Wealth Management and estate planning: finding an advisory firm that caters to your type of career and lifestyle

Wealth management means something very different for an entrepreneur, or at least it should. The lifecycle, behavioral profile, and tolerance for risk of entrepreneurs are unlike that of non-entrepreneurs. These considerations need to be accounted for before embarking on a program to create a proper financial advisory structure.

The entrepreneurial lifecycle: Investment management and wealth management are not the same thing. Often, clients come to a wealth management firm at or near an exit and expect the firm to just step in and work “magic.” A firm can certainly help and add value at that point, but wealth management for entrepreneurs needs to begin much earlier. Ideally it should line up temporally with their business lifecycle. Those who come to us near their exit are often limiting their outcomes. They are also reducing the value creation that comes from wealth management to returns on invested capital or just investment management. That is but one component of wealth management, not the whole thing, and often not the most impactful.

When properly prepared clients engage a wealth management or multifamily office firm, they do it at the moment that they are considering leaving their existing job to launch Newco. That is where the process begins. At that time, long-term planning needs to be executed along with their new business plan. In fact, how you structure your Newco, including the corporate structure, method of issuing shares, how shares are held, tax structures, holding entities, and the like can all have an incredibly meaningful impact on your future financial outcome. A wealth management firm that works exclusively or mostly with serial entrepreneurs can provide the greatest insight and value to entrepreneurs.

It is imperative that successful executives and entrepreneurs consider the sheer magnitude of the responsibility of managing their own large pool of wealth. Managing your wealth is very similar to running a business itself. Organization, process, and resources should not be overlooked. In fact, these are the base components of a well-thought-out plan. Clients should take the time to consult with an appropriate wealth management firm as early as possible if they think some form of change may be coming. Aligning yourself with a firm that has a broad and diverse group of partnerships delivering value-added resources such as custodians, strategies, investment products and vehicles, research, trust services, and back-office solutions and can integrate all of this into a comprehensive solution can be invaluable.

We live in an age of increased specialization and segmentation. “Generalist” wealth managers are usually not appropriate for an entrepreneur because they do not have the experience and expertise to handle the intricacies of the responsibilities. Just as there are wealth advisors for certain wealth levels, there are definitely advisors with specialized expertise to help entrepreneurs. On a personal note, I will readily admit, that now that I have lived the life of a startup CEO, I am better suited to advise other CEOs. The sheer experience, terror, joys, and challenges of the startup life and being a CEO have dramatically improved my ability to advise other CEOs and entrepreneurs on the intricacies of their wealth, careers, and businesses.

As the entrepreneurial lifecycle grows and evolves, there will be numerous opportunities along the way to affect outcomes. They could be related to personal or familial changes in the person’s life events. They could be changes at the company such as hockey stick growth or challenges leading to pivots. Each of these requires detailed analysis and evaluation of possible strategies in the wealth plan. As the executive achieves greater success and wealth is created, even if illiquid, new possibilities emerge. Having an ongoing, honest dialogue with your advisory team is critical. Your advisory team should be able to identify unique opportunities and how to apply innovative resources for you to capitalize on and achieve your personal financial goals.

The points in time where a professional advisory firm can have the greatest impact are:

  • Business
    • At business creation
    • As the company attempts to raise institutional money
    • As the company begins to scale
    • e-exit/IPO
    • Post-exit/IPO
  • Personal and family life events
    • New career/company
    • Birth/death/disability
    • Marriage/divorce
    • Pre- and post-retirement
    • Generational planning
  • Economic
    • When forecasting is required
    • Managing complexities of the economic cycle
    • Periods of volatility

You cannot separate entrepreneurs from their business and thus their business from their wealth

