Written by:- Hutch Ashoo and Chris Snyder, Co-Founders of Pillar Wealth Management. A fiduciary wealth management firm delivering custom investing and planning advice to families with a minimum of $5 million, and up to $500 million of liquid investable assets.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
Table of Contents
- What Most Advisors Say When the Market Crashes
- Kingdom 1: Improving Your Investment Performance
- 7 Avoidable Costs that Erode Performance Gains
- How to Achieve the Highest Investment Performance
- Kingdom 2: Choosing the Right Financial Advisor
- The 5 Non-Negotiables of an Ultra-High Net Worth Financial Advisor:
- 6 Warning Signs Your Financial Advisor Is Leading You to a Life of Anxious Uncertainty
- 6 Ways the Wrong Advisor Can Threaten Your Portfolio’s Long Term Health
- 4. Depends on Erroneous Expectation of Lifespan
- 5. Denies the Certainty of Future Stock Market Implosions
- 6. Makes Poor Assumptions about Your Business Sale Price
- The ONLY 5 Things You Can Control
- Warning Sign 6: You Believe You Need to Understand Finance Before Choosing an Advisor
- Kingdom 3: Protecting your wealth
- What Is Important about Money to You?
- The Secret to Successful Wealth Protection
- Unwind Your Risk from Highly Concentrated Wealth
- A Word of Caution
- Transferring Wealth and Prosperity to Future Generations
- Kingdom 3 Next Steps – Answer These Questions
It’s been a wild, historical and bad couple of weeks for Wall Street.
In fact, last week was the worst week for the market since the 2008 financial crisis.
The coronavirus wiped $3.18 trillion in market value from U.S. stocks this week, according to estimates from S&P Dow Jones Indices. Investors also witnessed the fastest market correction on record, as the S&P 500 took just six sessions to fall more than 11% from a peak.
Five days and more than $3 trillion lost.
You’re about to discover an approach to financial advisory services and wealth management that looks very different from what big banks and Wall Street firms can deliver.
If you’ve worked with any of them, you know what we’re talking about.
You know what you don’t want. You don’t want cookie cutter investment plans. You don’t want the same service that families with $1,000,000 receive. You don’t want deer in the headlights looks when you bring up estate planning or high net worth tax planning. You don’t want a financial advisor who just graduated, and you don’t want to talk to a different person every time you have a question.
The question is – what DO you want?
You want strong performance. You want customized service. You want wealth protection and financial serenity. You want to feel known, understood, and prioritized.
But how does that look? What services should come with that broad level of expectation from an expert financial planner?
This guide will walk you through three areas – three kingdoms, as we’re calling them – because each must be conquered to get what you want.
Kingdom 1: Improving your investment performance
Kingdom 2: Choosing the right financial advisor
Kingdom 3: Protecting your wealth
Taken together, these kingdoms contain the service, the philosophy, the expertise, the experience, the prioritization, the process, and the performance you can and will receive when working with Pillar Wealth Management.
When you conquer all three kingdoms, you will have what you set out to acquire.
When times turn bad, most financial advisors – including the fiduciaries – are exposed for what they really are: Button pushers just following the herd, doing what everyone else does, telling you that “markets always go up over time” and “just wait this out and you’ll make it all back.”
We meet with all sorts of ultra-high net worth and high net worth investors. We cannot count how many of them come to us with portfolios created by other advisors – including fiduciaries – that are allocated 60% equities and 40% bonds.
The 60/40 split is used by some very big players in the financial industry, including some well-known pension funds and college endowments. It is very popular. But it lost about 34% during the great recession!!!
What Most Advisors Say When the Market Crashes
Most advisors – again including many fiduciaries – will tell you that everyone loses during a market crash, but the key is to just “stay the course.” Don’t panic, stay invested, markets always go up over time. Just wait this out, and you’ll recover your losses.
Can you imagine being told this by your fiduciary advisor after he or she lost nearly 40% of your wealth with a 60/40 split during a financial meltdown?
Whether you understand investing or not, it’s unacceptable advice.
What would you think of your financial advisor in that scenario?
Would you still send them a Christmas card that year? Invite them to your retirement party? The retirement that now looks far more perilous than it did a year ago?
Pillar Wealth Management is different. We refuse to put our Ultra-High Net Worth Clients’ wealth at risk. So if you think your portfolio is over exposed in the market, you’re encouraged to schedule a chat with Hutch Ashoo, CEO and Co-founder of Pillar Wealth management. Hutch is a fiduciary wealth manager and can quickly assess whether you’re being served by your current financial advisor.
“Markets always go up over time” is an insult to wealthy investors who have lost millions of dollars due to terrible financial planning like a 60/40 split.
A true fiduciary would be explaining how they helped you avoid the huge losses that are walloping everyone else.
Is there a better way?
If even fiduciary advisors – ones who are supposed to be acting in their clients’ best interests – are using these kinds of methods, how do you avoid suffering such great losses if the next financial meltdown hits right before you planned to retire?
To learn more about 60/40 and learn how to Survive the Next Market Crash without Losing 33.8% of Your Wealth
Back on topic and the first of the three kingdoms.
Kingdom 1: Improving Your Investment Performance
The Right Goals
Investment performance begins by choosing the right goals. The right goal is not a percentage return or a certain dollar amount. Your goals are inseparable from your lifestyle, personal achievements, and legacy. The things and people you care about most. How you define your life.
The question you should be asked by any wealth manager worth your time is:
What do you really want your money to accomplish?
To answer that, you need a customized financial planning process built around your unique life situation. In addition to your net worth, this customized process will incorporate:
- Family situation
- Health and the health of your family
- Retirement dreams
- Values about time and money
- Pursuits you care about
- Pending or unresolved deals and disputes
- Sources of income now and in the future
- And much more…
The Big Bank Performance Failure
Here’s the simple truth. If you rely on recommendations, systems, and processes from big banks, run-of-the-mill investment advisories, and discount brokers, you will have a more difficult time reaching your goals.
