Wealth, Actually Read online




  Copyright © 2018 Frazer Rice

  All rights reserved.

  ISBN: 978-1-61961-859-6

  For My Niece

  Tyler, I thought this book would be a great way to gather my lessons in wealth and decision-making in one place. I’d like for you to avoid many financial mistakes your friends or others in fortunate circumstances might make. Now, I know this is a lot to take in at the age of three, but bear with me here!

  I’d also like for your generation to be able to pick up on these lessons as well. Yours will be the first generation to have lived in a world with full internet access and boundless access to information. I think I was the last person from college to graduate without an email address! There is little actual privacy in your world, but there is access to worldwide tools, culture, and experience that open up unbelievable doors. It is a thrilling time.

  Your generation has upended the financial services industry with new ideas about the utility, role, and function of wealth. It is a world where the wealth industry struggles mightily to reconcile what it means to have a relationship with a client while being a profitable business. I suspect the idea of picking up the phone to reach a banker may seem quaint by the time you are ready. While many fundamental concepts will remain consistent, this isn’t your father’s (or uncle’s) financial world anymore.

  I want to share my experiences in the industry so that you and your generation can develop your most valuable assets: the ability to make good decisions on your own and to be able to recognize when it’s time to ask for help. By being able to learn from my hits and misses (and those of my industry), my desire is for you and your generation to avoid the rookie mistakes that others have made and limit the lasting damage they can cause. I hope you will develop the self-awareness and tools needed to navigate a confusing and fast-moving era fraught with new risks but full of limitless opportunity.

  Time is your greatest asset. You need to develop and use your decision-making tools as early as possible. If I did it right, this book will give you a head start.

  Contents

  For the Practitioner

  Introduction

  My Initial Answer

  Look Twice at “The Client Comes First”

  Helping Clients Help Themselves

  Listen, Diagnose, Fix…Anticipate

  The Importance of Anticipation

  A Unique Philosophy

  Everyone Profits from Great Advice

  Who Should Read This Book?

  Why Should You Read This Book?

  Answering the Late-Night Email

  1. Am I Rich?

  My Initial Answer

  What Is Wealth?

  What Is Liquid Wealth?

  What Type of Wealth Is Illiquid?

  Beyond the Balance Sheet

  Balancing the Liquid and Illiquid

  Current Wealth and Legacy Wealth

  Another Type of Wealth: Time

  Health and Wealth

  At What Dollar Amount Is One Considered Wealthy?

  The Source of Wealth Is Important

  Wealth Generated from Current Income

  Wealth Generated from Assets or Businesses

  Corporate Executives

  Hedge Funds and Private Equity

  Inherited Wealth

  Specialty Wealth

  Wealth from Legal Settlements

  What Is a Liquidity Event?

  When Can Liquidity Be a Threat to Wealth?

  Ideologies for Increasing Wealth

  Following Up on Jimmy’s Question

  2. Preparing for the Hurricane of Wealth

  My Initial Answer

  Your Goals Drive Your Planning

  Questions to Ask and Answer

  Mistakes and Consequences

  When to Communicate Your Plans

  Another Approach to the Timing of Communication

  What If the Children Aren’t Interested?

  Benefits of Third-Party Experts

  Two Common but Complex Challenges

  My Happiest Clients

  Getting the Wealth Prepared for the Family

  Getting the Family Ready for the Wealth

  The Impact of Not Working Together

  Importance of Values in Growing Wealth

  Understanding Strengths and Weaknesses

  Structuring Teamwork

  You Can’t Predict Everything

  The Storm Is Gathering Force

  3. How Much Do You Cost?

  To Begin, Clarify Goals and Resources

  The Common Costs to Consider

  Scenarios Where Knowing Your Cost Is Important

  Goals Should Drive Spending Decisions

  Conclusion: Know Your Costs and Goals

  4. What Makes a Good Investment

  My Initial Answer

  Evaluating Investments Using Income Goals

  Create an Investment Policy Statement

  Preventing Bad (and Expensive) Decisions

  The Client’s Financial Pop Quiz: Analyzing Investments

  How Should Assets Be Allocated?

