Money may indeed be the “root of all evil”, but when the rubber meets the road it also “makes the world go round”. The challenge for many is to effectively manage assets through the various stages of life so that accumulated wealth can help meet needs along the way. While previous generations may have saved for a rainy day by stuffing money in a mattress or, more recently, may have provided for retirement through a traditional pension fund, successful wealth management today isn’t that simple.
“Wealth management is far more than just managing money,” said Bob Martin, regional president of BNY Mellon Wealth Management in Nevada. “Wealth managers look at the total picture.”
The Lay of the Land
The total picture for wealth management is a life-long holistic plan that includes such things as insurance, philanthropy, estate planning, trust documents and succession plans in addition to long-term financial planning. Today’s wealth managers advise clients on a continuing basis about how all these elements (and more) can work together to build and maintain meaningful wealth while also providing for reliable transfer of assets at the time of death. The key lies in developing a personalized plan that clients and managers can work with on a long-term basis.
“There’s this mystery about the business. We need to keep our clients on the path we’ve set to be successful,” Martin said. “What our clients want is proactive advice. The most important thing is for us to talk to them.”
As the economy and societal events ebb and flow over time, wealth managers need to be cognizant of these changes so they can best serve their clients. Over and above that, however, certain principals of sound financial management seem to stay in place. Owning asset classes that are not correlated over the long-term is a very common practice, for example.
“Everything we do is on a diversification basis and we’re always favoring quality,” said Brian Cunning, vice president and senior wealth advisor at Nevada Wealth Advisers at Nevada State Bank.
Other traditional practices include:
- Rebalancing over-performing and under-performing assets on a periodic basis.
- Strategically locating a mix of after-tax and tax-deferred assets to improve the after-tax rate of the portfolio.
- Reducing internal expenses by taking advantage of share classes available to institutional money managers.
- Eliminating the client’s temptation to make emotion-driven investment decisions.
- “People are living longer and they need forward planning,” Cunning added.
Although these principals can provide a calm sea for investment most of the time, investment boats can periodically be precipitously rocked by unforeseen events. As with almost every other factor of life, financial planning and wealth management were seriously impacted by the economic recession that crashed down less than a decade ago. The cushy days of high returns disappeared, leaving investors to scramble for safe yield-producing asset classes.
“It seemed that in 2008 and 2009 the market was running really good and you could get a 10 percent return,” Martin said. “The mind shifted later to more capital preservation.”
Safe and Sound
With investment fear and anxiety running high in recent years, wealth managers and their clients have had to adjust their thinking, but at the same time not abandon sound investment principals.
“Since the financial crisis in 2007, expectations for market returns have changed. There’s been a sharp decline in interest rates,” said Greg Kaplan, director of fixed income for City National Rochdale, a subsidiary of City National Bank’s Wealth Management Division. “We have a low-rate environment and more people are needing income for retirement. The backbone revolves around diversification. Treasury yields are quite low and you run the risk of taking on risk you might not understand. Interest and dividends are still good sources of income. We look at alternative investments as a complement to the portfolio,” he said. Traditional asset types could be bonds and bank loans while alternative types could be railcar leasing or reinsurance contracts.
Overall, the climate of fear has caused many clients, as well as professional wealth managers, to pull in their horns.
“Clients are more conservative, but also more diversified,” said Martin. “We try to eliminate the peaks and valleys. We need to keep the ride smoother. We need to buffer the downside of the market.”
Although retired people may have greater fears about preserving their capital, younger investors have feelings of uncertainty as well.
“There’s a great deal of fear and anxiety even among people who are working as to what’s coming down the pike,” said Steve Hollingworth, partner at the law firm of Solomon, Dwiggins & Freer who specializes in tax planning and trusts among other practices.
“People are more risk adverse. They want to pay off their debt and be very liquid. They are not open to longer term higher risk investments; you need to find that sweet spot in the middle. Other people are looking at higher dividend paying stocks. Stocks can be less secure, however. Chasing yield can be a moving target,” he added.
Another important component to successful wealth management is staying the course, according to Martin. “We need to keep our clients fully invested. We don’t want to buy more of the high-price assets and sell more of the low-price stuff,” he said.
With the help of a professional wealth manager, investors are less likely to panic with the ups and downs of the market. The job of the manager is to keep the ship sailing on course for the long term.