These large firms have commoditized the investment process. They ask everyone the same questions. They rely on name familiarity and the illusion of authority based on their size.
But here’s the unvarnished truth: Big banks do not earn stronger performance, and they are not more secure. Remember these names? Bear Stearns. Washington Mutual. Lehman Brothers. These are big banks that no longer exist since they crumbled in the 2008 crash.
Why Does Performance Really Matter to You?
Performance matters not because you care about some random numerical goal fed to you by the person managing your money. It matters because you want the confidence and security to live your life the way you want, without anxiety or fear.
Therefore – true security comes from maximized optimum performance. What does this mean? It means finding the perfect balance between performance and risk.
This is what Pillar Wealth Management obsessively pursues for each and every one of our clients as we manage their money – customized around their personal goals and desires.
The Supreme Value of Customization
It simply can’t be overstated too much. The best investment plan is one that is customized around your specific life situation, desires, goals, and lifestyle. And the best fiduciary financial advisor near you should have a clear process for creating that plan.
Every person, every family, every affluent investor, has a different path to their own security. That’s why this is a quest through three kingdoms. Each person is on their own journey, and how they navigate their challenges will look different from every other person.
That’s why Pillar Wealth Management refuses to offer cookie-cutter solutions to our Ultra-High Net Worth Clients.
If you’d like to see what a custom, individualized investment plan looks like, you’re encouraged to email Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help navigate the best way FOR YOU, the Ultra-High Net Worth Investor to maximize returns and protect your wealth.
Here’s a quick description of how Pillar Wealth Management creates 100% customized investment plans for each high net worth and ultra-high net worth client:
1. Run Portfolio through 1000 Historically-Based High Stress Simulations
To accurately assess a portfolio’s true health, we need to see how it would have withstood real historical and present-day events. But even more than that, we need to see how it reacts to hypothetical scenarios too. We use historical market data – dating back 100 years – to simulate 1000 ‘what if’ scenarios that haven’t actually happened, but very well could.
The point of these simulations is to test how well your portfolio holds up to extreme stress.
The market is volatile. With more risk in your portfolio, it becomes more volatile. With less risk, less volatility. The right approach for you depends – once again – on choosing the right goals for your life. Your financial advisor should place high priority on incorporating your goals into your investment plan.
2. See if Your Portfolio Exceeds Your Goals in 75-90% of Simulations
If your portfolio projects to exceed your goals in 750 to 900 of the 1000 high stress scenarios, we deem you to be within the Comfort Zone.
This is the number you seek. In fact, this is true performance, because it means you are secure. Isn’t that what everyone really wants?
3. Make Quarterly Adjustments to Stay within the Zone
We re-run the 1000 scenarios every quarter – four times per year. By doing so, we can continually assure you that you are on track to live the lifestyle you desire for the rest of your life.
If your life situation changes, as it likely will at some point, or if world events take a major turn for the worse (or the better), and you fall outside the Comfort Zone, we make minor adjustments to get you back inside it. This is how a a financial planner to the affluent manages money differently.
With this approach, financial security is no longer a question. No other number can provide you a feeling of security with this degree of high confidence. Certainly not earning 17% one year and feeling great about it, but still wondering how you’ll do next year.
Security and Investment Performance
With an approach that takes a holistic view of your whole financial picture and not just your investments, we can help you make tough decisions and answer hard questions.
Questions like, should I sell my vacation home or keep it?
The answer to questions like that is found through the portfolio analysis process you just saw. Your homes, your other real estate investments, your businesses – these assets fit into your financial security too, even though they aren’t ‘investments’ in the narrowly defined Wall Street sense.
Yet some big bank advisors will propose absurd and highly risky plans. We have seen financial advisors near us opening eight different accounts, all positioned for aggressive growth, with 100% of their clients’ liquid assets in equities. This is, to put it politely, insane – if what you’re after is long term financial security and the achievement of all your lifestyle dreams and desires.
Any financial advisor who declares they can consistently outperform the stock market should be avoided.
This aggressive approach that pretends to be chasing the highest performance will, in more than 90% of situations, result in lower performance. And that’s just in one year. Over ten years, you will fall short pretty much 100% of the time.
One the contrary, it’s your priorities, values, and lifestyle dreams – combined with your financial situation – that should determine the level of performance you need in order to achieve financial security.
7 Avoidable Costs that Erode Performance Gains
You want a wealth manager who is obsessed – but with the right things. One thing we obsess over is minimizing avoidable costs that most high net worth investors don’t even realize they’re paying.
Why? Because earning 8% but paying 2% in avoidable costs is much, much worse than earning 8% and paying 0.5% in costs. For investors with $5 million to $500 million, that little percentage difference can mean millions over the life of your investments.
In other words, performance isn’t just about gaining. It’s also about not losing. Read this to see why many so-called fiduciary and certified financial planners will fail to protect their clients’ wealth in the next financial meltdown.
If your current financial advisor cares little about minimizing fees, costs and taxes for you, you’re encouraged to schedule a chat with Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help navigate the best way FOR YOU, the Ultra-High Net Worth Investor to minimize costs that are eating away at your wealth.
As for costs, here are just seven of the ones that we target tirelessly to help our clients not lose, as part of our standard investment advisory service.
1. Performance-Based Fees
One year of great performance doesn’t mean anything in the long run. So why should your financial advisor get a performance bonus for a “great” year? You’ll never see that money again, and it won’t translate to any future gains. Will the same advisor give you money back if they have a bad year?
2. Bond Spread Investment Costs
When you buy and then later sell a bond, the difference between the sell price and the purchase price is called the spread. When a bond manager sells bonds, the manager can take a percentage of that spread as payment. This is one way the managers who charge “zero fees and commissions” make their money. It’s a hidden cost, and you never even know you lost it!
