Yet, I also hope that you will realize that each of us needs to broaden our horizons. Most of us have approached this mission of ours from the perspective of a small fraction of the universe. I started life as a security analyst, became a portfolio manager, and then a strategist and member of senior management. Whatever I had to learn about taxes, behavioral finance, non-traditional investment strategies, transaction flows, client communication, and the simple discovery of multiple goals, multiple risk profiles, and multiple time horizons occurred through chance and experience. I would love to say that progress was always linear and in the right direction! That would be the biggest lie. I learned through trial and error – as we all do – always putting the best interest of the client first. I hope this book will allow readers to sidestep a few of the traps into which I fell. Perhaps it will confirm a few intuitions as well as relegate others to the “doomed” bin, thus speeding up the learning process. Most importantly, I hope it will convey the notion that this is not a job, but a profession, and that success will not come without passion. That passion must be geared toward our clients, who, as I was told many times when I was younger, do pay our salaries!
Part One
The Integrated Wealth Management Challenge
Part 1 of this book is dedicated to setting the stage pointing to the multiple challenges that wealth managers should expect to encounter and which are different from the institutional asset management norm. We look at the fact that managing wealth requires the applications of multiple disciplines and a solid evaluation of how they interact with one another; we illustrate one such interaction focusing on the issue of tax awareness and suggest that wealth management advisors should view being interpreters as a large part of their roles.
Chapter 1
Many Interrelated Disciplines
Crucial among these many challenges must be the notion that helping a family manage its wealth is much more than helping manage its financial assets. This misguided conception of the classical wealth management relationship is illustrated in Figure 1.1.
Figure 1.1 A Misguided Depiction of Family Wealth Management
This first chapter discusses the fundamental truth that family wealth management is broader than simple asset management and the difficulties this injects into the management process. Our point here is not to be comprehensive about these difficulties, as they alone could be the topic of another book. Rather, we mean first to take inventory and second to introduce a few of the alternative approaches which we have seen at work over the last twenty years or so. The serious student of these challenges should dig further.
Multiple Sources of Capital
At some elementary level, it is not hard to understand intuitively that there is more to any family than its bank or brokerage account. After all, if this is so obviously true for the average family, why would it be any different when the only change one makes from the average is to assume that the family is financially wealthy? No family can be simply reduced to its financial assets; if that were the case, why would it have occurred to anyone to create the phrase “from shirtsleeves to shirtsleeves in three generations?”6 Money certainly is a part of what a wealthy family is, but it is only a part, and hopefully not the most important.7
Lisa Gray coined the phrase “authentic assets”8 to refer to the many different sources of wealth that exist within a family; her crucial point is to warn us that financial assets are only a part of the management challenge faced by the wealthy and their families. At a minimum, let's consider just a few: clearly, the wealthy do have financial assets. But human, intellectual, social, emotional, philanthropic, and artistic dimensions cannot be ignored; and there are others. Each has its own definition, which can be generally accepted or hotly debated and many have been studied in the halls of academe for quite a while. Whether a family is indeed financially wealthy or not, it is still a grouping of related individuals who exist within a broader social context. Maximizing their financial wealth is rarely enough for all members of the family to feel duly fulfilled. In many ways, certain families have even adopted a mental framework that is well worth considering: financial wealth is an enabler in that it facilitates family members to seek overall, complete fulfillment, while less wealthy individuals often cannot focus on much more than making financial ends meet.
Expanding on the Corporate Analogy
There is even more to the wealth management challenge than the fact that there are various sources or definitions of capital. Families must deal with a variety of issues that are common across the whole wealth spectrum, although financial wealth or social prominence tend to magnify them somewhat. They must pay taxes on their income and need to meet their ongoing expenses. They must pay transfer taxes when some of the wealth passes from one generation to the next or simply from one individual to another. They must comply with rules and regulations, whether in the management of financial assets or otherwise. They often have important philanthropic intensions that require planning and executing. Last, but not least, they must manage a wide range of risks for which insurance exists in certain cases and not in others, and which wealth can exacerbate, for instance with respect to reputation risk!
Figures 1.2 and 1.3 help put this notion in the proper perspective by drawing on the comparison once suggested by Charlotte Beyer, whom we already met in the Preface. The first step in our logic is to illustrate the broad management problem facing the chief executive officer (CEO) of any corporation. Figure 1.2 provides a graphical depiction of the issue. It is mighty hard to think of the successful CEO of a successful company who only focused on a single dimension of his or her job: the business world is littered with failed companies where the CEO only had time for research, engineering, finance, or marketing – to pick four areas at random. While not a totally inescapable proof, as there must be an exception to any rule, this helps set the simple proposition that a corporation is a complex assemblage of multiple functions and that the person at the top of the ladder must understand both how each of these functions operates individually and how they all work and come together to create the business of the whole firm for which he or she is responsible.
Figure 1.2 The Multiple Dimensions of Corporate Management
Figure 1.3 The Multiple Dimensions of Family Wealth Management
Now, let's apply the same analytical framework to a family, assuming that a family is no different than a corporation. Making this assumption requires us to leave aside a number of important considerations, but the case can simply be made that these are not crucial to our point here. Let's imagine the head of the family as the CEO of his or her family's wealth, a company Charlotte Beyer calls My Wealth, Inc. Just as was the case for a corporation, there are multiple dimensions and the successful high net worth individual must first realize the multiplicity of these dimensions, and, second, be able to deal with all of them. Figure 1.3 illustrates this point and recalls a number of the dimensions we mentioned in the introduction for this chapter.
Just as it would be silly for a corporate CEO to focus on a single aspect of the business, it is equally misguided for an individual to consider