Are wealth managers managing wealth or just money?

September 28 2017

Given the crisis-ridden recent past and the future challenges of the financial planning industry, it is timely to question whether financial planners are managing the total wealth of customers or just managing money. The profession has experienced a turbulent time resulting in remediation programs and reviews. While there are many methodologies and regulatory guidance, there appears to be some confusion as to what the offering is and what the offering should be. More precisely, what should be the new narrative for financial planning and wealth management?

The understanding of wealth creation and management in modern society is deeply rooted in money. Essentially we are planning to accumulate money for retirement and de-accumulate money during retirement. Central to our thinking is that if money was available, the rest will fall into place. Simply put, money will come to the rescue. Yet, we know that money alone will not bring wellbeing or total wealth regardless of the stage of the lifecycle. If our total wealth – family wealth, physical wealth, inner wealth and financial wealth – is not in balance we are destined to encounter problems.

Should wealth managers go well beyond planning financial affairs to planning total wealth? Are we only considering material wealth in our wealth planning strategies? This is no doubt one of the questions we should ask, especially in view of the developments in robo-advice, blockchain and machine learning where a significant part of the current involvement of the planner is likely to be less important.

Often a natural disaster or a terminal illness amply reminds us of the limits of financial wealth and life itself. One could be forgiven for questioning the “horrors” of nature and fragility of mental and physical wellbeing. And, often our pursuit for financial planning ignores the limits of financial wealth. But, there is a silver lining in the darkest cloud. That is, one’s family, health, relationships, contentment and inner wellbeing cannot be taken away by disasters. They stand tall in the midst of adversity. Yet, we tend to focus the least on these as we search for financial wealth and material goodness. So, should the financial planners take a step back and critically review how they should contribute towards achieving total wealth that includes non-financial wealth of their clients?

While wealth management has been marketed as a total solution, it still focuses on financial aspects of “wealth”. It does not bring out the “total needs” of an individual and then plan for total wealth including financial wealth. It is life planning based on total wealth planning that ultimately drives sustainable wealth and life success. Single-mindedly chasing and planning for financial wealth does not deliver total wealth.

Therefore, should financial planners focus on total wealth – family wealth, physical wealth, spiritual/inner wealth and financial wealth and, then, help clients understand and unleash total wealth?

A clear framework based on “total needs” should help wealth managers to deliver that extra edge in providing a “balanced” value proposition that goes well beyond money.

Let’s consider the extreme. Take, for example, a person who has worked all his life in trying conditions at the cost of family or health which, in turn, will adversely affect financial wealth. Are these not so common scenarios even with senior executives and ultra-rich?

Poverty of the homeless poor is visible. But often the poverty of the rich and powerful is hidden. Poverty behind pin stripe suits is not so uncommon.

There are few better examples than the following comments from an Australian tycoon: “I had a marriage breakdown last year. The last thing I think I am perfect. I’m just trying to do the best job I can. I’m trying to be the best father I can to my kids. I’m trying to do the best job I can running my business”.

Real success and satisfaction cannot be measured by money alone. But we often try to do that. We should ensure that our success contributes to our total wealth and total well-being. There is a difference between achievement and satisfying achievement. One might not find satisfying achievement by creating and accumulating “financial wealth” alone.

On the contrary “donating wealth” could also become a key contributor to satisfying achievement as some tycoons have experienced recently. The latest to join the wave of donations or philanthropy is the Australian mining tycoon Andrew Forrest. He has followed the footsteps of Mark Zuckerberg, Bill Gates and Warren Buffet. The benefit (utility) of giving is often not fully understood as satisfaction (or utility) of giving is difficult to measure in dollar terms.

Paradigm Shift

The Preference Theory and Utility Theory are not new. We have used them in financial evaluation of strategic investments. But we hardly use them in making investments in our own lives with limited time horizon.