3. Margin Interest Costs
Some non-fiduciary financial advisors who get paid depending on how much money they’re managing will encourage their clients to borrow against their assets to free up some liquidity.
This is kind of like a home equity line of credit, but with your investments instead. The money you borrow goes on margin. That act triggers two new costs for you – interest on the bond, and higher fees to your advisor.
4. Internal Investment Costs
Big banks and discount brokers excel at this one. They add internal fees to many of the investments they recommend to their clients, and the reality is buried in fine print in the prospectus. Some of these fees are as high as 1%. If you have $15 million being managed by one such advisor, 1% of that is $150,000.
Imagine paying these completely unnecessary fees to a financial advisor year after year. Millions of dollars, down the drain.
5. Active vs Passive Management
Multiple long term studies and new data that comes out every year consistently reveal the same truth: Active money managers fail to outperform the market, especially over long stretches of time. And because active managers tend to charge much higher fees, this too is an avoidable cost with little benefit for ultra-high net worth investors.
6. Short vs Long Term Capital Gains
Short term gains get taxed at the highest rate, currently at 37%. Long term gains get taxed at 20%. Do you want a wealth manager who triggers a bunch of short term gains? Even if they get “higher” performance, you’re very likely to lose it all, and more, in the taxes.
7. Tax Loss Cultivation
Some equities go up and produce realized gains, while others produce losses in the same year. A proactive wealth manager pays attention to this, and uses losses to offset some of the realized gains. Why do this? Because it reduces your tax burden.
This sort of work takes time, effort, awareness, and attention to detail. But every dollar you save using strategies like these adds up to tens or hundreds of thousands of dollars every year, and these savings are completely independent of the reported performance rates that everyone focuses on.
You want a financial advisor who obsesses over minimizing your costs, because that is the only way to truly maximize your performance.
If your current financial advisor cares little about minimizing fees, costs and taxes for you, you’re encouraged to send an email to Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help navigate the best way FOR YOU, the Ultra-High Net Worth Investor to minimize costs that are eating away at your wealth.
Your Life Is About Much More Than This…
From retirement, to the death of a spouse, to selling a business, with divorces, inheritances, and so many more life-altering situations, we have been privileged to help many affluent clients through dramatic life transitions.
This is why we use the term ‘maximized optimum performance.’ Because it involves all your major life decisions, achieving strong investment performance, and minimizing losses, debt, costs, and taxes.
Here are some decisions our clients have faced that we have helped them navigate:
- How to manage a 401k before and during retirement
- When to sell company stock shares, and how to minimize taxes in the process
- Evaluating life insurance policies
- Understanding the benefits and drawbacks of long term care insurance
- Paying off mortgages early verses the tax benefits of a continuing mortgage
- Helping with IRA rollovers
- Accessing retirement money before turning 59.5 (without penalties)
- Handling non-qualified retirement plans
- Deciding the best age to start drawing social security (this is another tax minimization issue)
- Navigating required minimum distributions (yet another tax issue)
- Estate planning and philanthropy
Do big banks and discount brokers offer all these services, as part of their standard service, and in tandem with your portfolio performance? Not even close. If you’ve ever wondered the difference between a wealth manager and a financial advisor, this is a big part of it.
Try asking your Schwab, Fidelity or even your big Wall Street firm financial advisor to have an intelligent conversation with your CPA or attorney about a matter like a Charitable Remainder trust, or the benefits of a family limited partnership! You’ll find out very quickly why you need a wealth manager, and not merely a certified financial planner.
If getting certified were like getting accepted into college, the wealth manager would be the one who built the college. That’s how vast the difference.
The fact is these big bank financial advisors are merely pawns in a big game Wall Street and discount brokers have created to trick you into believing you are receiving custom and informed advice!
As wealth managers, we work with CPAs, estate lawyers, insurance experts, and the other specialists you need in order to achieve the outcomes you desire. This too is performance. We call it ‘white glove’ wealth management, and it is all included in one base fee. No extra or hidden charges of any sort.
How to Achieve the Highest Investment Performance
All other services aside, you do want the strongest possible investment performance that will help you exceed all your lifestyle dreams and desires.
You do this with a threefold approach. We call this strategic asset management. It is not active. It is not passive. It is not automated or generic. It is customized to you. It relies on three intertwined activities:
- Pursue the highest possible growth
- Keep costs as low as possible
- Minimize risk
Over the 15-year period leading up to 2017, 92.33% of large-cap money managers, 94.81% of mid-cap managers, and 95.73% of small-cap managers failed to outperform their market benchmarks.
Beating the market isn’t the goal. Earning the highest possible growth is the goal.
Even if you luck out and manage to find one of the few active managers who can consistently beat the market, and they don’t retire or switch companies a few years later – what costs are you paying for the privilege?
As you just saw, you’ll be paying higher fees, higher short-term capital gains taxes, and perhaps other fees. What matters is net returns – after taxes. Not pre-tax reported returns. Making 14% but paying 50% in taxes (combining state and federal) is really only 7%!
Strategic management balances your risk by making adjustments as your life situation and investment performance needs shift over time. It is driven by the plan, the quarterly updates, and the targeted ongoing adjustments to keep you secure, with balanced risk, AND earning the highest possible performance.
If your financial advisor doesn’t appreciate the difference between net returns – after taxes and pre-tax reported returns, you’re encouraged to schedule a chat with Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help navigate the best way FOR YOU, the Ultra-High Net Worth Investor to maximize NET returns.
Kingdom 2: Choosing the Right Financial Advisor
When you have conquered the first kingdom, you now understand that investment performance isn’t measured only by numbers sent to you by your financial planner. It is measured by outcomes. Are you achieving and projecting to exceed all your lifestyle goals and dreams?
