Case Study:
Tom and Patricia Morgan have two children, Charlie and Samantha. Tom and Patricia have recently retired, they have $5 million in savings and no debt. Charlie and his wife Lisa have two children ages 13 and 15 years old. Charlie is an architect and Lisa is a nurse. They have $1 million in savings and are focused on saving for the children’s college expenses and traveling with the family. Samantha is a single mother, with $500,000 in savings, and a young daughter with special needs. Tom and Patricia have set up trusts for the children and grandchildren to help them achieve their respective goals. (See figure 2.)
An advisor might treat this family as a single relationship, but their respective goals and objectives will be very different depending upon the respective dollar amounts, cash-flow needs and time horizons. A family shouldn’t be defined by their wealth. Each account should have its own goals and a customized portfolio designed to meet those goals.
Incorporating Goals-Based Investing
Working with HNW families requires a broader set of capabilities, moving beyond the portfolio. Wealth advisors need to evolve their practices to better meet the growing needs of these investors, evolving from selling products to solving needs, and expanding capabilities to include trust and estate issues, dealing with concentrated positions, lending, charitable giving, and tax management. Goals-based wealth management provides the framework for addressing these needs.
Wealth advisors should adopt a goals-based wealth management approach to solve the needs of HNW families, changing their relationship and value proposition to better align with the family’s goals. HNW families have complex needs, and goals-based wealth management is designed to identify them and then deal with them individually. Goals-based wealth management is the preferable model for both wealth advisors and HNW families.
Goals-based investing provides a road map for families large and small. Some families may be more focused on intergenerational wealth transfers, and others may be more focused on retirement planning. Some may be focused on charitable giving, while others are solving for college funding. Typically, HNW families are solving for multiple needs simultaneously, and their portfolios should be tailored to meeting each goal.
Wealth management is an ever-evolving set of disciplines. The one constant is serving the needs of families. Larger families often have more complexity and may require specialized team coverage. Wealth management is a multigenerational endeavor; therefore, it is incumbent on the advisor to develop relationships with the whole family to effectively deal with the inevitable wealth transfer challenges to come.
Key Takeaways
Goals-based investing is designed to identify and solve for multiple goals simultaneously. Rather than merely optimizing a portfolio to maximize returns or minimize risks, goals-based investing recognizes that HNW families have multiple goals, with different cash-flow needs, and different time horizons to achieve them.
A goals-based wealth management process provides the framework for achieving various goals across family accounts and developing the appropriate solutions for each account. Family goals are typically geared toward life events like transferring wealth, college funding, and charitable giving, each of which requires a dedicated focus to achieve the desired outcome. Affluent families are increasingly considering sustainable investing, aligning their portfolios and purpose, and wealth advisors need to understand and respond to this growing trend.
Wealth advisors need to engage all HNW family members and develop relationships with children, siblings, and other trusted advisors. A few tactics to engage wealthy families include engaging the children, educating the family, conducting family meetings, developing personal relationships and developing a family mission statement.
In this article, I examined the limitations of traditional finance, including MPT, and discussed behavioral finance and the inherent biases that we all exhibit. MPT assumes that investors are rational and will select optimal portfolios; it assumes that the future will be like the past. Not all investors seek to maximize returns or minimize risk. Most investors are solving for multiple goals with different time frames to achieve those goals. Goals-based investing is a more appropriate way of solving for client needs, marrying attributes of MPT and behavioral finance.
In this article, I suggested framing the investment discussion in terms of the role that the various investments play—growth, income, defense, and inflation hedging. A HNW family may use similar investments across their various accounts, but the weighting of the investments will vary based on their respective goals, cash flow needs, risk-tolerance, and time horizon, among other issues.
Tony Davidow, CIMA is president and founder of T. Davidow Consulting, LLC an independent advisory firm focused on the needs and challenges facing the financial services industry.