  Focus on “After-Tax, After-Fee, After-Inflation” Returns

  An Example of Allocating Assets

  A Quick Note on Overseas Investment

  Responding to My Friend on the Phone

  5. Types of Assets and Where They Fit

  Stocks

  Bonds

  Alternative Asset Classes

  Private Equity and Venture Capital

  Hedge Funds

  Real Estate

  Commodities

  Collectibles

  Back to Our Caller

  6. Threats to Wealth

  Letter to the Editor

  My Initial Answer

  Bad Investments

  Taxes

  Infighting (Communication Breakdown)

  Divorce

  Excessive Lifestyle

  Creditors and Lawsuits

  Theft and Kidnapping

  Cybersecurity and Extortion

  Disaster Recovery Plans

  Answering Our Budding Thespian

  My Answer

  7. Who Manages Your Wealth?

  Choosing Your Cabinet Members

  Professional Designations

  Advisory Team Objectives

  Determining Best Fit

  Finding the Right People

  Choosing Your Wealth Manager

  Being a Good Client

  Answering the Investment Banker

  My Answer

  8. Getting Your Plan Off the Runway

  My Initial Answer

  Long-Term Wealth Planning

  Appoint Your CFO

  Structuring Your Long-Term Plan

  Flexibility for Unplanned Events

  Death

  Building Your Plan: Timelines

  Building Your Plan: People

  Other Helpful Tips

  Responding to Our Poor Squash Player

  My Answer

  Conclusion

  Final Takeaways

  Next Steps

  Appendix

  Investing

  Estate Planning and Structuring

  Family Dynamics

  Inside Information on Wall Street

  Humor

  Thought-Provoking

  Acknowledgments

  About the Author

  For the Practitioner

  Wealth, Actually is meant to ignite discussion between clients an
d their advisors. I want to raise clients’ level of decision-making. I want clients to think strategically about their new lot in life and help them use you better—challenge you, listen to you, and ultimately implement your advice.

  This book is not meant to be a reference book or technical road map for advisors. I don’t want the reader to be bogged down in acronyms and jargon, and I purposely kept the math to a minimum. For people new to wealth or intimidated by the vernacular of the field, a GRAT may be something you would find in Space Invaders, a NIMCRUT might be useful for changing a tire, and an inverse floating swap might be something you’d expect to find on a yacht.

  I would rather the wealthy think about what they want to do with their good fortune. What are their goals? What do they want their legacy to be? Once those questions are answered, the good practitioners and advisors can do what they do best: execute for the client.

  For those who wish for voluminous flowcharts and convoluted justifications to sell insurance, I say, “Bah humbug!” Very few of life’s important answers are found in a pitch book or a slide deck. Instead, use this book to help you ask the questions that will help clarify your clients’ unique goals and needs. In other words, use this book to help your clients ask you better questions toward building an appropriate, impactful, and lasting wealth management plan.

  Introduction

  A Fortunate Problem

  As a wealth manager, it’s common for me to receive emails from people who are clearly losing sleep over a problem involving their wealth. The email below—written at 1:30 a.m. on a Sunday—is a great example of the anxiety-inducing issues that often arrive with wealth.

  Frazer,

  I’ll be coming into a large sum of money soon. It’s an inheritance from my grandmother. I’ve known about this inheritance for a while, but this money is not something I relied on or even thought about. Unfortunately, my mummum recently passed away, and now this inheritance is coming. I don’t feel prepared for it. I’ve got a lot of things going on in my mind. Can I retire off this? Should I retire? How do I tell my husband? Should I tell my husband? How do I broach the subject to my kids? I don’t want them to turn into monsters. Yikes! I don’t even know what to ask or where to start. What should I do?

  My Initial Answer

  These inquiries happen all the time and come from people with different levels of experience and sophistication with wealth. In order to answer this late-night email, I’ll need to explain the reasons I’m writing this book and who should read it.

  For Clients and Their Advisors

  First, after canvassing fifteen years of experience in wealth management, it’s important to take stock of where wealth management is going. Whether you’re newly rich, or you’re “old money” and are just now learning the ropes, it’s completely reasonable to not want to become an expert. Only a small portion of us find all the dynamics and complexity of wealth management to be fascinating. For everyone else, I know it is hard work that can be bewildering, unpleasant, and filled with emotion—all the more reason to take the time to build a solid team to help you with the responsibility.

  I’ve spent significant time advising clients and helping them achieve their goals across different market environments, complex situations, and expert teams. With fifteen years in this segment of my career, I thought it would be useful to write down a personal statement about wealth management, what concepts work, and how the client can best use the services the industry provides. Writing this book has been a terrific exercise to review what I believe is important for clients to know as the wealth management industry undergoes massive change.

  This industry is moving in many different directions and grappling with existential challenges. There are different business models, severe pressures on fees and expenses, extreme obstacles for business growth, and shifts in attitudes toward active management and passive management. There is the internal struggle of advisors trying to understand what it means to act in a fiduciary manner, where a client’s interests must be prioritized over the advisor’s interests. There are also seismic changes occurring in the political landscape, the stock market, estate taxes, income taxes, legal changes, interest rates, and trusts. It is a challenge for the financial professional to understand and monitor all of these issues, let alone an uninitiated client!