Even for people who have a fair amount of skill and knowledge in investment and finance, they have little desire to spend so much of their precious time fixating on this.
This is why high net worth families turn to wealth managers over other investment advisories. What is a wealth manager? A wealth manager is, more or less, a financial advisor who tailors their service for ultra-high net worth clients.
The question is – how do you find the one who is right for you?
In our experience (and we have a combined 60+ years of it), there are 5 non-negotiables for anyone who wants to find the best ultra-high net worth financial advisor for their needs.
The 5 Non-Negotiables of an Ultra-High Net Worth Financial Advisor:
Non-Negotiable #1 – They have a track record of being able to harness the growth of the market to maximize portfolio returns while minimizing losses from major market collapses…
Non-Negotiable #2 – They can measure how well your life-goals are performing using ongoing quarterly stress tests… (much more about how critical this is later)
Non-Negotiable #3 – They keep your taxes and expenses as low as possible, year after year…
Non-Negotiable #4 – They use portfolio performance as only one measurement of progress…
Non-Negotiable #5 – They are fiduciary and independent…
As you may have noticed, those five qualities received a lot of attention in the first kingdom of improving your investment performance. If you want strategic asset management that results in optimized investment performance, those are the five things you want in a wealth manager.
Also, as you search for a financial advisor, keep in mind these six warning signs that the advisor you’re talking to is likely to fail to provide the service, performance, or customized attention you need to exceed – not meet – all your lifestyle and financial goals.
6 Warning Signs Your Financial Advisor Is Leading You to a Life of Anxious Uncertainty
Warning Sign 1: The Advisor Tells You Costs and Fees Are the Same Thing
Every financial advisor has to charge something, obviously. These are known as fees. Most wealth managers charge somewhere in the neighborhood of 1% of the assets they are managing for you.
Though there is some variance here, what matters much more is all the other costs you might pay if you end up with the wrong advisor. You were introduced to seven of these in the first kingdom.
Here they are again if you missed them:
- Taxes from capital gains
- Active vs passive management
- Bond sale spread
- Performance fees
- Margin costs
- Tax loss cultivation
- Internal expenses
If a potential financial advisor tells you costs and fees are the same thing, or they minimize the importance of non-fee related costs, that’s a person you should avoid entrusting with your assets.
Warning Sign 2: The Advisor’s First Question Is About ‘Risk Tolerance’
As you saw in the first kingdom, risk tolerance balances performance, but it depends on what you want to achieve through your life and wealth. Risk tolerance does not exist in a vacuum. Without context, it is next to meaningless. It is not a philosophy. It is not an emotional reaction.
And risk tolerance is not the thing you should be most worried about if you’re concerned about your portfolio performance failing to meet your needs or expectations. It matters a great deal – but when put in proper context, it becomes merely one factor in the design of your customized investment plan.
If you’d like to see what a REAL custom, individualized investment plan looks like, you’re encouraged to email Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help navigate the best way FOR YOU, the Ultra-High Net Worth Investor to maximize returns and protect your wealth (without asking what your risk tolerance is.)
Here are six things you should be much more concerned about.
6 Ways the Wrong Advisor Can Threaten Your Portfolio’s Long Term Health
1. Approves of Unchecked Spending
Your retirement income, no matter how large, affords you a particular lifestyle. Our process will give you a number, such as $500,000, that you can freely spend every month. But that number hasn’t been pulled out of a hat. We didn’t throw darts at a board with Warren Buffet’s face in the middle. That number is the result of the detailed, customized planning process you read about in the first kingdom.
Even billionaires can go broke. Ted Turner lost $8 billion dollars – 80% of his wealth, in a matter of a few years, when the AOL-Time-Warner merger imploded.
You don’t want a yes-man for a wealth manager who freely approves boundless spending decisions. You want a guide who can take you safely through all three kingdoms.
2. Fails to Plan for Large One-Time Distributions
What if you have a large one-time expense that goes beyond your monthly plan? If you know about it in advance, then it should be built in to your investment plan. It’s pretty simple. If you know it’s coming, you plan for it. These sorts of expenses are NOT part of your monthly lifestyle fund.
3. Fails to Plan for Unexpected Life Events
We all know what could happen. But none of us knows what will happen. You can’t plan for everything, but a good wealth manager will anticipate the unexpected and include it in your plan.
Any financial planner – even a certified one – who does not do this should be avoided. Even with an advisor, there are at least seven ways you can run out of money if you don’t plan accordingly:
- Withdraw too much
- Suffer a tragedy
- Live too long
- Watch the market implode at the wrong time
- Sell business for too little
- Fail to think about the future
4. Depends on Erroneous Expectation of Lifespan
Social Security reports that 1 in 4 people aged 65 will live beyond 90 years old. That’s 25 years of retirement if you retire at 65. If you retire at 55, that’s 35 years or more. This may be shocking to read, but we can cite numerous cases of high net worth examples who lost it all in spite of having a financial advisor.
5. Denies the Certainty of Future Stock Market Implosions
You should not fear what you know is coming. You can protect yourself from stock market volatility if it is built into your plan. This is one of the most powerful attributes of the 1000 ‘what-if’ simulations we run on all our clients’ portfolios every quarter.
Any financial advisor who does not do this for you, but instead lays out pretty charts and graphs showing your wealth increasing every year for the next thirty years, should be regarded with great caution and skepticism.
An article referenced earlier reveals how some so-called fiduciary financial advisors can still cause you huge losses if they don’t anticipate the certainty of market volatility. Here’s the article again. [link to blog 71]
6. Makes Poor Assumptions about Your Business Sale Price
Does your financial advisor have any experience with business sales or mergers and acquisitions? If not, then how can you trust them to include that in your portfolio projections?
The ONLY 5 Things You Can Control
No matter if you have $5 million, $10 million, $100 million, or $1 billion, everyone faces the same reality: You have control of just five things related to your money.
