Читать книгу Goals-Based Wealth Management - Jean L. P. Brunel - Страница 7

The first book I wrote on the topic of Integrated Wealth Management was published in 2002, with a revised edition in 2006.4 In truth, it was a textbook whose audience turned out to be chiefly comprised of students of the industry. One day, I actually told a friend who had asked me to sign a copy he had just bought that the best use I could think of for the book was as a means of propping up a table that had one leg shorter than the other three. Another joke I probably overused was that it should be prescribed to people who had trouble sleeping!

Clearly, I only half meant those jokes, as it had taken me quite a bit more than a year to write the book and I had poured everything I knew – or knew of – into the effort. I was quite pleased (and proud) of the end product. I saw it at the time as a bit of a reference book to which one could go to see not only what one person (me) thought about a particular issue, but, probably more importantly, what the current leading thinkers in the industry thought. I received some praise for it, and it was mentioned as a reason behind an award I received from the CFA Institute in 2011, which is quite close to my heart. Therefore, I still look back on the effort as both useful and quite worthwhile. With the second edition nearly nine years old, I could simply have endeavored to bring the text up-to-date, called it a third edition, and left it at that.

Yet, I decided to take a completely different route. I decided that the experience – quite a bit of it practical – gained over the last fifteen years or so required me to take a different tack. In truth, the theory behind our industry and its day-to-day activities has evolved somewhat, but the change has not been radical. Even something as “big” as goals-based wealth management, which was pioneered in 2002, has really not caused massive change in the last few years; we have seen slow evolution, at best. Goals-based policy formulation itself has only seen modest refinements, arguably in large measure because it has yet to be broadly adopted. We first need to see what really causes practical implementation challenges and what works well as is before we can finalize the full specification of the approach. In short, you could argue that the baby has been born, but that it still needs to go through many of its normal growth phases.

This book is, therefore, about sharing that experience, with the main focus being on what I see as the cornerstone: goals-based wealth management. The vast majority of people who know something about managing assets or wealth agree with the simple statement that the key to long-term success resides in having the right strategy. This truth has often been phrased in ways that obscure rather than clarify the point: “Asset allocation is the main contributor to long-term returns.” In fact, the statement is only partially true and, more importantly, is missing a key word. The correct formulation5 is that one's “asset allocation is the main contributor to long-term risk.” In fact, I take this one step further; I add the word “strategic” so that the phrase becomes: “Strategic asset allocation is the main contributor to long-term risk.” This allows one to distinguish between the long-term investment policy and tactical portfolio rebalancing or tilting. The former is what drives the long-term performance expectations for the portfolio in terms of both return and risk. The latter involves the activities associated with shorter-term portfolio moves either to bring a portfolio that has drifted away from policy – as a result of market performance – back to it or to take advantage of occasional, perceived market opportunities. These rarely generate more than a minute portion of total return and, if properly managed and executed, return volatility; in fact, rebalancing or tactical tilting often fails to generate extra returns when it is executed in a tax-oblivious manner and taxes are taken into consideration. So, in short, the fundamental element of our thinking should be that strategic asset allocation drives long-term expected risk and, thus, returns.

Experience has taught me that goals-based wealth management is the best way to deal with the formulation of that strategic asset allocation, at least when it comes to individuals with more financial than human capital. Clearly, the experience I want to share does not exist in a vacuum. I will have to recall certain facets of theory from time to time; if only to stay grounded. Yet, I will refrain from detailed exposition of theory and will rather strive to keep linking it to what it means to the affluent and their advisors alike, in a very practical way. In fact, the conceptual framework used in each of the four parts of the book will involve setting out the issue with a sufficient recall of theory to provide the base on which and the principles with which we can build. I will then translate this base and these principles into day-to-day language, illustrating one of the most important lessons I have learned in the last fifteen years: clients do not ask advisors how to make a watch; they ask them what time it is! To wit, they ask us to translate for them the stuff we learn in our jargon, which I have come to dub “financialese.” Being a client certainly does not absolve any affluent individual from his or her share of responsibility in the joint enterprise in which we cooperate: the management of their wealth. However, these responsibilities do not extend to the need to learn a foreign language. Clients should feel able to rely on advisors to translate their needs into the realities of capital markets and to explain to them what is possible and what is not, how one can proceed and what to expect.

The goal here is to focus on the most important issue affecting the affluent: how their various goals, constraints, and preferences should drive the strategic – or policy – allocation of their financial assets and how the process has to take into account the very natural fact that we are all subject to a variety of emotions. Will these always help us? The effort must, therefore, reflect all of the client's personal circumstances to allow the advisor to feel safe that he or she does understand what he or she needs to do before actually doing anything. It should also allows the client to feel equally safe so that he or she can accept that there are emotional elements at play and that he or she has to learn how to deal with and control them. Last century, at J.P. Morgan, one of our standard lines was that we would not touch a penny of our clients' assets until we knew exactly what the client needed. This was not a principle limited to the Trust and Investment Division; the classic JPM advertisement, which displayed a blank mirror and stated that “Some time, the best thing to do is to do nothing,” illustrates that it applied to the institution as a whole. The main message there and in what we told clients is that we would not start work and charge a fee if we did not think that the client's goals were feasible. And before we could tell whether these goals were feasible, we had to understand them. In the Preface, I mentioned the case of a young man with $10 million in assets who spent $250,000 a year. I stated that I would not consider him affluent because he could not maintain that level of spending unless he quickly got a job to add wages to investment income. I am sure that more than one family patriarch or matriarch will immediately think of this or that descendant who needs to adjust their lifestyle to be sure that some of the capital that the individual inherited is left for his or her own descendants; similarly, I am sure that a few of our readers within the wealth management industry will recognize real-life circumstances when they had clients who were trying to achieve the impossible. Just as no medical doctor would try 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 least too difficult to implement until either they have been simplified or some form of change has occurred in the landscape. Being involved in a consulting role, my focus has always been to think of what the world could and should be. I am sure that there are quite a few operational aspects of this revised set-up I do not fully understand in their true detail or complexity. I also know that I am not the one who might have to accept lower profitability in the short term in a bid to raise profitability in the long term.

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!