Finding and Keeping Your Balance

There is a seemingly endless amount of information related to managing substantial wealth ideas—claims, predictions, and legal and tax techniques. Much is written about legacy planning, family values transfers, and […]

There is a seemingly endless amount of information related to managing substantial wealth ideas—claims, predictions, and legal and tax techniques. Much is written about legacy planning, family values transfers, and the responsibilities of wealth. It is all useful to varying degrees, but only after the center point for families is established and they know what they need to balance.

The center point is simply the long-term goals of the family members. They should know the answer to the question of “what is this wealth intended to accomplish specifically.” I regularly find that families are either not thinking of, are mis-prioritizing, or are losing sight of the objectives of their wealth. They’re off balance. With substantial wealth, however, they may not realize it. The question of purpose is a simple one but can be difficult to answer completely and the answers often seem to change for reasons that are unclear.

Clients should expect that the first priority of their advisors—including tax, legal, banking, investment, real estate, etc.—is to help them clearly identify, understand, and refine their needs and goals that are aligned with the purposes of their wealth. Every advisor should make a beneficial contribution to helping establish and maintain balance. Each has a role to play in this regard, formal or informal.

[To read more of Michael Pagano’s thought leadership click here]

How do you prioritize within a uniquely tailored plan that has the right risks and expected returns while also remaining open to new ideas and retaining financial flexibility? It’s a tall order and there are always tradeoffs to consider.

  • Balance how you spend time to create goals, quantifying them to the extent possible, and then determining what return is required to reach them. This is your risk need. It’s a simple but valuable starting point. It gets tough quickly when you consider all the various types of assets, use of leverage, liquidity, cash-flow, volatility, fees, taxes, account types and titling, and perhaps other matters. With substantial wealth there is a need to create separate accounts or structures for specific needs like college planning or retirement. Unfortunately, the desire for adequate planning also seems to fade as well due to the often misplaced sense of security greater wealth provides.
  • Balance how you view risk. Ask yourself what the risks are of not reaching particular goals? Risks come in many forms; investment loss, lack of liquidity at the wrong time, performance risk, inflation risk, correlation risk, reinvestment risk, and more. Balancing your risk need and your risk tolerance is crucial. Understanding and accepting the implications of not reaching your goals is key so you know which risks matter most.
  • Balance your team. Seek out experts like those at City National Private Client  who look at the entirety of your goals and all aspects of your balance sheet to take advantage of complex strategies that are a highly tailored combination of leverage, portfolios, and trusts such that everything works together in a specific way. It may be that you can ladder loans to an intentionally defective trust to minimize taxes. Or utilize customized leverage to improve cash flow or enable asset transfers to the next generation. Alternative investments can be used for either downside risk management or to generate incremental risk-adjusted returns. More wealth means more choices and more decisions. Your assets, debt, and structures should be simple enough to meet your goals and preserve flexibility but not so simple that they are ineffective.
  • Balance your evaluation and assessment. Think about how to roll everything up annually to review it in an integrated fashion. This helps you get a clearer picture of how all the elements are interacting. With regard to assessing investment performance, don’t spend much time comparing to industry benchmarks. Concentrate on what you need to reach your objectives. Industry benchmarks can be useful references, but they are secondary to the performance you expect given the risk you are taking and your constraints for liquidity, cash-flow and other elements. Calculating your returns and seeing everything holistically takes work when you consider your real estate, other real assets, illiquid assets including private and direct investments, partnerships, business ownership interests and partnerships, stock options and restricted stock, all debt, etc.

With a clearer understanding of your own balance, staying there should encompass these considerations:

  1. Know your limits. For example, we see professionals in one field suddenly try to become experts in another too quickly. It’s tough to be a great doctor and also a great real estate investor at the same time. Take time to understand how that real estate fits into your bigger picture. Avoid becoming too ambitious too quickly in the spirit of being opportunistic.
  2. Check regularly, perhaps annually or whenever something in your life changes, to see that you’re balancing risk need and risk tolerance, agreed upon by you and your advisors.
  3. When planning, gifting, or making philanthropic commitments be sure not to plan yourself into financial inflexibility. Losing too much financial flexibility by over-committing can inhibit the capacity to borrow and use leverage when appropriate to maintain your balance of being opportunistic yet disciplined.
  4. Staying with an advisor of any kind, financial, legal, tax, etc., just because you always have is not reason enough. Every advisor—friend or otherwise—and their firm has to earn more than your trust. Trust is all-important of course, but not all-encompassing. Your advisor should be able to provide advice and also challenge your assumptions and sentiments in a way that helps you define and reach your goals and stay in balance.
  5. Most importantly, be focused on your own well-defined objectives and be certain that your tax, legal, financial, and other advisors are clear on them. Set high expectations of everyone who advises you. It is very difficult to find and keep your balance otherwise.

Non-Deposit investment products are not FDIC insured, are not obligations of or guaranteed by the bank, and are subject to investment risk, including possible loss of principal. Past performance is not a guarantee of future results.

[For more on City National Banks’s approach to Private Banking click here]