For those of you confused about the best way to manage your wealth, do yourselves a favor. Read one of the best books ever written on the subject: Ross Levin's classic, Implementing the Wealth Management Index.
I've known Levin for more than three decades and have admired the uncompromising integrity with which he's built his $1.8 billion advisory business and respected his leadership in our industry through organizations like the Alpha Group.
His book wasn't written for you. It was written for financial advisors. "My gift to the profession," Levin put it at breakfast recently near his Edina, MN office. But the clarity and elegance of its approach makes it a resource just about anyone can use. It's wealth management for smart people instead of Wealth Management for Dummies (which is an actual book).
Too many of us view managing our wealth as being primarily an investment-centric undertaking: Which stocks or bonds or mutual funds to choose and in what amounts in what sectors. "Asset allocation". "Risk tolerance." "Market timing." "Rebalancing." "Volatility". These are the vocabulary words we usually associate with wealth management. But the key to Levin's approach in Implementing the Wealth Management Index - the same approach he's used for decades in building his $1.8 billion registered investment advisory business - is to focus, holistically, on all components of financial health, not just investing.
Think of measuring your financial health on a scale from zero to 100 points.
In Levin's world, planning and executing investment strategy is only worth 25 points. What are the other components? Asset Protection - worth 25 points. Income Protection - 20 points. Debt Management - 10 points. Estate Planning - 20 points. Add it all up and your score will tell you how financially healthy you are. On a scale where the best possible score, 100 points, represents perfect health.
I've taken substantial liberties to make Levin's approach sound simple. And conceptually it is. The complexity and difficulty lies in executing. That requires focus and discipline and consistency and attention to detail, all combined with regular review and adjustment. As Levin tells financial advisors, "any wealth management plan is rolling. You cannot deliver a financial plan once and be done. Wealth management is like running a marathon - just because you've trained for and completed one doesn't mean that you will be in shape for the rest of your life."
In the marketplace for financial services, investment management is becoming a commodity. That one of the drivers behind the trend to low-cost passive investing (which now accounts for 60% of all assets under management in the US).
Which is not to minimize the importance of managing your investments. Defining success (what are you saving for and how much do you need over what period of time), understanding your tolerance for risk and constructing a portfolio that has the highest possible chance of meeting your goals - all that still represents one of the biggest contributors to financial health.
But just as important, for Levin, are developing a life insurance strategy, making sure you have adequate medical insurance, protecting against the loss of personal assets and against professional liability, planning for succession and the transfer of business interests.
Next on the list are all the things that go into ensuring you have enough money to live on, not just today, but during all phases of your life, particularly during retirement, when things get really tricky. That includes budgeting and projecting your cash flow; inventorying all sources of income (including pensions and social security, when they kick in); identifying large expenditures, like buying a home or putting children and grandchildren through college; optimizing the use of benefits and qualified retirement plans. And yes, building a model that shows how it will work over the course of your lifetime.
Then comes the liability side of your balance sheet. Do you have the right amount and the right kind of debt? Do you have enough in reserves and lines of credit to get you through an emergency?
Finally, do you have appropriate estate plans in place? Like a will? Don't laugh - many people don't, as I was shocked to learn recently about a friend of mine who has a wife at home, four children under the age of 10 and joint ownership of an illiquid business.
In many ways, this is old school financial planning. Offering holistic advice to his clients 35 years ago, Levin was a pioneer. Today, he represents where the wealth management industry is finally heading. The best financial advisors - certainly, those worth working with - today offer some version of Levin's approach. Their value - what you're paying them a fee for - should be about everything Levin describes in his book.
You will be better able to identify what you need your advisor to help you with after reading Implementing the Wealth Management Index. And his index itself is one of the best methods I've ever seen for knowing just how well your doing, now and over time.