Who Should Drive Asset Allocation Decisions?

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Let me start off by saying that I am posting on a subject that I know requires additional thought.  Consequently, your input and perspective on the below would be particularly appreciated — especially as I suspect it might be a controversial topic in the financial services world.  So with that as a lead in, here goes:

Let me begin with a few assumptions:

First, I believe that many would acknowledge that significant wealth is often created through concentrated positions in closely-held businesses or real estate.  There are notable exceptions for those that are exceptional traders or service providers, etc. — but they too are generally leveraging a few assets or skills or talents instead of following a diversified investment strategy.  To put it another way, traditional asset allocation discussions are for maintaining wealth and not for creating it.

Second, while there are businesses or real estate portfolios that remain in families for generations, it is more likely that there will be some type of monetizing event which will transmute the concentrated position into cash and ultimately into the traditional marketable securities portfolio.

Third, family wealth cannot be maintained forever through a traditional diversified portfolio of marketable securities.  Either withdrawals of income or principal will erode the portfolio’s value over time (admittedly the larger the portfolio, the longer that time will be — perhaps long enough to satisfy the spending needs of several generations) or the increase in the family’s numbers will overtake the portfolio’s ability to grow fast enough to maintain the per-family member purchasing power as of the monetizing event.

I am open to being challenged on any or all of those assumptions, but in a number of Family Wealth Counseling engagements over the past few months I have been struck by a disconnect for post-monetizing event family investment behavior versus what that behavior was like before.  Recognizing that there is exceptional value in getting good investment advice (as these families appear to be getting), the nearly complete outsourcing of managing the family’s wealth seems not only inconsistent with what got them where they are today financially but also with their stated goals for their children and their children’s children to be productive stewards of the family’s wealth going forward.  Meeting quarterly with investment advisors is simply asking too little of the next generation(s).

So what’s going on?  Perhaps a portion of what’s happening is that the family is no longer the primary driver of where they put their resources to work when it used to be the exact opposite.  The new circumstance puts less responsibility on the next generation, which also limits their opportunity to learn and grow as financial adults.  The new circumstance is predisposed to substantially limiting the amount of risk that the family took, which also limits the potential rewards — and given the third assumption above, sets up a potential diminution of the family’s real wealth long-term.  The new circumstance could throw the next generation (or the one after that) into a retirement type investment mentality which, although perhaps appropriate for the generation which created the monetizing event, will limit the productivity of that generation.

Would it not be better for the family to retain primary control of its asset allocation strategy and determine what portion of the wealth should go into wealth creation strategies and what portion should go into wealth preservation strategies?  To be clear I’m not saying that it would be wise for a family to “put it all on red” like many entrepreneurs traditionally do each and every day until they ultimately sell.  The family’s wealth didn’t come from what it is today — it came from something much smaller, hard work, perseverance, talent and maybe a bit of luck along the way.  But putting at least a small portion of the family’s wealth to work in wealth creation pursuits after a monetizing event may foster increased productivity and allow for a family’s wealth to avoid becoming a wasting asset.  And, if the family’s overall productivity is of greater import than the dollars available at any particular moment, isn’t this more likely to lead to an investment strategy and approach more aligned with the family’s underlying goals?

Again, this is not a completed thought — so I ask very broadly and honestly, what do you think?

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Mark initiated this blog due to his passion in assisting and equipping families to manage their wealth and their families well.

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