It’s a huge warning sign when you talk to a certified financial planner who builds your investment plan based only on risk tolerance, neglecting the other four. Here is the complete and exhaustive list of what you can control:
1. How Much You Spend – Your Lifestyle
2. How Much You Save
3. Timing of Major Distributions (for big purchases)
4. Your Risk Tolerance
5. How Much of a Legacy You Want to Leave
If you’d like to see what a REAL custom, individualized investment plan looks like, you’re encouraged to schedule a chat with Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help navigate the best way FOR YOU, the Ultra-High Net Worth Investor to maximize returns and protect your wealth. (Without asking what your risk tolerance is.)
Warning Sign 3: Your Financial Advisor Says a Diversified Plan Will Withstand Market Volatility
Since 1946, there have been:
78 pullbacks of between 5-10%, an average of 1.5 per year.
27 corrections of between 10-20%, an average of 0.5 per year (1 every 2 years).
11 bear markets with losses over 20%, an average of 1 every 7 years.
The market is volatile. Sometimes you will gain, other times you will lose. Your financial advisor cannot predict when these declines will happen. They cannot time the market.
Does diversification help? It can to a degree, but it’s not enough. If you have equities in 50 different tech companies, you are diversified. But if the tech industry suffers a meltdown like it did in 2000, you will suffer severe losses.
What matters much more that diversification is asset allocation.
One study showed that over 90% of the variation of returns on portfolios can be explained by your asset allocation in equities, bonds, and cash. Not timing. Not money managers. Not getting lucky. Not sectors. Not asset subclasses. Not narrowly defined diversification. Just a healthy asset allocation.
David Swensen, who grew the Yale endowment portfolio from $1 billion to over $23 billion by earning 13.9% average annual returns over 30 years of market craziness says that asset allocation is the most important investment decision of your lifetime.
When the market falls, only one thing matters: Are you on track to exceed your goals?
If you fall out of the Comfort Zone, what do you do? You adjust one or more of the five things within your control.
Warning Sign 4: Your Financial Advisor Says They Have Experience Making Good Investment Choices
Smart investing is about asset allocation, balancing risk with performance, and building a customized plan around your goals and desires. Years of experience means little if those years have been spent doing things the Wall Street way, riding out booms and busts, trying not to panic during the busts.
6 Reasons to Avoid Big Investment Firms, Discount Brokers, and Banks
1. Expertise Not as Deep as Promised
Yes, some large firms do have a few true experts. But most are filled with freshly certified financial planners and advisors doing what they have been told to do by the company. They serve the company’s interests first, not yours. They are not fiduciaries. They do not serve only your best interests.
The importance of this point cannot be overstated.
2. No Personalization
Most big firms have huge caseloads. Almost none of them create 100% customized plans. Instead, they funnel your money into the same investments as everyone else. They pick from a pre-designed swath of investment plans to manage your money, and fit you into the one they think is best.
You are just a number.
3. Doing Their Supervisors’ Bidding
These big bank financial advisors are doing what they were trained to do, not necessarily what’s best for you. Do they think about costs like taxes incurred from short term capital gains? Do they think about what happens to your money if your goals change? Then they are not operating as a fiduciary advisor.
4. Conflicts of Interest
The big companies, and their financial advisors, generally serve the bottom line of the company before your financial outcomes. That is a conflict of interest, because they are serving more than one set of goals. Many advisors have quotas – they must sign up a certain number of new clients. That’s their goal, not your interests.
And if they make money on commissions by selling certain plans or products, their conflicts of interest are now multiplying.
5. Use Wall Street Methods and Beliefs
Many ‘experienced’ financial advisors don’t think about things like costs, personalization, unexpected life events, or the long term futility of active vs passive management. Many fixate mostly on rates of return and risk tolerance, and little else. Do that, and you will ride the booms and busts, and never feel secure or comfortable.
6. Over-Emphasizes Diversification
Again – an asset allocation that balances equities, bonds, and cash, and is tethered to your goals, will almost certainly perform better than a Wall Street style investment plan. Especially over a decades-long time period. And by updating those goals and your plan every quarter, you can ensure your allocation will continue to produce maximized performance.
See the difference between ‘normal’ financial planning and what Pillar Wealth Management offers?
If you’d like to see what a REAL custom, individualized investment plan looks like, you’re encouraged to email Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help navigate the best way FOR YOU, the Ultra-High Net Worth Investor to maximize returns and protect your wealth. (Be forewarned: It’s not ‘normal’ financial planning.)
Do ‘Experienced’ Active Managers Perform Better?
Human wisdom would assume so. But the data says otherwise. We could cite countless studies on this. Here’s one from Bloomberg:
“Over the prior five-year period, 76.5 percent of large-cap, 81.7 percent of mid-cap and a whopping 92.9 percent of small-cap managers lagged their respective benchmarks. At 10 years and 15 years, the numbers are even worse for active managers.”
Why is this true?
For one, because active money managers must do better than the indexes since they charge higher fees. So even if they match the performance of the market, you will make less money, and you will pay those higher fees year after year. You also need to consider that choosing the right indexes is another critical piece of this. The DOW – an oft-cited index – only includes 30 companies.
But also, active managers just aren’t as good as they think they are. They’re trying to time the market. They have to know when to get in, and when to get out. As it turns out, they are pretty good at the first one. Getting out at the right time is where many of them fail.
Besides just experience, here are seven more qualifications the right financial advisor needs to have:
1. High Net Worth Investment Experience and Documented Success
‘Success’ means, the client reached or exceeded all their lifestyle and financial goals and dreams. With the Comfort Zone, you will always know that you are on track to achieve yours.
We call that feeling ‘financial serenity.’ Doesn’t that sound better than just having a financial advisor who has worked in the business for a while?
