficult challenge here is allocating and reallocating capital effectively. As a taxable investor, every time you sell a successful investment you must share your gains with the government. Every time you pay tax, you are left with a smaller base of capital on which to compound returns going forward. If you're an advisor, every time your client pays investment-related taxes, those are assets on which you no longer earn fees. This complexity is not shared by tax-exempt investors or their advisors. It requires different perspective and special skill.

      Chapters 10, 11, and 12 integrate the business, financial, and cultural elements of managing a complex, potentially multigenerational, family enterprise. At their core, family enterprises require values and vision that support a strong economic engine and a flourishing family. They also must navigate complex estate taxes and the evolution of control and ownership from one generation to the next. Building and managing all this in the face of change, uncertainty, and timeframes that can approach 50 years or more is no small challenge, but it can be done, and the results are powerful.

      Chapter 13 is a reminder to everyone that investing involves risk. I explore the key risks to investing in this way, at least the ones I can foresee. It's important to process the risks to be alert to them and to not be distracted by the inevitable ups and downs of market movements that are unavoidable parts of the landscape.

      Many wealth owners reading this manifesto are mulling over whether to manage their financial assets themselves or to hire an advisor to help them. Having read it, I believe that most will be convinced that choosing a skilled advisor is instrumental to long-term success. You will also have increasing conviction to identify the right advisor, hold them accountable, and compensate them appropriately. The right talent comes at a price but pays for itself many times over. In Chapter 14, I discuss how to choose the advisor you need to help you accomplish your objectives. The answer varies depending on your scale, the complexity of your circumstances, and your time horizon. The challenge is to find a person or team who offers what you need, has the mindset and skills to deliver on their promise, and whose interests are aligned with yours.

A word about financial advisors: many find themselves in a bind. Why? They know how difficult it is to beat the market, but they also know clients will pay them for advice that feels complicated even if it's unlikely to work. Even when advisors know that clients will get better results with a more straightforward solution, they fear that clients won't pay for what sounds simple and straightforward. The thinking goes that indexing is cheap and doesn't add value, so why pay an advisor to recommend it?

      This manifesto illuminates a path out of this bind, to the benefit of both wealth owners and their advisors. There is so much value creation that goes into comprehensive, strategic, after-tax wealth management that has largely gone unrecognized, undelivered, unmeasured, and unpaid for. Looking forward, we can change this. Taxable investors deserve to get good advice and advisors deserve to get paid fairly for delivering it.

      Note

      1 1 One of my favorite quotes from John “Jack” Bogle, the founder of Vanguard Group, comes from his April 13, 2004, “Gary M. Brinson Distinguished Lecture,” where he speaks about why it was taking so long for indexing to catch on: “The problem faced by low cost no-load