We know that beyond a certain point an extra dollar has little value and other attributes of total wealth like family wealth, physical wealth and inner/spiritual wealth would add more value. The choice between alternatives are often ours. And, in certain circumstances the excess financial wealth might even become a hindrance to harness other attributes of total wealth – family wealth, physical wealth and inner/spiritual wealth.

Looking through the prism of management science we could view our total wealth as the objective function subject to four attributes of wealth – financial wealth, physical wealth, family wealth and inner wealth. The main constraint is life expectancy. The challenge is to execute financial planning and risk management within the framework of total wealth. The four attributes of total wealth are interdependent.

The rapid change driven by financial technology (fintech) and the flexibility of blockchain should be able to take care of financial planning without much human involvement. Then, the challenge to the financial planning profession is to embrace the change and add value to clients with a robust value proposition.

As one of the most successful financial planners put it: “My high net worth clients do not need pure financial planning really, because they have enough to retire on for this generation and, in some cases, for the next as well. What they need is what you call total wealth planning. I have to be more than a financial planner to satisfy these clients”.

The wealth management value propositions for clients are often flawed due to the lack of understanding of clients. The clients do not or cannot articulate the non-financial aspects of their needs.

The non-financial aspects are also an integral part of wealth. At times, they do matter even more than the financial aspects. The same applies to risk. Non-financial risks eg. risk of divorce, risk of health problems, risk of family disharmony etc. are difficult to articulate but ultimately they can affect wealth including financial wealth. Herein lies the need for total wealth planning.

Measuring Your Life and Total Wealth

Wealth managers should help clients in measuring their lives but not only their finances. Then only can a meaningful plan be developed.

This is in stark contrast to the current multi-step financial planning process. A neat quadrant called Total Wealth Quadrant (TWQ)™ is now available to understand the interdependencies of total wealth – family wealth, physical wealth, spiritual wealth, and financial wealth.

Further, a range of metrics to measure the “balance” of different drivers have also been developed. Only when you press the “non-financial buttons” do people come up with the total picture.

Two different scores are calculated using the computer-based calculator. Very soon wealth managers will have to wear the hat of a life coach and what really matters is where the client wants to be in total wealth terms.

The approach is relevant to blue collar workers as much as the high net worth individuals. For example, it may even be more important to manage physical wealth for blue collar workers. As a truck driver puts it “Total Wealth Quadrant (TWQ)™ showed for the first time how poor I scored on family and physical wealth, and, if I fix them it will help me to score well even in financial wealth”.

The models, processes and metrics can also be used for business development in the wealth management and life coaching area.

A calculation methodology supports the metrics of the TWQ™. Wealth managers can use the calculator and run several scenarios and the process of calculation is as useful as the final scores but the scores ultimately “reveal it all”. In some cases early warnings are obvious and in others it may take time.

The risk management is also different with total wealth planning. The risks are inherent in all four quadrants but we often do risk profiling based on financial wealth. Traditional risk profiling does not take into account the health and family risks. Lack of “inner wealth” may also pose unexpected risks.

Put simply, life is not only about “financials”. Life is about relationships and living, and, the scarce resource is time.

We must optimise everything around time.

The total wealth approach assists in a self “re-invention” by:

  • Understanding who you are and your total wealth;
  • Identifying gaps in total wealth;
  • Identifying the risk factors;
  • Developing and implementing total wealth based life plans as opposed to pure financial goals driven plans;
  • Adjusting and re-aligning strategies;
  • Identifying and evaluating non-financial risks;
  • Addressing the inequality and gaps within; and
  • Unleashing the hidden potential.

Once we go through the above process progressively it will assist us in total wealth accumulation and continuous improvement on total wealth.

This is a new approach to wealth management. It is more robust not only in total wealth terms but also in financial wealth terms.

It brings all key drivers of life under the umbrella of total wealth so that we can enjoy satisfying achievements. Once you learn how to view wealth through the prism of total wealth it helps us to embrace a more balanced and fulfilling approach to wealth management including financial wealth management.

When inequality within is addressed and power of non-financial wealth is harnessed life itself will be well balanced.