2. Invests Toward Your Goals without Emotion
Emotions and investing do not make good dance partners. Financial advisors who can’t separate the two do the exact opposite of what’s best for their clients. They buy high and sell low, because they panic based on what they see happening in the market and make rash decisions.
With a customized investment plan – built upon the foundation of historical data, your life situation, and your goals – you will continually make sound financial decisions, not based on emotion.
3. Rebalances Your Investments
Rebalancing, which we do quarterly after re-running the 1000 simulations, reduces your exposure to undue risk.
4. A True Fiduciary
A true fiduciary acts in your interests and clearly discloses any conflicts of interest.
When you’re looking for someone to manage money to the tune of millions of dollars which you’ve spent a lifetime working for, you can’t risk entrusting it to anyone who does not put your best interests first at all times and in all decisions.
The stakes are just too high.
5. Reduces Your Expenses
6. Prioritizes Consistent Asset Allocation
7. Not Bound by Industry Norms
Wall Street exists to make money for itself, not for you. So if we employ the tactics espoused by Wall Street, the only thing we know for sure is that Wall Street will make money.
You don’t want a financial advisor who can check off a couple of these seven items. You want someone who can check them ALL, add more to the list that you didn’t even realize you wanted, and check those too.
Your future is worth that level of service.
If you feel you, your family, your portfolio deserve a higher level of wealth management, you’re encouraged to schedule a chat Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help navigate the best way FOR YOU, the Ultra-High Net Worth Investor to maximize returns and protect your wealth.
Warning Sign 5: Your Financial Advisor Promises to Stay on Track with Your Goals
At first glance, this warning sign might seem contradictory. Haven’t we been talking about goals this whole time? Yes, except for one unchangeable truth:
Your goals will change.
Because of that, if you don’t adapt your plan to your ever-shifting goals, your plan will fail. And fail again. And again. This is why the quarterly updates we run are so critically important to our process. Every plan will fail if it doesn’t get continually updated. Every single one. Even ours.
What does your financial advisor plan to do when your life situation changes?
Let’s consider some questions about your goals for the future. These come from our book, Beyond Wealth: Find the Balance Between Wealth and Happiness.
1. Do I spend my time doing what I really want to do?
2. Do I travel whenever and wherever I want?
3. Do I have any unfulfilled dreams?
4. Do I have an up-to-date tax management plan to reduce all my taxes (income, capital gains, and estate)?
5. Do I have too many eggs (assets) invested in one basket?
6. What do I want my family and friends to say at my funeral?
7. How much of my estate do I want to pass on, and to whom?
Suppose you go through a goals process with your wealth manager, and six months later a hurricane flattens your second home in Florida and seriously injures one of your renters, and now their family is suing you.
How relevant will the goals you just identified six months back still be?
Is this an extreme example? Not really. No one is immune from the unexpected, and everyone goes through life challenges.
Imagine a business plan made in 1995. There was no internet to speak of, no social media, no apps. Cell phones were in their infancy. That business plan, even ten years later, would already be a dinosaur. 20 years later? It’d be an office joke. If a business plan gets outdated that fast, how much faster will your retirement plan get outdated?
How different will your life look in 20 years? How different does it look today from 20 years ago?
Warning Sign 6: You Believe You Need to Understand Finance Before Choosing an Advisor
The Dark Staircase
Imagine you’re walking in a house that’s completely dark. No light at all. You find yourself at the top of a staircase. You can feel it with your toes. You know it’s a staircase, so if you take careful steps, you can make it down safely.
But you don’t know where it goes, how long it is, if it’s straight or winding, or what’s at the bottom. You just know there are steps here and you can’t see anything beyond.
This is what investing is like. For everyone.
You need a wealth manager who knows he cannot see the future, as opposed to one who thinks he can.
No one knows how to time the market. Past performance has no bearing on future results. What matters is:
- A healthy allocation in equities, bonds, and cash
- Avoiding money managers who make bets with your money and drive up your costs
- Tethering all this to your goals, updated quarterly
- Running your portfolio through historically-based stress tests
- Ensuring you’re within a 75-90% confidence level
That’s what it takes to finally relax and know with as much certainty as possible that you’ll be able to fully fund and live out your life as you desire.
Kingdom 3: Protecting your wealth
The Great Depression, the oil crisis of 1973, the rapid inflation of the late 1970s, Black Monday on October 19th, 1987, the dot-com bubble burst of 2000, the stock market and housing collapse of 2008 – all of those were portrayed by the ‘experts’ as “never before” surprises. We don’t buy it.
The fact these ‘surprises’ keep coming ought to convince us to stop being surprised when they do. But life-altering surprises can come in your own life too.
The key to protecting your wealth for you and your family is to create a portfolio that withstands surprises. How you do that begins by examining your beliefs about money, meaning, and family.
What Is Important about Money to You?
When you really dive deep into this question, you realize that wealth isn’t a number. Whether you have $25 million or $425 million, what matters is what it allows you to do in life.
Do you feel in control of your money, or does it control you? Does it help bring your family closer, or does it cause friction and dysfunction? Does it bring peace, or anxiety?
All this speaks to one question – are you using money as the useful, effective tool it is meant to be?
If you feel you, your family, your portfolio deserve a higher level of ‘no surprises’ wealth management, you’re encouraged to schedule a chat Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help navigate the best way FOR YOU, the Ultra-High Net Worth Investor to maximize returns and protect your wealth.
Two Studies about Enduring Wealth
A study carried out by Withers’ international law firm examined a thousand individuals with high and ultra-high net worth. It found that those who were the most clear about their values and passions have wealth that continues to grow.
Yet, another study by the Family Office Exchange asked first-generation wealth creators what they most feared could jeopardize their family’s wealth. The top three fears were bad investments, a bad economy, and politics.
Only 7% cited their own family’s ability to function, communicate, and trust each other. But the Withers’ study found exactly this – that the most common cause of lost wealth is a breakdown in communication and trust between family members.
