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Jerry Nightingale

Tackling Growing Intricacies in Wealth Management

To be more proficient with your tasks as a wealth manager, you need to practice, practice and practice perfectly.

August 16, 2007
by Jerry Nightingale, MBA/CPA

While the world is becoming smaller, it is also becoming more complex, thanks in large part to continuing technological innovations in the Internet, telecommunications and advanced computer systems. As we learn more about business around the globe, our responsibilities as wealth managers also become more complex.

Global Awareness in Wealth Management

Maintaining a global awareness has gained emphasis in wealth management as well as in other areas of our political and business lives. Recently, the United States world stock capitalization shrunk to less than 50 percent. For the last six years, the MSCI EAFE Index (Morgan Stanley Capital International Europe, Australia, Asia and the Far East Index) returns have outperformed the U.S.-based S&P 500 Index returns by a significant amount. As a result of this, a wealth manager on CNBC stated that more than 50 percent of his managed portfolios will be invested internationally because he believes the future returns will be better outside of the United States.

Historically, because of the correlation between the United States and international stock markets, the international allocation to a client’s portfolio was about 20 percent. In the last several years, international markets have become more correlated with the United States stock market. This raises questions that if the United States and international markets are more correlated, should that manager invest more internationally or should he allocate less because now international investments do not reduce volatility as much as was achieved in the past? Or should this wealth manager take into his asset allocation consideration that the S&P 500 companies receive 45 percent of their revenues from overseas operations?

As wealth managers we don’t only focus on investment portfolios, but rather the entire financial life cycle of our clients. Harold Evensky in his book Wealth Management says, wealth managers’ “efforts are devoted to assisting clients achieve life goals through the proper management of their financial resources … the wealth manager will know … the client’s dreams, goals and fears … there is very little about the client’s global fiscal life that is not important information.”

If wealth management includes the client’s total fiscal life, that would include knowledge of the client’s needs and wants and knowledge of life insurance, disability insurance, long-term care insurance, education planning alternatives, investment planning and implementation, liability management, tax planning, estate planning, pension and profit sharing planning, social security advise, health savings accounts, the new Medicare program and others. These are a respectable share of disciplines in which to be proficient.

Some used to consider wealth management as primarily investment management. Even with that perspective, investment management has become more complex. More alternative instruments are available and used more than in the past: More accessible and different kinds of hedge funds, private equity, more and broader use of index, stock and ETF options, a plethora of passive and actively-managed exchange traded funds, more market participants with faster computers and more sophisticated analytical tools and reports, to mention a few.

At a seminar I attended shortly before writing this article, I listened to financial experts’ presentations filled with ideas and knowledge that reflected they had thought thoroughly about their materials — or were experts in their respective areas. It reminded me of how I approach some complexities when I consult with or hire experts. For example, long-term care is not my forte. So I have a standing agreement with a specialist colleague who can meet with my clients who need long-term care. She reviews their needs and the different LTC programs that are currently available for the client’s particular situation. If the client decides to proceed, then she works directly with the client, but I know what is going on.

I know of some wealth managers whose primary focus is eldercare. Their approach is to work as a team member or team leader of gerontologists, social workers, eldercare attorneys, medical providers, real estate specialists for seniors, family mediators and others in the eldercare field to get their arms around the eldercare issues and to provide the best service to their clients. The way Michael Eisenberg, a member of the AICPA Financial Literacy Commission, put it, “The wealth manager becomes a quarterback for the team.”

Another way to reduce complexity is to focus on selected areas for ourselves and to delegate other areas to staff that have the skills — or simply outsource the tasks. Our particular part of the pie could be focused on what we like within the realm of wealth management to meet our clients’ needs. For example, you may enjoy running different “what if” scenarios in a comprehensive financial plan to see what effect it has on different probability results of a Monte Carlo simulation. If you are doing what you like, any complexity becomes fun. With practice, the complexity may remain per se, but you become really skilled at it.

The Origin of Complexity

Sometimes the origin of complexity is not in understanding a new or modified concept; it is in implementing a new or complex analytical tool. It is sometimes simple to do some financial plans. But if you have a comprehensive financial planning program, you may have to spend a lot of time getting familiar with its intricacy so you can get your desired output. Tools and products are often changing, coaxing us to keep learning.

Oftentimes, complexity is reduced by having adequate time to address a matter. We all have 24 hours to balance our non-work life with our work life and sleep. Hence, time management becomes very important. It does not pay to invest fees of $300 per hour to do a $10 per-hour job.

Nevertheless, we as wealth managers need to educate ourselves, then use that education to educate our clients and our partners. It’s our way of spreading financial literacy on a higher level. When we learn, we get better.

Where does the ever-changing landscape of wealth management go from here? Where does it fit in your firm? How will you tackle its intricacies to accomplish your clients’ goals?

To get more and more proficient with your tasks as a wealth manager, you need to practice, practice, and practice perfectly. As renowned motivation coach Tony Robbins quips: “Constant and never-ending improvement” goes a long way toward simplifying the complex world of today’s wealth manager.

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Jerry Nightingale, MBA, CPA/PFS, is a principal with Nightingale Financial Advisory Services in Palo Alto, California. He is chair of the California Society of CPA’s state Personal Financial Planning Committee and former Vice President of the Association of CPA Financial Planners. Jerry specializes in financial planning and investment management for high-net-worth individuals. He has been providing excellent financial services to clients for over 20 years.