Wealth Management for HNI’s

WHAT DOES HIGH NET WORTH INDIVIDUAL - HNWI MEAN?

A classification used by the financial services industry to denote an individual or a family with
high net worth. Although there is no precise definition of how rich somebody must be to fit into
this category, high net worth is generally quoted in terms of liquid assets over a certain figure.
The exact amount differs by financial institution and region. The categorization is relevant
because high net worth individuals generally qualify for separately managed investment accounts
instead of regular mutual funds.
The most commonly quoted figure for membership in the high net worth "club" is $1 million in
liquid financial assets. An investor with less than $1 million but more than $100,000 is
considered to be "affluent", or perhaps even "sub-HNWI". The upper end of HNWI is around $5
million, at which point the client is then referred to as "very HNWI". More than $50 million in
wealth classifies a person as "ultra HNWI".
HNWIs are in high demand by private wealth managers. The more money a person has, the more
work it takes to maintain and preserve those assets. These individuals generally demand (and can
justify) personalized services in investment management, estate planning, tax planning, and so
on.
WEALTH MANAGEMENT SEGMENTATION
The Indian market has been segmented by Wealth management service providers into five
categories, namely:
 Ultra-high net worth, or Ultra-HNW (in excess of US$30 million), will have a total
population of 10,500 households by 2012.
 Super high net worth (between US$10 and $30 million) will have a total population of
42,000 households by 2012.
 High net worth (between US$1 million and $10 million) will have a total population of
320,000 by 2012.
 Super affluent (between US$125,000 and $1 million) will have a total population of
350,000 households by 2012.
 Mass affluent (between US$25,000 and $125,000) will have a total population of 1.8
million households by 2012.

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Mass market (between US$5,000 and $25,000) will have a total population of 39 million
households by 2012.
WEALTH MANAGEMENT SERVICES COMPRISES:
 Financial Planning
 Portfolio Strategy Definition/ Asset Allocation / Strategy
 Portfolio Management –Administration, Performance Evaluation and Analytics
 Strategy Review and Modification.
KEY CHALLENGING AREA:
While immense business potentiality of this emerging sector is a driving point for most of the
firms, they face many challenges in formulating winning services offering meeting the client
needs. In the following section, we would briefly take a look on the key challenges area in the
present context.
1. Highly Personalized and Customized Services: Unlike other stream of financial services,
mostly being transactional / commoditized in nature, wealth management services require client
specific solution and service offering. No one solution exactly meets the needs of other client. In
a situation of highly personalized and customized nature of service offering, developing any
form of generic service model does not support growth of the business.
2. Personal relationship driving the business: To meet client expectation of personal attention,
mode of communication in wealth management services tends to be highly personalized. Thus,
the conventional grids of communication, such as call centre, data centre does not fit well.
Success of wealth management services heavily draws on personal interaction with the dedicated
relationship manager, who takes care of whole investment management lifecycle for bunch of
clients on one-to-one basis. This essentially requires service firm to invest heavily in human
processes to groom and retain a team on competent relationship managers with cross functional
skills.
3. Evolving Client Profile: The biggest challenge in providing wealth management service
offering is to factor and reckon the evolving nature of client profile, in terms of investment
objective, time horizon, risk appetite and so on. Thus, a service model developed for a particular
client cannot remain static over a period of time. Any service model has to be flexible enough to
consider the dynamic nature of client profile and expectations arising out of it.