The sad reality is, about 80% of ultra-high net worth families lose their wealth by the third generation. If you want to protect you wealth, start with your family relationships. The best investment plan in the world won’t survive a dysfunctional family environment for very long.
Create a Family Constitution
Few would doubt that a written constitution is critical to a functioning democracy. If that’s true for nations and states, why not apply it to our families?
Your family needs a document that states categorically where it is heading and the principles that will govern it. There are forces out there— both social and economic—that do not mean your family well. Without a governing structure, these forces can decimate a family and dissipate wealth.
The family constitution deals with issues of family authority and individual rights.
Here are some of the ways a family constitution will position your family for long term stability:
- Elevates family above the individual
- Protects against wayward relatives
- Includes everyone
- Tells your family story
- Defines your family’s identity
- Expresses social, vocational, and relational values
- Connects to future generations
You can get started on writing your family constitution today. Here are the first three steps:
1. Define your family’s values
2. Articulate a vision for your family’s future
3. Draft the mission statement
A wealth manager can help guide the process if you need help. Once you get these down on paper, you need to begin to act on it. Move in the direction of your mission. Consider how future generations will respond to it. Make it flexible enough to be adapted, but not so much that it dissolves and becomes unrecognizable in a few years.
The Secret to Successful Wealth Protection
Ultra-high net worth families often have several advisors, managing everything from investments, to insurance, to real estate, to tax and legal issues. Gathering a team of expert advisors who have minimal conflicts of interest is the secret to enduring protection of your wealth.
Experienced wealth managers who possess the qualities discussed earlier are proactive and they know where and how to reach out to experts such as trust administrators, attorneys, CPAs, M&As, and real estate professionals. They are usually single-minded in helping you find the best solutions for your family’s long-term needs.
The best wealth managers will provide so much more than just investment planning and advice – though they should excel at that first. But they can also give you help with:
- family governance
- family education
- conflict resolution
- family values
- succession planning
- exit planning from a privately owned business
- trustee selection
- arranging family meetings
- tax strategies
- estate planning
Ultimately, here’s what you want to know: How well can your go-to wealth manager help you pursue the goals and lifestyle objectives you have set forth, and communicate to you whether you are on target for achieving them and whether any adjustments need to be made?
If you’d like to see what a REAL custom, individualized investment plan looks like, you’re encouraged to email Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help navigate the best way FOR YOU, the Ultra-High Net Worth Investor to maximize returns, protect your wealth and achieve your life goals.
Wall Street would like you to believe that performance alone can achieve those things. It cannot.
Consider what some renowned Wall Street companies, some of which still exist, recommended in the lead-up to the Enron collapse, from March to November 2001:
- Merrill Lynch, near-term buy
- Goldman Sachs, on recommended list
- J.P. Morgan, buy
- Bank of America, buy
- AG Edwards, buy
- Lehman Brothers, strong buy
- Prudential, hold
- Goldman Sachs, market perform
- Credit Suisse, hold
Despite those ratings, Enron’s stock value plunged to nearly nothing by the time it filed for bankruptcy on December 2, 2001, just one month later.
You do not want to put your wealth unnecessarily at risk—and you want a fiduciary wealth manager who understands the real meaning of success to you and the true path to securing your wealth. However you structure your relationship with advisors, you want to be able to go to sleep at night knowing your family’s wealth is in good hands.
Unwind Your Risk from Highly Concentrated Wealth
Harold Hamm, the chief executive officer and founder of Continental Resources, reportedly lost about half of his $20-billion fortune within just a few months in late 2014 into 2015, thanks to a precipitous drop in oil prices. His situation illustrates the risk of concentrated wealth.
The former chairman of the brokerage firm Bear Stearns reportedly lost a staggering 95% when his firm imploded in 2008.
Masayoshi Son, founder of SoftBank, is said to have lost more than $70 billion during the dot-com bust of 2000. The stock price was down over 99 percent from its peak during the bubble.
Is your family holding a substantial concentrated position, be it real estate, stock, or a small business? If so, what protection do you have in place? Ultra-high net worth investors are worried about suffering huge losses like these. Yet what are they doing to reduce their concentration risk? Are their certified financial planners warning them about this?
Look at the history of such blue-chip firms as General Electric, McDonald’s, Disney, and Microsoft. Each of those companies have shed more than half of their market value at some point in time. That kind of free fall would represent a catastrophic loss for most anyone holding massive amounts of wealth in such a company.
One of the main reasons high net worth investors struggle to sell concentrated stock is taxes. If you sell your company stock, you will have to pay taxes. However, you can make that loss back through smart investing and proper asset allocation of the proceeds.
Selling is the easiest solution to escape the risk of concentration. To overcome the tax consequences, there are a number of approaches you might take. Here are a few we have used with our clients:
- Prepaid forward sales
- Exchange funds
- EDIT – Executive Diversification and Investment Trust
The best approach for you depends on your family’s appetite for risk, spending needs, the time horizon, insider status, charitable inclinations, your family’s tax rate, and other considerations. Hence the importance of writing that family constitution as soon as possible.
But is this approach not better than risking the loss of large swaths of your wealth?
If you’d like to see what a REAL custom, individualized investment plan looks like, you’re encouraged to schedule a chat with Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help assess your risk of concentration as well as navigate the best way FOR YOU, the Ultra-High Net Worth Investor to maximize returns, protect your wealth and achieve your life goals.
A Word of Caution
According to Morningstar, in 2009, 72 percent of all mutual fund deposits—about $2 trillion in all— were flowing into four- and five-star funds. That is clear evidence of the human propensity to follow the herd.
But a Burns Advisory Group study took a look back, starting in 1999, and for the next decade followed the progress of all 248 five-star funds. By 2009, only four had kept their five-star ranking after ten years. In other words, 98 percent of those five-star mutual funds lost at least one star in just ten years. This is the history of mutual funds, and we believe hedge funds and private wealth managers are no different.