In addition to the economic atmosphere, wealth management has also been greatly impacted by technology and the plethora of information available to everyone on the Internet. “There’s a lot more information out there that wasn’t there before,” said Cunning. “It could overwhelm people. They need help.”
With financial television channels running investment advice 24/7, it’s easy for investors to be caught up in the frenzy of chasing the latest and greatest stock tip. Although keeping informed and proactive are positive traits for an investor, it’s important to use that knowledge as part of their overall wealth management plan.
Labor Department Regulations
As if all these balls are not enough for wealth managers to keep in the air, new Department of Labor (DOL) fiduciary regulations, slated for implementation in April of next year, have created a firestorm of confusion among those in the financial industry. Typical of government documents, the 300-page epistle outlines a myriad of rules for increased federal involvement in the arena of retirement accounts. Although the DOL was authorized in 1974 through the Employee Retirement Income Security Act (ERISA) to dabble in the retirement savings pond, involvement at that time was focused on traditional pension plans. Many people in the wealth management industry fear the new regulations are an overreach of federal intervention which could cause higher costs for clients and increased litigation, along with significant changes in the relationship of wealth managers and brokers with their clients.
“One of the challenges is the uncertainty about how it will be interpreted,” said Martin. “It deals with what kind of advice we give clients.”
In anticipation of the new regulations, Bank of America Merrill Lynch recently told its financial advisers to stop selling mutual funds in brokerage retirement accounts. The new DOL regulations will require advisers to put their clients’ interest first for those accounts and outlines a complex contract that would legally require brokers to disclose any conflicts of interest. To help offset the expected loss of revenue from commissions, which will be disallowed by the new regulations, Commonwealth Financial Network will offer short-term loans to its advisers.
Wealth managers face additional challenges in keeping up with demographic changes. As more and more millennials become potential wealth management customers, financial institutions are facing marketing and product development challenges. Wealth managers need to take into consideration this generation’s mistrust of financial markets, their lack of financial knowledge, their need for socially responsible investing and their desire to consult social media and their friends for advice.
“This generation of millennials is different,” said Martin. “They might be okay renting rather than buying a house, for example.”
Wealth managers who embrace new technologies to interact with this age group will be ahead of the game. Contemporary business models that reach out to millennials include social investing, which involves sharing investing ideas online through E-communities, as well as institutional websites that provide algorithmic trading suggestions from their wealth manager.
In regards to the performance of investing, the economy looms large as a critical factor in any discussion of wealth management. Most financial professionals have said they believe the economy is slowly recovering compared to the darkest days following the crash. Uncertainty still abounds, however, as to how long the recovery will last and what form it will take as well as whether figures released by the government provide the true picture of the economy.
Martin expressed belief that the economy will continue to plod along with recovery in the housing market and growth along The Strip in Las Vegas. Kaplan said the economy in most major U.S. cities is pretty healthy, although slow-growing, but the labor market isn’t as good as he would like it to be.
In addition, Hollingworth wondered how long the growth trend will last. “There’s been a significant recovery in real estate locally so people can take advantage of that. Not everyone is sure how long it will last. Opinions are across the board,” Hollingworth said.
Even though statistics show a remarkable relationship between stock market performance and which political party is in power in Washington D.C., wealth managers said the market reacts to other factors rather than who sits in the White House. “Markets go up and down no matter who is president,” Cunning said.
However, S&P 500 market performance charted from 1933-2015 shows annual growth of 4.9 percent with a Democrat Congress and Republican president, 9.3 percent with a Democrat Congress and Democrat president and 15.1 percent with a Republican Congress and Republican president, according to statistics provided by StrategasRP. If those statistics hold true, the results of the recent election should be a boon to growth.
If you’re wondering how investors can possibly survive and even thrive amidst the challenges they face, wealth managers stick to basic common sense when giving advice.
“Look to keeping your costs down in your investments, including taxes,” said Hollingsworth. “Never put all your eggs in one basket. Many people invest based on the moment. Pick investments that you’re comfortable with in the long term. Don’t trade on public information. Review and adjust periodically.”
Kaplan emphasized the importance of using a professional who will assist you in balancing risk, personalizing your plan and helping you to stay the course. Martin added that it’s very important to start saving and planning early, especially in your working years. Don’t wait until retirement to chart your course.
Although the path to sound wealth management seems to be filled with potholes, positive opportunities do exist. “There’s a tremendous variety of investments available and lots of tools online to help,” Hollingworth said.