Effective wealth management planning should go beyond investment decisions and address broader issues of family dynamics and philanthropic vision.
Clients, or prospective clients, often ask us “What is your best idea?” That’s a fair question. One of Morgan Stanley’s core values is “Lead With Exceptional Ideas,” and we are committed to always bringing you and your family our most innovative thinking.
You might assume that our “best idea” is an investment thesis, such as “What undiscovered small-cap manager should I add to my portfolio?” or “Is it time to increase the share of active management?” But, in fact, those questions are often hard to answer thoughtfully without first exploring the broader context of your overall planning. It may seem counterintuitive that an understanding of your estate plan, or even your family dynamics and philanthropic vision, could drive investment decisions, and even affect something as discrete as which small-cap manager to select in a given portfolio. But it does.
For example, assume you have created long-term trusts for children and grandchildren, and that you have structured those trusts so that they will not be subject to estate tax when you die. Those trusts may have different “hurdle rates” of return, or investment horizons, than the assets you retain for personal use. One entity may need a different type of small-cap manager than another based on its unique cash flow, liquidity needs or risk profile. Further, sophisticated estate planning often involves transfers of assets from one entity to another. In those cases, we need to consider the impact of having the small-cap manager in an account that ultimately will be making distributions to another account. These questions require a more nuanced understanding of your broader objectives. And those objectives will change over time, which means we need to have an ongoing conversation. And sometimes our best ideas may not even involve investment strategies at all. Instead, as just one example, they may relate to how you use your financial capital to empower your descendants, rather than watch your financial wealth impede their initiative and stifle their ambition.
So why don’t broader planning issues lead every conversation? The truth is that both you and we bear some responsibility. You may be uncomfortable raising those issues with us because you haven’t resolved all the emotional and family dynamics that underlie the plan.
For example, is the fairest approach to treat all children equally; or is it actually fairer to take into account that some children have greater resources, or greater challenges, than others? Do you continue to pursue, as a group, the philanthropic passions of prior generations; or do you allow younger family members to pursue their unique missions?
At the same time, we know that we are advisors, not members of your family. So, we might be uncomfortable raising such sensitive issues for fear of provoking family tension and jeopardizing our good standing with you. And yet you may be looking to us to provide some thought leadership by sharing our experience about best practices among similar families when they address these issues. Sometimes just being honest about the reluctance you and we both have about engaging in these discussions can be a healthy first step. At the same time, while that reluctance may be understandable, as your Advisors, it’s our job to put such reluctance aside and, with your permission and with the delicacy and respect such topics require, address them together. We’re not only willing, but eager, to play our part.
The notion that you must continually address these challenging questions may seem unpleasant, or even overwhelming. But, of course, not planning is a form of planning. Here is a list of “reality check” questions that we believe you should revisit regularly with all members of your advisory team, including your attorney, accountant and other financial advisors:
- Is our estate plan aligned with our deeply held family values, and does it reflect our true mission?
- Do we have the appropriate amount of life insurance, and is it owned by the appropriate parties or in the appropriate structures?
- Do the existing trust structures take into account the preparedness of the trust beneficiaries to be good stewards of the family wealth? Do our trustee choices still make sense? Are they still willing to serve?
- Are there any gaps in the financial education of any family members?
- Have the family dynamics changed, for example, after a recent marriage or divorce?
- Is the philanthropic mission up to date? Are the evolving priorities of each family member addressed? Have we considered the views of newer family members?
- Once we’ve answered the questions above, what are the implications of those answers with respect to our asset allocation, manager selection or the mix between liquid and illiquid investments? Do those implications change our tactical thinking?
- On the other hand, have we taken into account the impact of our actual investment or tax experience on the objectives we initially defined? What steps must we take if one entity or another has more or less wealth than we originally anticipated?
We don’t have prepackaged solutions to every issue that might arise. We will never understand your objectives, or the underlying dynamics of your family, as well as you do. But we can ask appropriate, open-ended questions to help bring these issues to the surface. We can share stories about families similar to yours and how they have dealt with these questions. And we can point you to other resources that offer thoughtful approaches.