An entrepreneur has a personal balance sheet comprised of two halves. One half is what is traditionally thought of in Wealth Management, the public traded securities, funds etc. The other is the nonliquid assets. In the “old model” of wealth management, the client might find an advisor who has some expertise regarding Securities Investing and asset allocation. That economic model is based upon charging fees on the assets that reside in an investment account with that broker-dealer. Thus the interests of the advisor/broker are solely related to that pool of assets, and that is where he or she focuses all their attention. To the extent that they do have any expertise to begin with, it revolves around stocks, bonds, maybe third-party investment managers, etc. But, if you were to ask any entrepreneur where his or her wealth is likely to come from in the next five to ten years, they will generally tell you that it will come from the half of their balance sheet that is the company that they are building and the other related business endeavors and deals associated with that, which is generally illiquid and not sitting in an investment account. But a typical advisor just does not have any real-world expertise to help with that side. It is just not “what they do.” This is an important distinction. Providing advice around the entire balance sheet, including the “assets” that are not sitting in an investment account can often be where real long-term success comes from.

Alignment of interests is another critical component of success. This relates of course to economic models, fees, products, conflicts of interest, and incentives. The days of hiring an advisor who pitches you only the firm’s vertically integrated products and their firm’s ideas are numbered. Working with an advisory firm that has access to many different views of the world, investment managers, products, and resources is incredibly valuable.

In the “old model” a client found an advisor and moved his or her assets to that advisor’s firm. That firm was generally a big bank that is leveraged sometimes 10:1 or more. The client then would receive ideas and strategies from just one firm’s perspective. As we all know, no one firm will always see every opportunity or risk, so a broader access to safer custodians, research, and perspectives can be really powerful. An advisory firm that has partnerships with a multitude of un-levered and more stable custodians, as well as the top research firms and their views, is key.

So, the clients become “captive” to that advisor, that bank, and all of the risks associated with that. Frequently, the smart clients would have accounts at a few different firms for “diversification” purposes. That is no longer necessary.

The world is changing. The advent of Registered Investment Advisory (RIA) firms as a dominant force in the wealth advice world has leveled the playing field in favor of the client. It has shifted the leverage away from the big bank to the client. It is our view that in the future it will move ever further to where the clients will be the ones with all the leverage because they are the ones with the capital in the first place. It will be the advisory firms that will come to them. The advisors will compete online and off to attract clients so that advisors can go to the client, not vice versa. Those clients will have an open architecture, including a disparate team of advisors and of products and services from which they can choose and integrate into one platform that they control.

The behavioral biases: Most clients do not have an appreciation for the recent advances in finance theory, especially behavioral finance. Based upon our research, it is clear that the most impactful component of a personal financial model are behavioral biases (both the clients’ behavioral biases as well as those of the advisors). We all have biases and tendencies, and they are driven by our own personality types and personality dimensions. These lead to our own decisions and outcomes.

You might be a procrastinator, impetuous, or risk- averse—these are behavioral types. First, knowing where you fit in on this spectrum is critical. It
is very similar to knowing your strengths and weaknesses in your golf game before you go to play or your advantages and disadvantages in a negotiation before you enter into one. If you have proper awareness of your situation and yourself, you will likely fare far better. Finances and managing wealth are no different. Methodologies are emerging today that accomplished wealth advisors and technology companies are utilizing to significantly improve client understanding, self-awareness, and ultimately outcomes through behavioral technology.

As the former MIT and Harvard Professor in Behavioral Economics and Chief Scientist from HintBox.ai*, a leading technology company that offers a Behavioral Artificial Intelligence Personal Finance platform, describes, “Like
all human behavior, making an investment decision involves a multilevel, complex interplay of processes: the cognitive (how you think; for example, how you process facts and information about the markets), the affective (what emotions you experience; for example, the regret you feel about not having bought the stock that made your neighbor a fortune), and the perceptual (how you perceive the outside world; for example, to what specific events and possible consequences of the recent presidential elections you pay attention). Moreover, as investors, we don’t live in an isolated dark room that keeps us immune to the influence of others. Rather, we read the news, we talk to our friends, and we observe, in conscious and less-than- conscious ways, what others do in the markets and how they understand what is happening. To this list, add social factors like conformity and groupthink, then you discover what may lead people astray in their financial decision making!

