Goals-Based Wealth Management
High-net-worth individuals face very specific challenges. Goals-Based Wealth Management focuses on how those challenges can be overcome while adhering to their goals, incorporating constraints, and working within the individual's frame of reference to drive strategic allocation of their financial assets. JEAN BRUNEL, CFA, is the managing principal of Brunel Associates, a firm that serves ultra-high-networth individuals and their advisors. Formerly he was the chief investment officer of J.P. Morgan's global private bank and a director and member of the Executive Committee of J.P. Morgan Investment Management, Inc. He has been the editor of the Journal of Wealth Management since 1998 and the author of Integrated Wealth Management: The New Direction for Portfolio Managers , as well as many peer-reviewed articles. He received the C. Stewart Shepard award from the CFA Institute in 2011 and the Multi-Family Family Office CIO of the Year award from the Family Office Review in 2012.
Goals-Based Wealth Management
I have spent the last thirty-eight years in the world of investment management and the last twenty-three dealing with the people we all call "the affluent." Although I do not want to cast aspersions on anyone, I feel that we-as an industry-have not done the best job serving them, in part because we have not sufficiently adapted our processes to their specific needs and in part because the affluent have not always taken the time to discern what they really needed. My point in this Preface is to take our readers through the evolution of our industry and its market over the last forty odd years, to describe the way our industry is currently structured and operating, and to identify the mission I feel it needs to fulfill. I also want to discuss the three areas of focus that should help me achieve my goal of contributing to the further growth of the industry: (1) recognize the need for humility, (2) promote a sharper focus on the definition of the goals of our clients, and (3) discuss the potential for a restructuration of the typical advisory firm so that it can better serve its target market. But, first, we must define what we mean by "the affluent."
There are about as many definitions of that group of people as there are people trying to serve them. They can be described by the financial assets they possess, but this can be misleading, as assets can be income-producing or not; they can be owned or in some form of generational wealth transfer structure; they can be liquid or illiquid; they can even cost more to maintain than they produce in terms of income! Think of the aristocratic European families, for instance, who conduct guided tours of what is left of their castles or estates because that is the only income they have to live on and maintain these massive structures!
I define the affluent as a group of people who have liquid assets of at least $5 million and who could maintain their lifestyles drawing income and principal from these assets, even if they do not earn material outside revenue. Thus, a family with $5 million, where both husband and wife are in their early sixties and semi-retired and spend $250,000 a year would qualify. By contrast, a single individual-a young man, for instance-with $10 million who spends the same $250,000 a year and is in his thirties would not be affluent, by my definition. Our semi-retired couple does not have to change their lifestyle to enjoy a high likelihood of not running out of money in the next twenty-five or thirty years, which corresponds to their current life expectancy, if they have taken the precaution to buy appropriate catastrophic insurance. 1 By contrast, the young man in his thirties has a sixty-odd-year life expectancy; unless he is an excellent investor, he could well run out of money spending about 2.5 percent of his assets each year, particularly if inflation was to play dirty tricks on him. He could run out of money in two different ways. First, he could run out of money by taking too much risk that does not pan out into higher returns if he simultaneously tries to grow the assets while being unwilling to cut his spending. Conversely, he might run out of money by being too conservative in his investments, which would then not earn enough of a return to carry him through the balance of his life, let alone the possibility that his spending might change as and when he decides to marry, start a family, and raise children! In short, you have to look at assets, running spending rates, and required horizons before labeling someone-a family or an individual-affluent in my definition.
Over the last twenty plus years, I have had the luxury to follow the evolution of this industry with a serious dose of fascination coupled with cynicism. When I first started to work with the affluent, as the chief investment officer of J.P. Morgan's (JPM) Global Private Bank, the vast bulk of the industry's assets, at least in t