Wealth management experiences
Wealth management experiences are part of life for all of us: rich, poor or somewhere between those positions. We may not all realise that we are indeed engaged in wealth management activities; and we may not all find those experiences pleasant. We know that for those who plan their financial journey, wealth management experiences are remembered more favourably than is the case for the ‘casual journeyman’.
What wealth management experiences can we we encounter in life?
How is it that the wealth management journey can be so difficult for some (whilst the same experiences are unpleasant – even worrying – for others)?
What is wealth management?
In broad terms, we consider wealth management to be ‘the utilisation of the range of resources we have available, the responsibilities we undertake and the goals we set’ to achieve predictable outcomes as efficiently and effectively as possible. The wealth management experience is the journey from the commencement of accepting financial responsibility, through to the attainment of the ultimate lifestyle and financial goals.
From a wealth management point of view, these are generally financial in nature, but include our ability to work/ derive an income. We need good health, adequate capital and careful cashflow management to attain the ultimate financial goals.
The importance of ‘good health’ is found in the need to be able to generate adequate income to fund recurrent lifestyle expenditure as well as to provide investment funding for future needs. This resource needs protection and sustenance. Protection can be provided through healthy living; and should include life insurance to cover for those unpredictable and unavoidable events that disrupt our capacity to do our work (whether as employees, business owners, or investment managers).
The provision of ‘adequate capital’ can come from a variety of sources. Some will benefit from the largesse of family (gifts and/ or inheritance); some might succeed through a significant capital gain; and others will accumulate the reward of ‘hard work’. Whilst all three of these sources of capital will benefit from the development and implementation of investment strategies, those who accumulate off the rewards of their labour will also need to support their efforts with relevant life insurance protection.
Whether wealth has come to you ‘on a platter’ or is accumulating incrementally, the need for ‘cashflow management’ is usually an important exercise in the wealth management journey. Investors know that it is preferable to invest funds so as to minimise the downside risk to invested funds: these risks can come from market volatility – or drawdown. Market volatility is not something the investor can control and so, the better cashflow is managed, the less likely any capital drawdown will impact the future financial outcomes.
So, if these are the resources we will have available to us, how do the responsibilities of life impact our wealth management experiences?
Just as the responsibilities we take on differ from each other, the timing of their impact on our wealth management experiences also differs. Eventually, the responsibilities we are concerned with in this article are financial, but the type and extent of those financial impacts may emanate from other considerations. The responsibilities that will make a demand on our wealth management process include: family, home, business, education and so on.
The responsibilities of ‘family’, start with the basics of life: food, clothing and shelter. They may extend well beyond the basics and include matters such as: lifestyle ‘luxuries’, health matters, carer duties, and possibly even, financial commitments (of others).
The ‘home’ part of the equation may involve a mortgage (or rent), that bring continuous financial responsibilities – and will vary in nature according to where we are in the life continuum: single, partnered, with/ without children, under care/ caring, or in retirement.
If a ‘business’ is part of our responsibilities, the financial obligations will extend beyond our personal needs, to embrace the requirement to stay financially viable – and able to support the business if unexpected duress is experienced.
The responsibility to ‘education’ can also be multi-faceted: furthering your own education; and/ or providing for the career preparation of children or other dependants.
Some wealth management goals
There is a saying that ‘failure to plan, is planning to fail’. If we want to plan for a successful journey of wealth management experiences, we need to set a goal(s). Setting goal helps us to know where we are trying to go – and when we have arrived! They may focus primarily on what might be called ‘end goals’, but they should also include some ‘milestone measures’ that reassure us that we are on track for that end goal.
As you read through the ‘Our Responsibilities’ section above, there were no doubt, several goals that came to mind. Some of those could have been:
- age at retirement;
- family size;
- location of principal residence;
- preferred schooling arrangements;
- recreational pursuits; and
- career aspirations – just to name a few.
Having set the goals and formulated the plan, the wealth manager can restart the journey with a clearer vision of where they are heading.
What will the journey be like?
Perhaps like an Ocean Cruise: starting out slowly, progressing along a level plane (with occasional turmoil); and arriving in a relaxed state of mind?
Perhaps like Air travel: starting with a steep climbing take-off; cruise at a planned level (with occasional turbulence); and then slow decline to the destination, but retaining some level of anxiety about the journey?
…or more like a Road Journey (through mountainous terrain): navigating through the ‘local’ streets, on to a freeway, then up and down hills and mountain ranges – and so on? … we’re sure you get the picture!
In this ‘road journey’ analogy, the wealth management experiences of this journey might be compared taking Economic Cycles as the ups, downs and twisting through mountain ranges; Investment Trends as the variation of road speeds in urban and rural areas or on highways in progressing towards the journey’s end; and Market Events are like the roadworks, RBTs and traffic congestion we might encounter along the way.
Planning, research and preparation improve the chances of a successful journey
Drivers with some years of experience are familiar with the process of planning the journey, checking that the route chosen is likely to be clear, and ensuring that the vehicle is up to the challenge. Likewise, wealth managers are encouraged to look at these elements and anticipate the long-term with clear goals and objectives – knowing the checkpoints along the way that tell you that you are progressing in the right direction. The important part of this analogy is to ensure that your financial journey is even better planned that your driving holidays might typically be (and one muses whether the ‘are we there yet’ question might be asked just as frustratingly as happens in the family car?).
What are economic cycles, investment trends and ‘market’ events?
Economic Cycles are those recurrences of economic activity that favour investment in particular classes of assets at different times: sometimes it is property that performs better than the rest, sometimes shares, sometimes bonds and yet other times, cash. It can be difficult to determine which part of the investment cycle any particular asset class is in as there are occasional ‘noises’ that suggest they are in one phase when in fact it is merely a pause in the continuation of the recent phase.
This is at least one sound reason for diversifying a portfolio: whilst this strategy won’t provide the investor with the full benefit of the currently-performing asset class, it will allow some participation in that asset’s run – at the same time sheltering the portfolio from the full downside of the least performing asset class.
The cycle is sometimes reflected on an ‘investment clock’ – but no matter how it is portrayed, it cannot be ignored: an asset class that is the high performer for one period is unlikely to be the ‘star performer’ the following period. On the other hand, if you are holding an asset that is an under-performer, ‘cycle theory’ suggests that by holding it for an appropriate period, it will ‘take its turn in the sun’!
Investment trend is the direction in which the aggregate value of the assets being measured is heading. An old investment expression is that ‘the trend is your friend’ – and looking at equities and property as asset classes over the past one hundred plus, years the truth of that expression is quite obvious.