Your wealth gives you and your family the freedom to pursue your goals; however, accumulating it requires diligence, focus, and patience. For this reason, it isn’t something investors want to do twice!
The global marketplace is currently treading in the precarious waters of a secular bull market. In these changeable conditions, investors are looking for sustainable approaches that will keep their wealth afloat for many years to come.
In our experience managing family wealth over the past few decades, we have noticed seven roadblocks that can get in the way of investors making their wealth sustainable. We review each one below and provide insights about how you can overcome them:
Often, portfolios are constructed to chase relative index-based benchmarks that measure success according to things like market or peer performance. These approaches can be inherently flawed since the metrics might not have any bearings on your unique goals. This makes it easier to veer off course and can expose you to higher levels of risk.
To navigate around this impediment, focus on goals-based benchmarks centered around what really matters: creating sustainable wealth that empowers you to achieve your goals and fund future commitments.
You need to start from day one with a clear understanding of your objectives (things like financial, lifestyle, and philanthropic aspirations) and the purpose your wealth plays in helping you achieve them—only then can you construct a portfolio that will get you there.
2. Policy Vacuum
An Investment Policy Statement (IPS) plays an incredibly important role in effectively capturing your portfolio’s purpose and how you want it to be managed. Though the content may vary, these core elements should be present in an IPS:
- Investment objectives specifying the purpose of your portfolio in order to meet your unique financial goals.
- Risk tolerances, which outline your ability to tolerate risk in terms of capital and income loss.
- Constraints including liquidity (defining any short-term needs for liquid funds), taxation considerations, and specific legal and regulatory issues to be addressed.
Regardless of where you keep your investments, you should always have an IPS that’s properly tailored to reflect your needs and objectives. Your IPS gives investment professionals specific instructions to follow when managing your money and it gives you an opportunity to reflect on and articulate your own financial and lifestyle goals.
3. Erratic Investing
Although many people assume this is how investments work, the reality is that this type of behaviour is never the best recipe for creating sustainable wealth. Instead look for disciplined processes underpinned by fundamentals and work with investment advisors who will structure a portfolio aligned with both your return goals and risk tolerances. This balanced and stable approach keeps you comfortable and committed to your long-term investment plans regardless of market conditions.
4. Island Investing
Money management is a crucial part of managing wealth, but it does not always stand alone. Families and foundations often have complex wealth management needs and benefit from working with professionals like lawyers, actuaries, and accountants who provide important structural advice to help better manage their assets. In the case of an affluent family, these recommendations could be related to the design and implementation of investment holding companies and trusts.
The key is to coordinate and integrate the structural and investment advice you receive so your investment advisor can architect a tailored plan and create well-informed, holistic solutions that generate sustainable wealth. You want your network of trusted advisors working collaboratively and in well-defined roles together instead of in silos to manage your wealth and guide you towards your goals.
One of the most frustrating questions you might grapple with is figuring out if your investment solutions are right for you or for the investment firm.
To assess this, it helps to understand the five main components that make up asset management offerings:
- Individual Securities: The specific stocks and bonds themselves.
- Investment Management: The people who “pick” stocks and bonds.
- Brokerage: The people who trade stocks and bonds on behalf of investment managers.
- Custody: The people who hold clients’ securities.
- Portfolio Advice: The people who structure a portfolio to match your investment objectives and risk tolerances.
Be wary if a single firm performs more than one of these five functions, and ask the firm questions like “why have you chosen that service provider?” and “how are their services priced compared to other similar competitors?”. The answers you come to will help you discern if the service providers have been chosen for your benefit or the firm’s convenience.
6. Portfolio Monitoring Gaps
Once implemented, investment professionals have an obligation to make sure they’re pursuing your investment intentions by strictly adhering to the objectives, risk tolerances, and constraints outlined in your IPS.
Your portfolio should be reviewed against metrics like:
- Asset allocation
- Security quality
- Diversification of holdings by individual and/or industry allocation
- Overall assessment of historical returns against portfolio objectives
Keep in mind that it’s natural for discrepancies in things like asset mixes, security quality, and diversification to occur from time to time. By consistently monitoring your portfolio, investment professionals can identify and rectify inconsistencies as soon as possible. If your advisor believes discrepancies with things like risk tolerances are in your best interest, they must obtain an updated and signed IPS from you, the client.
Regular reviews give you valuable opportunities to find out how your investments are doing and discuss changes, ensuring your portfolio continues to meet your ongoing objectives and risk tolerances.
There are three broad types of reviews that should be conducted on a regular basis:
- Goals reviews, which allow you and your investment managers to ascertain whether or not your goals have shifted and, if necessary, make adjustments to your portfolio.
- Portfolio reviews to make sure your portfolio is behaving as it needs to and is meeting your short, medium, and long-term goals.
- Policy reviews to go over any changing circumstances that might require reforms to the portfolio structure or IPS.
Communication between you and your investment advisors needs to be open, objective, and consistent. This transparency will give you confidence that your family’s wealth is being sustainably managed in a way that reflects your unique needs.
How You Can Avoid These Impediments
Creating sustainable wealth takes commitment and perseverance. Working with an investment advisor dedicated to designing a goals-based portfolio, working with a range of professionals to provide comprehensive solutions, and being transparent with you about your portfolio’s performance will help guide you and your family towards the financial freedom and stability you seek.
HighView is an experienced fiduciary portfolio management firm committed to investor transparency. We would be happy to discuss our goals-based investment approach with you and your professional advisors.
Watch our videos about a variety of asset management topics.
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- The Obstacles in Creating Sustainable Wealth - April 7, 2022