After a 40-plus-year career holding a variety of roles in the finance industry, I am now happily retired in the mountains of Colorado. I’m overjoyed, as any retiree would be, to be able to spend my days with my family—skiing, hiking and quality time with my grandchildren. And as I’ve settled into retirement, the demand for financial advice from my wonderful children, extended family and friends certainly haven’t let my skills atrophy.
With successful careers and busy families, more common questions surround whether one should buy or rent a house, what size house they can afford, and how to finance it. After discussing personal finances, general economics, risks and tradeoffs, these people have become comfortable making their own decisions.
Now, the more difficult decisions are related to their investments. What percentage of their salary should go into a 401K? How do they select from the available investments in a 401K? What investments should be in their spouse’s 401K? How should they invest in their taxable brokerage and savings accounts? Should they set up a college fund for their kids? How should that be invested? How are all these decisions related? Their questions, which are more than legitimate, are all part of what is now called, wealth management.
Once I started lecturing on the interrelationships among all these decisions, risk-return tradeoffs, risk tolerance, investment horizon, taxes, inflation, deflation, liquidity, volatility and global perspective, I realized I’ve lost my audience. As an educator, I’ve spent my life with the notion that teaching a person to fish is far superior to fishing for that person. In this case, some knowledge is necessary, but efficient execution is essential. The two-part requirement has motivated me to provide my children, extended family and friends with concepts in the form of a book, Do-It-Yourself Wealth Management, and tools in the form of a web application, RipsawWealthTools.com, for the implementation of their investment decisions throughout the course of their lives.
Organizing and Conquering
The financial services industry has had an advantage over their less sophisticated clients in terms of knowledge, data access, technology infrastructure and economies of scale. The excessive advisor fees and fund expense ratios are a huge drag on wealth accumulation, especially in a low interest rate environment. Unnecessary complexity and a lack of transparency are intentional means of having clients think the process is too complex for them to do it themselves. I believe everyone should learn enough to make decisions in their own best interests. That is why I have devoted my teaching to helping people make superior financial decisions for themselves.
Investment portfolios have numerous moving parts and complexities. There is a focus in my book on building intuition and practical implementation. It is important to present information in a relatively non-technical jargon-free manner. Using many examples of actual events in the book are intended to make the material come to life. I begin with a few easy tips to garner “easy wins” that develops intuition and confidence:
1. Maximize tax-deferred retirement contributions. If there were a set of commandments for investing, maximizing qualified tax-deferred retirement contributions would be number one. Qualified pre-tax retirement plans have a unique set of incentives to save and invest for the future. The goal of wealth management is to achieve a preferred standard of living through time—we invest in education for better job opportunities and higher future income, we promise some of those future higher earnings to pay down a mortgage for home ownership and a higher standard of living now.
2. Rollover a company tax-deferred plan (401K, 403b, 457b, etc.) to a traditional IRA at every opportunity. Many tax-deferred plans restrict the available funds to those with high expense ratios as well as the number and type of investments. You can minimize this negative effect by rolling over a company plan to a self-directed traditional IRA with more and better investment opportunities. Then, jointly managing investment choices within and outside your tax-deferred plans can be used to improve your overall wealth management strategy.
3. Reduce the cost of implementing your financial plan. A do-it-yourself strategy will reduce the significant drag on wealth accumulation from excessive advisor, administrative and fund expense fees. This has never been more important in our current low interest rate environment where fees and expenses can actually exceed investment income.
Once these small pockets of knowledge are provided, it’s easier to move into a deeper education of wealth management that allows folks to take control of their finances.
While we are all part of a global community, we are all different. Different lifestyles, priorities, hopes, dreams, families—yet in the investment management industry, we’re usually put into a risk bucket based on a short questionnaire.
These buckets exist to scale for risk tolerance and guide portfolio construction and the mix of asset classes you hold. Loosely speaking, risk tolerance is an attempt to assess the degree of variability of returns on an investment portfolio that an individual is willing to withstand. Once an investment advisor places you in a bucket, you typically get a percentage allocation among stocks, bonds, and cash. They define each bucket by varying the percentage allocation.
For example, Maximum Capital Gains could be 100% in stocks for the most risk tolerant (aggressive) bucket. Then Growth objectives at 75% stocks and 25% bonds. Fifty percent stocks and 50% bonds could be for the Growth-Income moderate risk tolerant bucket. For the least risk tolerant (conservative), 75% bonds and 25% cash for the Income focused bucket. Notice the cookie cutter efficiency for the investment manager.
This is great for scaling investment opportunities for the investment firm, but not great for the unique investor you are. Wealth management means including all of your assets and liabilities, not just those that advisors are managing for you. Examples include private investments, business ownership, company stock and option plans, annuities, pensions, social security, and loans. These are all part of your bond and stock portfolios that advisors don’t include because they don’t get paid for that or don’t have the technology to include them.
Clearly, rules of thumb are not sufficient to adapt to evolving economic environments, especially those we have never seen before. I believe disruption is coming to this sector—the information age is now poised for a new era of access to knowledge, data, and computing power. Future wealth management and investment tools will not only cut out more of the distribution costs in a do-it-yourself framework but will also provide better assessment and control of the risks and expected returns in wealth portfolios.
In the meantime, we must find ways to capitalize on our individual needs with better financial education and decision-making tools. I’m not always going to be here for my children or my students, but I rest easier knowing that I’ve built their intuition and taught them the practical implementation of wealth management with the tools they need to succeed now—and long into the future. A worthy investment I believe we should all make.