“Next, consider that only very late in the course of evolution did humans come up with the concept of money and start acting as investors and financial decision makers. Compare this financial decision making to how people deal with stress in modern life, and you realize that from an evolutionary perspective, we are not equipped to deal optimally with either challenge. For example, when we feel threatened by a sudden, unexpected stressor in the environment, our evolutionary response is to either flee from the stressor or to engage in an immediate fight. While this fight-or-flight reflex had survival value in the world of the hunter-gatherers (think of the sudden sight of an approaching tiger), in today’s world simply running away and hiding or attacking to destroy the source of stressors is usually not adequate (think of your financial advisor breaking the bad news of an unexpected investment loss). Similarly, our hard-wired, innate tendencies in financial and investment decision situations may also be limited.”

The point is that we all need to understand our own capabilities, limitations, and needs, especially in managing our own wealth!

Technology, tools, and new models: Indexing, passive investing, and robo-advisors have captured the zeitgeist of the personal finance world for the past two years. The media have certainly boosted their status, and for good reason. These tools have expanded the available options to investors and allowed many smaller investors to participate in the markets with greater ease and essentially index more easily. While we are fans of anything that makes it easier for investors to achieve their goals, these are but one small step in the direction of where the world of finance is going. But they have their own limitations. The long-run returns on stocks as an example annualize at rates near 10 percent, but average investors generally do not come close to that. Thus the argument for passive/index investing is a strong one. But these numbers benefit from the fact that stocks have been in a bull market for years. By definition, index investing, robo-advisor models, and the like are long-term strategies that carry uneven risks in more challenging periods. Thus an all-of- the-above strategy can be a wise one.

In fact, if you look at the numbers of the robo industry, it is doing a good job of helping the smaller investor, but the numbers are still relatively very small. The technology curve is steepening and the exponential nature of it scaling before our eyes. We are on the cusp of far greater advances in technology that will enable greater financial outcomes. These advances will create services that employ artificial intelligence and data science to better analyze (satellite and UAV/Drone imagery, Sentiment analysis and Quant models), and improve decision making; provide greater transparency, reporting, aggregation, and safety; and all around better returns and outcomes. We allude to the positive impact that the emergence of behavioral AI is having on the industry, and this is a result of the confluence of regulatory change, technological shifts in big data, data science, mobility, and artificial intelligence. The future of an actual AI- based advisor is just about upon us.

Structural planning: Structural planning is one of the game changers in outcomes. It is the very first and most important component of risk management. We view taxes, creditors, and predators as primary risks to a successful personal financial plan. It is also, unfortunately, the one that is almost universally overlooked. This is a category that relates to every single turn in the lifecycle. Some refer to this as estate planning, but for us it is far more integral and involved in almost every facet of your plan.

As we referred to throughout, events will arise in your life that have planning consequences. Whether is it the new business, having a child, marriage, divorce, or retirement, to name a few, there are impacts to your structural planning. Frequent areas of iteration and discussion include financial planning, stock-based compensation, and liquidity considerations. More traditional areas are tax (income, estate, capital gains), philanthropic, and legacy planning.
The inherent complexity and the intensely personal nature of these items generally lead people to avoid these topics. However, the costs of procrastination are often very high. As you build your team of advisors, it is critical to make sure that there is a specialist, preferably an attorney, as part of the team with deep expertise in structural planning. We believe that the best method to achieve an integrated and unified outcome is to allow your trusted advisor to arrange for the key participants and service providers to provide advice and services. Our view is to integrate this with and do not outsource this from your wealth management advisor.

In conclusion, the best approach to the creation and development of a successful wealth management plan is to use your business skills and approach it in a similar manner. Rely upon your business experience and instincts to research the firm, understand its value proposition, and make sure that its specializations align with your needs and goals.

Once you build your team, be certain to properly communicate as much as possible on an ongoing basis to maximize the resources and talent at your disposal. If you take this approach, your odds of success in creating a successful and sustainable Wealth Management model for you and your family are far greater.

David J. La Placa, Founder and CEO, Intellectus Partners