  It is my belief that in order to provide the best advice and direction for each client, it’s up to each individual advisor to use the strengths of each institution and avoid the things they don’t do well or cost-effectively.

  My hope is that this book will be useful to both the client and advisor in understanding a different approach to the business of wealth management. It’s an approach that emphasizes the delivery of solid, long-term advice to the wealthy, especially as they take on the mantle of wealth and incorporate it in their lifestyle. Being wealthy comes with its own set of (good) challenges that require attention, scrutiny, and planning.

  Changing the Wealth Management Industry

  Second, I’m writing this book to change the wealth management industry (for the better, hopefully). I want to contribute and teach the concepts I’ve seen over the course of my career to help other advisors advise their clients instead of selling to them. I believe that it is okay to run a profitable business. People are allowed to make a living, right? However, it is not okay to take advantage of clients.

  I’m not saying everyone in the financial industry is a shark. The vast majority of financial professionals do a solid job. I am also not saying there is one magic way for wealth to be managed. There are many valid approaches to helping clients reach their goals.

  I am saying our industry can do a better job of sharing best practices. Instead, with the stakes high and the wealth business environment becoming more challenging by the day, the industry has become extremely competitive and cutthroat. This is happening between rival institutions and within each institution itself. By congealing my thoughts into this book, I hope to elevate the practice of wealth management and recenter it on the needs of the client.

  I am lucky to have a broad educational background and a diverse work résumé. I began my career in politics, working for the governor of New York and a variety of political campaigns. After working on campaigns and within state government, I can see the pluses and minuses of public life. I understand the harms that publicity and regulatory oversight can cause if one jumps into public life naively. My political background also helps me assess future political risks and opportunities. However, while politics is a game that is fascinating to play and watch, it is a world where votes matter more than wealth.

  Politics is a difficult place to establish a career, especially for an introspective person like me. Needing an actual career, I left politics for law school and briefly practiced law. The legal background is of great benefit to me as a wealth manager, helping me spot issues across a variety of areas. There might be issues with contracts, securities regulation, intellectual property, criminal law, or other types of legal problems. Being able to identify the opportunities and issues associated with everything the law encounters (which is everything) helps me alert my clients to the variety of risks in play and enables me to help them mitigate those risks.

  Alas, the billable hour and I never became very good friends, and I wisely turned my attention to wealth management. This was an area that melded the legal background, my interest in successful people and the stories that surrounded their lives, and my affinity for banking and the markets. Applying what I have learned from my previous experiences is valuable in advising wealthy clients and gives me an informed sense of the opportunities and risks within the investment world.

  No background is complete without the activities that occur outside of the workplace, and when it comes to hobbies and interests, my antennae spread out widely. I enjoy writing, broadcasting, film and music production (but don’t ask me to sing), and community and business involvement. My smattering of experience
s also includes screenplay and op-ed writing, running a blog and producing a podcast, producing a movie and graphic novel, being the treasurer of a Manhattan co-op, serving nonprofit organizations, and advising small businesses.

  This hodgepodge of know-how helps me spot issues for clients, especially from the corporate governance side and legal side. While not a classic entrepreneur like many of my clients, I can relate to the pressure and emotional drain of trying to create and maintain something of lasting value. That perspective fuels my advice to clients. It also taught me that it’s okay to ask for help. Understanding that I don’t have all the answers helps me avoid the catastrophic outcomes that can occur when uninformed but well-meaning advice from other advisors meets with unready clients. This ability to coordinate input from different advisors is of particular value when building a team to advise wealthy families.

  These lessons are important now, when financial markets move quickly and financial advice looks similar from institution to institution. Often, the experience you get from a financial institution is wholly dependent on the individual financial advisor you work with. With that in mind, it is vital that wealthy people come armed with basic concepts to discuss with their advisors to save time and resources and to help them to become better clients.

  Finally, I thought it would also be helpful for financial advisors to use the lessons learned from my practices to spot issues for their clients and provide better advice. Not everyone can be an expert in everything, and providing the best advice to clients does not happen in a vacuum. If you’re a wealth management advisor, I hope this book can be a tool to use when you’re dealing with the natural internal tension between running a profitable business and doing the right thing by your client. It is a bad look for the industry when the advice for the client is misaligned or in total conflict with the way a firm and an advisor are compensated. The book should help the advisor add more value for their client while being able to be paid appropriately for the skills and time they put into their advice.