Most money managers talk about a time-weighted return. What you want to consider instead is what we call a wealth-weighted return. We believe few brokers and financial advisors understand the difference. They will quote you the former, but what you should care about is the latter.
How much money will your family end up with at the end of the year, after taxes and fees? In essence, that is the wealth-weighted return. A time-weighted return could show a hypothetical growth of 10 percent, but what we care about is how much you net after taxes and fees, which might be only 5.5 percent.
Transferring Wealth and Prosperity to Future Generations
Without advanced estate planning, the biggest beneficiary of a $100 million estate is likely to be Uncle Sam. Currently, the highest estate tax sits at 40%.
In an oversimplified example, if you have two equal beneficiaries in that estate, neither would get as much of the proceeds as would go to the federal government. Each of those heirs would receive about $30 million, while the man in the star-spangled top hat would claim about $40 million.
It is startling how few families of ultra-high net worth have put in place advanced estate-planning strategies. With inadequate planning for asset protection, estate transition, and business succession, they leave their business and personal fortunes vulnerable.
It is a question you must ask yourself, and you might not like the answer: When was the last time you had your advanced estate plan looked over? Do you even have one?
If you want to avoid the estate tax, there is a great variety of estate- and tax-planning strategies, so you’ll need to combine the efforts of several advisors. You might already have an attorney and a CPA as well as a wealth management advisor. All three of those professionals have a critical piece to contribute in devising a plan that is best suited to your family’s needs, wants, and goals.
Even though the available options are numerous and complicated, the proper strategy for avoiding estate tax comes down to two outcomes:
1. The wealth transfers to your beneficiaries
2. The wealth transfers to charities
The reason we are not including the government in that statement is that we are talking here about proper wealth planning. Getting it right means the money transfers either to beneficiaries or to charities.
The simple technique to consider first is taking advantage of the annual gift tax exclusion, and the lifetime exemption. However, if you have an estate of $100 million or $1 billion, then that exemption and exclusion will not put much of a dent in reducing your estate taxes.
Here is a list of some of your further options:
- Crummey trust
- Private foundation
- Defective trust
- Generation-skipping trust
- Grantor-retained trust
- Life insurance
- Irrevocable life insurance trust
- Charitable remainder trust
- Charitable lead trust
- Family limited partnership
As you can imagine, your family will need to be in unified agreement on whatever you decide to do. This is yet another reason to nail down that family constitution.
You will also need your team of expert advisors to make this process a success. Using the right tools at the right times, you can ensure that your vision for your family’s future doesn’t end with you.
Kingdom 3 Next Steps – Answer These Questions
To get moving on conquering the third kingdom and protecting your wealth, begin by answering these questions, which have been briefly examined in this guide:
1. What does money mean to you?
What do you want it to accomplish in your life? How does this intersect with your hopes, dreams, and plans for your family?
2. Do you already have a family constitution?
If so, it may be time to make some revisions and also to ensure your family truly understands the values it outlines. If you don’t have a constitution, when can you schedule a family meeting to begin the discussion? Who can you put in charge of making sure the discussions are fruitful and lead to the end product—a useful family constitution—within a reasonable amount of time?
3. Are you happy with your advisors?
Are there any areas where your advisors are falling short? Are there some direct, proactive conversations you need to have with an advisor to make your expectations clear? Would you be better off replacing any of your advisors?
4. Do you have a clearly stated investment strategy?
If not, when can you schedule a meeting with family members and the appropriate financial advisors to create one?
If your current financial advisor doesn’t have a clearly stated investment strategy, or if you don’t feel it fits your situation any more, you’re encouraged to schedule a chat with Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help articulate the optimum investment strategy FOR YOU, the Ultra-High Net Worth Investor to maximize returns, protect your wealth and achieve your life goals.
5. What is your asset allocation strategy?
Is your allocation balanced? Or is it too concentrated? Have you used objective measures to determine the answer to questions 3 and 4—or do you rely on your “gut”? If you need a more objective evaluation, when can you schedule an appointment with the appropriate advisors to apply concrete measurements to your asset allocations?
6. Is your wealth overly concentrated in a single primary investment?
If so, is that concentration putting your family’s wealth at risk? Do you need help looking at this issue objectively? Is it clear to you what the first step you take should be—or do you feel uncertain about how to make your investments more balanced and diversified? If so, who can you turn to for skilled advice? When can you schedule that meeting?
7. Are you satisfied that you’re making the proper use of active vs. passive investing for your family’s needs?
When can you schedule an appointment to find out more from an ultra-high net worth financial advisor? Are you satisfied that your money manager is giving you good advice? If not, what steps do you need to take? What is your deadline for doing this?
8. Are you satisfied that you have a good plan in place for transferring your wealth?
Do you see areas you’d like to explore further with your advisors? Are you comfortable that your plan for transferring your wealth is consistent with your family constitution? When can you schedule a time to review your wealth-transfer plan with someone? Who would be the best person to do this with you?
If you’d like to see what a REAL custom, individualized investment plan looks like, you’re encouraged to schedule a chat with Hutch Ashoo, CEO and Co-founder of Pillar Wealth Management. Hutch is a fiduciary wealth manager and can help navigate the best way FOR YOU, the Ultra-High Net Worth Investor to maximize returns, protect your wealth and achieve your life goals.
Why Are We Sharing all this?
Because there’s a lot of financial advice being tossed at high net worth investors that is not in their best interests to follow.
It matters who you’re listening to, and what their motives are. Our motive is not just to take as many clients as possible.
Our motive is to help our clients maximize their performance, minimize their undue risk, and achieve financial serenity – for the rest of their lives and beyond.
If we aren’t able to do that for a potential client, and we can see the writing on the wall before signing them up, we will send their business elsewhere.
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