Q4 2013

On Oct 03, 2013 In Goals-based Investing 

Integrative Wealth Management: Our View

Over the past half-century, our American health care system has evolved from a model dominated by general practitioners— physicians treating a geographically concentrated group of patients across a wide range of ailments—to one dominated by specialists, each of which treats an ever-growing number of patients with a progressively narrower set of medical conditions.

From the patient's perspective, having access to expert diagnostic resources and sophisticated treatment options for each specific condition is highly prized. However, some patients— particularly those being treated by a multitude of specialists— report their desire for a more holistic view to their health care, one which attempts to measure and manage their overall health in its broadest sense rather than viewing them as simply "…the sum of their illnesses." (1)

In response, major medical centers have created "integrative medicine" offerings designed to aggregate patient health concerns into a single view and complement modern medicine with traditional or alternative methods. One such local center invites patients to "… experience a new approach to medical care that brings you and your provider together in a dynamic partnership dedicated to optimizing your health and healing."(2) Of course, this "new approach," helpful though it may be, is not dissimilar to the old approach used in times long past.

Like health care, wealth management ought to be integrative in its approach. Wealth management ought to be comprehensive, taking into account all relevant aspects of the investor's financial health. Wealth management ought to be holistic, treating each aspect of one's wealth not in isolation, but in the context of the broader personal or family picture. And wealth management ought to incorporate alternative methodologies, combining modern methods with complementary approaches tested over previous generations.

We believe that for wealth management to be truly integrative, it must:

  1. Recognize the complex, dynamic nature of personal financial goals. Individuals have multiple financial goals with differing levels of priority, timing, and risk tolerance. Goals and priorities change over time; those changes are themselves a source of risk for investors.
  2. Highlight the ultimate connection between cashflow planning and portfolio allocation. All personal financial goals can be expressed, at some point in time, in terms of required cashflows. All investment assets will be monetized on some future date to support those cashflows. Understanding the time horizon of required cashflows in relation to that of investment assets is key.
  3. Encompass a multi-generational time horizon. Capital will be consumed by each generation in supporting its lifestyle, entrepreneurial, philanthropic, and personal development goals. Balancing the needs and goals of senior generations against those of junior and future generations requires conscious inter-generational and intra-generational capital allocation policies, processes, and procedures.
  4. Focus on total return—net of all taxes and fees. Lack of cashflow planning and poor liquidity management often leads investors to focus too heavily on income production, reducing longterm expected returns and accelerating tax liabilities. For taxable investors, net-of-tax, net-of-fee returns should be the focus.
  5. Acknowledge the effects of portfolio volatility on long-term compounded returns. Even the most sophisticated investors may struggle to understand the connection between interim portfolio volatility and long-term compounded returns. At a given level of average annual return and spending, portfolios exhibiting lower year-to-year volatility will yield higher compounded rates of return over time.
  6. Broaden the scope of risk budgeting to encompass non-investment decisions. Risk budgeting often focuses on decisions of asset allocation, portfolio construction, and manager selection, while ignoring the degree to which non-investment uncertainties will affect long-term wealth outcomes. Decisions on spending policy, income tax strategies, estate plans, and insurance coverage all impact longterm portfolio values significantly.
  7. Incorporate the concept of decision risk and its potential effects. The risk of "changing horses in midstream" 3 is significant, especially in pooled family investment vehicles where governance and decision-making tends to follow generational cycles. For wealth management to be truly integrative, it must recognize the reality of decision risk and put in place guidelines, policies, and "rules of thumb" to help mitigate that risk.
  8. Recognize the potential effects of government policies—both current and prospective—on future wealth outcomes. Within just the last few years, U.S.-based investors have witnessed extraordinary monetary stimulus, a major change in income tax rates, and three different estate tax regimes in three successive years. Global policy risks also abound, as markets become more interconnected and geopolitical risks multiply. Moreover, major policy initiatives such as Obamacare may completely change the structure of certain industries, impacting especially those families holding concentrated equity positions in affected companies.
  9. Marry the wealth structuring process with the execution steps necessary to implement and maintain optimal wealth structures. The "best laid plans" adopted by families to preserve and grow longterm wealth are only beneficial when effectively implemented, maintained, monitored, and improved over time. This process is neither easy, exciting, nor profitable for service providers, but excellence in execution is a key component of wealth preservation.
  10. Receive ongoing support from a stable and sustainable family office and wealth advisory platform. Financial institutions—banks, brokerage firms, and investment managers—have always struggled to maintain corporate stability and continuity in client service. In recent years, however, the problem has multiplied several fold, as government bailouts, regulations, and oversight have led to dramatic restructurings. The likelihood of that such institutional instability will be ongoing needs to be considered in formulating and executing long-term wealth management strategies.

In my grandmother's day, country doctors traveled to the farm, treated old and young alike on myriad health issues, counseled women on matters of child rearing and nutrition, and occasionally applied some ancient remedy not found in modern medical texts. They were practicing integrative medicine, albeit without some of the knowledge and tools now extant. We certainly are not suggesting that modern medicine ought to be abandoned in favor of frontier methods, but we do acknowledge that many of us have felt "dis-integrated" by our interactions with the modern medical complex. Likewise, we do not suggest that modern investors eschew all of the knowledge, insights, and tools that we have gained since the birth of modern portfolio theory in the mid-twentieth century. We do assert, however, that integrative wealth management happens only through ongoing, purposeful interaction between family members and their advisors across a wide spectrum of both financial and nonfinancial topics—an approach that is in conflict with the infinitely scalable, profit-driven model practiced today by most of the investment industry.

(1) "What is Integrative Medicine?" by Katherine Kam, www.webmd.com, 2006.
(2) www.dukeintegrativemedicine.org
(3) Attributed to Jean Brunel

Our Updates

Click on the above categories to filter the content. 'Goals Based Investing' gives some background on our philosophy.