13 March 2012

Private Wealth Roundup: Insights from the Comments Section

Posted In: Private Wealth Management

Have you ever noticed that there are times when the comments section of an article is more illuminating than the article itself? Or if not more illuminating, just as interesting to read because the responses stimulate intense debate and take on a life of their own?

Consider an article from the recent issue of Barron’s, “Seeding the Next Fortunes,” which surveyed 40 of the largest wealth-management firms to find out how they are invested to produce the best risk-adjusted returns for high-net-worth investors with a moderate appetite for risk. What I found most interesting was not the article itself but rather the interchange between two readers on the subject of retirement planning. It raises some interesting points.

Barron’s readers, take it away:

SW wrote:

(1) Figure out how much cash is needed per year to satisfy a comfortable annual budget.
(2) Figure out your life expectancy.
(3) Multiply the result of (1) above by (2) above. This is the amount of cash you need.
(4) Subtract the result in (3) from your net worth. Put all of this into US stocks. If you are not a stock picker, an S&P 500 index fund will do, but spread it around various funds and institutions so your risks aren’t concentrated.
(5) Fire your wealth manager, but do preserve your wealth by dedicating your time to social causes that will keep our country strong and free.

LF replied:

I totally agree except what I do are (3) I put the amount of cash I need in individual US treasuries not ETF or mutual funds (4) subtract result of 3 from my liquid net worth. I put it on Vanguard S&P index fund.

SW replied:

Yes, cash should be something that is as close to risk-free as possible. For life expectancy, I should have stipulated “remaining life expectancy.” I should also have addressed the contingency of a negative result in (4), which applies to the vast majority of Americans. In that case, it means it’s not yet time to retire.
I also failed to address the value of residential real estate, cars, furniture, jewelry, collectibles etc. I consider all of this of zero value because it yields no income but does require certain expenses to maintain.

SW has a point about keeping it simple and diversifying risk. But firing one’s wealth manager as the culmination of a five-step process seems simplistic to say the least, especially when you consider the ever-greater complexities of taxes and inflation (which are not mentioned by either commenter); the need to plan for unanticipated expenses such as health care; and preparing — in the case of more well-heeled clients — for estate-planning and philanthropic goals. The solution for many high-net-worth investors isn’t less professional advice — it’s more integrated advice.

Here are some other articles from the past month that relate to wealth management, in case you missed them:

Check out “Shiller: Don’t Resent the Rich; Fix the Tax Code (Part 3)” from Bloomberg View. Robert Shiller is a professor of economics and finance at Yale University, where he teaches financial markets in the Open Yale Courses program. This is the third in a series of four excerpts from his new book, Finance and the Good Society, to be published April 4. Read Part 1 and Part 2.
It seems as if I am hearing a lot lately about grantor retained annuity trusts (GRATs). Here are the two most recent articles I came across: “Facebook Billionaires Shifted More Than $200 Million Gift-Tax Free” from Forbes and the latest Tax Perspectives from Fiduciary Trust.
“Giving It Away” makes the case that charitable giving is something advisers should be thinking about and discussing with clients all year long.
And last, but not least, if you (or any of your clients) have a penchant for investing in fine wines, you may want to read “Fine Wine Gives Hong Kong Politicians a Hangover” from the Financial Times. Gideon Rachman writes that “the craze for posh wines amongst the rich of Hong Kong — and now, more broadly amongst the plutocrats of a rising China — has driven the prices of top Bordeauxs to crazy new heights.” He also notes that the price of Lafite has begun to fall. “Is this a leading indicator of an economic downturn in China? Or is something more specific going on?” he asks. “A wine-dealer I met in Shanghai on Monday came up with two reasons for the decline. First, rich Chinese have begun to discover Burgundy, as well as Bordeaux. It is not just that these are great wines. The top Burgundies, like Domaine de la Romanee Contee (DRC) are made in such minute quantities that they are even more expensive than Lafite — and therefore even more prestigious.”

For more news and trends, visit the Private Wealth Management Community of Practice.

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About the Author(s)

Lauren Foster

Lauren Foster was a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.