Three Steps To Help Clients Clarify Wealth PlansThree Steps To Help Clients Clarify Wealth Plans

Creating and executing an appropriate wealth management plan can be confusing and daunting for private investors.  There’s no shortage of wealth management advice.  But parsing true unconflicted advice from marketing is no easy task.  And even figuring out how to assimilate good advice has its challenges.

As Rock and Roll Hall of Famer Tom Waits said, “We are buried beneath the weight of information, which is being confused with knowledge.”

Adding a sense of clarity to wealth and investment planning information overload is how advisors can add real value.  One easy-to-read guide advisors can use when working with investors is Ashvin B. Chhabra’s new book, The Aspirational Investor.  Ashvin is one of the founders of Goals Based Wealth Management, which integrates modern portfolio theory with behavioral finance.  The Aspirational Investor sets a path that incorporates many of the more macro issues families of wealth need to address and suggests ways for private investors to work with their advisors in setting a wealth plan that truly meets long-term goals.  In other words, Ashvin helps investors see the forest through the trees.

Three Steps to Frame Plan

Over lunch, Ashvin and I discussed the application of this approach to investors across the wealth spectrum.  Here are three steps to help frame a wealth plan, whether or not you follow a strict goals-based approach:

Identify personal goals and the amount of wealth that would be needed to achieve them.  Ashvin thinks about goals as falling into one of three buckets. The first covers necessities, such as a safety net in case of unemployment or illness and what would be required to cover basics such as shelter at an expected level. The second covers things that are important, such as lifestyle or education costs for children. The third is aspirational, those things that dreams are made of, such as philanthropy, owning a business or extensive travel.

Thinking about goals in this manners will help set a minimum floor and a stretch goal for what your client will need financially.

Focus more on risk allocation than on individual investments.  When creating an asset allocation, ensure all of a client’s existing assets are incorporated in the strategy and assigned to an appropriate goal.  The purpose of the asset will be reflected in which bucket it’s assigned. For example, essential, or necessary, goals may include insurance and a home. Retirement assets would also be in this bucket and could include both low risk/low return capital preservation assets and market assets due to the long-term time horizon.  Important assets would include market investments such as stocks, bonds, cash, private equity, commodities and real estate.  Aspirational assets could include riskier assets, such as stock options or a business.  But they could also include cash to fund opportunities.

Goal-setting will provide an estimate of the money needed.  Once the amount of money needed is known, that can be a check to see if goals can be realistically obtained.  The investment strategy must then be structured with the correct risk allocation—necessary, important, aspirational—to maximize the tradeoffs, for instance, achieving essential goals with high certainty.

Once the overall risk allocation is set, it’s important to have clear benchmarks that reflect the role of the assets and the mix.  Rebalance portfolios. Create customized benchmarks.    These will be critical in helping clients understand how their portfolios are performing.

The key to a successful long-term client relationship is crafting an understandable strategy that can clearly demonstrate how it can help achieve goals.  So next time you find yourself reaching for the Monte Carlo simulation—why not keep it simple?