Five Talent Series: Talent 3b Your Wealth Management Process

Reflection Leads To Perfection
In my previous post Your Your Net Worth Should be a Blessing Not A Curse we went through the net worth statement and went over some best practice to help the community use this tool to prosper. We are now ready to start looking and the Wealth Organization Process which aims to assist you in understanding yourself as an investor, formulating a plan, implementing your plan and reviewing and rebalancing the wealth plan where it is necessary.

To Thy Known Self Be True
The first part of any wealth management process is to understand yourself and your advanced suitability requirements. You must look beyond the basic details in your financial life such as age, income, savings and discover what your most important and closely held goals and attitudes are. Your capacity to select the right type of investments using the assistance of your financial advisors is secondary as technical knowledge can never replace your understanding of you own aspirations and how these fit into your own wealth management process.
• As you go through gathering all the information related to the Cash Flow Statement Template and the Saving Planning Worksheet ensure that you gather all the required quantitative data that will assist in organizing your wealth management process
• Once the quantitative details have been organized you have to think more about the qualitative data that is what are your needs, objectives and constrains to achieving these objectives. There are things that you have set out as goals that give your life meaning, and these must be factored in to your planning as well. This is very important as you need to list out your long-term qualitative needs such as giving to charity and traveling to build homes for the needy and look at what is constraining you from accomplishing these long-term goals. During this whole qualitative phase, you must liberate yourself from the constraints of strict financial planning and open yourself up to dream and write those aspirations and hopes down. This process of self-educating is fun and form the core of your personality and should not be neglected as you can end up with a lot of money and nothing worthwhile to do with it.

Formulate Your Plan
Once you have a concrete idea related to the needs that make up your objectives and some potential constraints we can now set out to formulate our plan. Planning at this stage is vital as it will lay out the various steps and goals marks that you must accomplish on your way to achieve your end objectives. You are looking to create an outline to help take you from where you currently are to where you would want to be. In formulating your wealth administration plan there are 2 principles subcategories that will assist you in this process and we will explore these below.

1. Innovative Financial Planning
   This involves the elements of financial planning that related to retirement, insurance, tax and estate management. Although we cannot go into too much detail related to all the elements I will mention a few points related to each topic.

Retirement planning
When planning for retirement you will want to answer the following questions.
• What will you do during retirement? Will you have hobbies, work part time, volunteer and/or look after your grandchildren?
• What amount of income do you hope to have during your retirement. This could be 75% of your current income or some other amount like 10000.00/month net.
• At what age would you like to retire? Some people plan to retire early or maybe don’t plan to retire at all as they love their job and it provides them with meaning and purpose in their lives.
• Where would you like to live in retirement? This also includes planing for the possibility of losing independence and requiring a home nurse or potential being required to live in a nursing home.

Tax Planning
When planning your wealth management process think on the following points.
• Tax is a very important factor in your ability to preserve and accumulate wealth over any given time-period as all spending on non-registered investment involves after tax cash flow.
• All investment products have different tax implications on your marginal tax rate and for this reason you must pick the appropriate product for your tax level and situation.
• The key here is to take advantage of different tax treatments for the various products by funneling your income from highly taxed activities to those with a lower tax treatment.

Insurance Planning
When planning for your insurance needs you will want to think on the following points.
• Make sure to go through and list out the current insurance protections that you have in place i.e. life, disability, health and medical.
• Ask yourself what this insurance covers? Does it provide you with sufficient protection for what you want to accomplish as goal and aspirations for the future?
• Don’t be shy to say you don’t understand or know exactly what your protections is doing for you. Ask a competing insurance broker if your current insurance coverage plan is optimal for your goals.
• A final point to mention here is on life insurance as the proceeds upon your death can provide a means for you to pay expenses and distribute funds to your heirs without depleting your estate and it is most often tax free.

Estate Planning
When planning your estate, you will want to think on the following points.
• Always make a will as the purpose of it is to identify who you would like to leave your estate and other assets to.
• A will also help to ensure that you decide who manages your estate and this can often be very important if you require an objective third party to ensure your wishes are followed in a family feud scenario.
• Do not die without a will as dying intestate will allow the government to decide how your assets are distributed even if this goes against your unstated wishes.
• There are certain tax advantages of having assets that are within your estate or flow outside of your estate to beneficiaries.

1. Investment and Portfolio Administration
   This involves you looking at the appropriate risk you are comfortable taking for the reward you are expecting, and ensuring that your expectations are in line with reality. Part of this process is determining the appropriate allocation of your money across assets class to achieve your risk reward expectations.

Deciding on your appropriate risk/reward trade-off level.
• Asset risk can be defined as the possibility of the expected return of an asset differing from the actual return. Everyone understands that risk really means the possibility of losing something of value, and we measure risk in the investment world by the variability of an investment’s rate of return.
• Risk is more accurately defined in your life as the possibility that you will not meet a specific goal and wealth management attempts to assist your in mitigating this risk.
• Ultimately, you must decide what your financial attitude toward risk is. We generally categorize this as Ultra Conservative, Conservative, Moderate, Moderately Aggressive and Ultra Aggressive.

(1) Ultra Conservative: You want to preserve your initial principal with minimal risk, even if that means that you do not generate significant income or returns and may not keep pace with inflation.
(2) Conservative: You are willing to accept low risk to your initial principal, including low volatility, to seek a modest level of investment returns.
(3) Moderate: You are willing to accept some risk your initial principal and tolerate some volatility to seek higher returns, and understand you could lose a portion of the money you have invested
(4) Moderately aggressive: You are willing to accept high risk to you principal, including high volatility, to seek high returns over time, and you understand you could lose a substantial amount of the money you have invested.
(5) Ultra-Aggressive: You must be willing to accept the maximum amount of risk to your principal to aggressively seek maximum returns and understand you could lose most if not all your money.

• Asset Allocation: Once you know your risk tolerance you can structure your portfolio according to the right asset allocation. I have given an example below to help you navigate a basic asset allocation. Please note that is not a recommendation to anyone but rather a good starting point for understanding basic asset allocation as it relates to risk appetite.

• Be wary if you have a short-term time horizon as volatility in the market can severely interfere with your portfolios performance. If you have a time horizon of over 10 years you should be ok to see the market fluctuate and not sweat it too much. Anything under 10 years and you may not be able to withstand your portfolio fluctuating in values which is part of the reason why selecting the correct risk tolerance is key to understanding what to invest in.

Ready, Shot, Aim
Once you have completed the preparation of your plan implementing it should be relatively easy. The important part here is to write it down to make it tangible and to allow yourself to be held accountable for its execution. Once the Wealth plan is in place all that is left is to execute trades which can be done at any number of self-directed brokerage houses. You can of course have a financial manager take care of this whole process for you if time and expertise is a constraint, but this will come at higher cost. The point of this post is to simply inform you of the process to manage your own money and this will require time and effort on your part.

If You Miss Aim and Fire Again
It is important that you review and rebalance your plan periodically if there are any major life changes such as death in family, marriage, new children and loss of a job. You must monitor your portfolios performance regularly but not obsessively. You should always evaluate your plan based on how well it has achieved your objectives. You should never rebalance a plan on a whim and always go through Formulate Your Plan before deciding if you want to rebalance or liquidate. Choose a bench mark from which you will evaluated the performance of your wealth plan. You will need to reevaluate the plan every year at a minimum and use this as an opportunity to rebalance the portfolio, adapt strategies and recalibrate your qualitative goals and desires for the future.

To conclude on this talent, you have to take the process of wealth management step by step as the Cash Flow Statement leads to the Net Worth Statement which helps us complete the Wealth management process. For simplicity I have attempted to summarize this process as elegantly as possible as these concepts can be difficult to communicate. If you would like something specifically elaborated on I can certainly dedicate a whole post to any of these concepts. I hope this has been beneficial to the community and I will see you in my next post Talent 4 Debt Management.