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4. Client Involvement Level: The conventional adage – the more money you have, more effort
is needed to manage it – proves to be otherwise in case of HNWIs. Generally, client involvement
in managing the finance remains on the lower side. This brings onus of managing the whole
gamut of investment and due performance single-handedly on the shoulders of investment
manager.
5. Passion Investment (Philanthropy and Social Responsibility): In the recent years a trend
has been observed that bulk of investments by HNWIs has been directed towards passion
investments (art, antique, jewellery, coins, unique assets, luxury), philanthropy and
social/community causes. As per World Wealth report, 11% of HNW investors worldwide
contributed to philanthropic causes with a contribution over 7% of their wealth in year 2006.
Ultra-HNWIs contribution was even more - 17% of Ultra-HNW investors that gave to
philanthropy contributed over 10% of their wealth. In total, this equates to more than US$285
billion globally. Against this backdrop, new breed of HNWIs expect to strategically manage the
wealth and personal resources allocated to philanthropy purpose, in order to maximize its impact.
This demands a relationship manager not just to be a passive financial advisor rather a passionate
partner sharing interest and inclination of the associated client.
6. Limited Leveraging Capabilities of Technology (as an enabler): In the recent times, we
have witnessed technology a key enabler to help business to expand its market reach with
reduced cost of services offering. Online banking and online trading/brokerage services are the
best examples in this regard. Technology leveraging has helped services firm to achieve
universal proliferation of market with substantially reducing transaction cost. As business rules
and service definitions to guide the applications tends to be quite composite in wealth
management services, leveraging the capabilities of technology to meet the business requirement
may not be highly feasible in the initial years.
7. Technical Architecture and Technology Investment: As business architecture is still
evolving, a proven basis of resilient technical architecture and framework to support the
emerging business greatly remains missing. In absence of this framework, any investment
commitment towards application development / system implementation would be fraught with
severe risk.
8. Intricate Knowledge of Cross-functional Domain: By very nature of wealth management, it
not just involves matters of plain vanilla finance but has intricate relationship with many
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elements of domestic / international law, taxation and regulatory norms. In order to provide
sound investment guidance, a relationship manager is required to have intricate knowledge of
domestic/cross-border finance, accounting, legal and taxation subjects.

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SOLUTION FRAME WORK

A HNWI client expects exclusiveness in services and key to success for a firm lies in offering
exclusiveness in services delivery (high quality services on most personalized basis), going
beyond client expectations.
A solution framework with considered inclusion of following key elements would help firms in
meeting and exceeding client needs towards sustainable business growth:
1. Quality of service level provided by the service provider firm would the key determinant of
growth and success in client acquisition, client satisfaction and client retention aspects.
In a sense, service offering could be developed in the form of partnership with the client based
on trust and integrity, where the relationship manager remains highly responsive to client
sensitivities and expectations. Without over-emphasizing, a satisfied client would provide
multitude of opportunities of growth of business – through deepening the relationship, direct /
indirect referencing as well as cross selling of products. In the other situation of deficiency in
service level, he would not hesitate to move the business to another firm. This keeps strong
emphasis on continued engagement with the client on the aspects of client expectation and
servicing, rather than showing extra attention only during the period of client acquisition.
Focused around client needs, a broad framework of service offering during whole lifecycle of
client investment management would be revolving around: Anticipate, Analyze, Advice, Act and
Monitor cycle.
2. Universal Service Offering: To meet the client needs in holistic manner, product and service
offering range of the firm should be wide enough to cover the investment spectrum across its
lifecycle. In an ideal situation, a client would expect to deal with a single firm to get complete
range of investment management services. However, for various business considerations of the
service provider firm, in many situations it may not be a viable proposition to offer those
services. While universal service offering with assortment of services under single umbrella is
not attainable in house, it could be achieved through active partnership and affiliation. But, due
consideration is required that quality of service level provided by partners/affiliates does not get
compromised in any manner. Any shortcoming in service quality, even if caused by
partner/affiliate’s services, would be ultimately impairing client satisfaction towards the firm.
3. Investment in People Processes: As relationship manager remains the face of the firm to a

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client, success of the firm would be greatly dependent on the skills, drive and enthusiasm of
relationship managers (to take an extra mile), while bonding and dealing with any of client
issues. This aspect is more challenging than as it appears. This necessitates transformation of
organizational philosophy towards its people and people processes contributing to business
success. Firms would be required to invest heavily in human processes to attract, groom and
retain a motivated team of relationship managers, who will make the real difference between
winning and losing the game.
4. Price not a True Differentiator: Pricing as a key differentiator to distinct the service offering
from one firm to other may not be highly relevant in case of wealth management services.
Focused on performance and quality of service, pricing in isolation will not make much meaning
to service seeking clients. Client would always value the pricing from the quality of services
received. He will certainly not mind paying extra, if he finds services offered to him meeting and
exceeding his expectations.
5. Unconventional Delivery Channel and Communication: Delivery channel for service
content and mode of communication has to be greatly customized – aligned with the client-
desired vehicles. This would require a process of continuous re-inventing and re-defining the
grid of delivery and communication channels to meet client expectations. Impact of
technological advancements and its interplay on service delivery and communication method
would certainly be an equally challenging aspect to be factored in, while designing such
strategies.
6. Flexibility of Technical Architecture:
 Against the background of lack of clarity on business model and involved process, A
loosely oriented technical architecture with optionality and mix of Build – Buy –
Integrate components would be considered as a good beginning point.
 To meet the information technology requirements, a firm has several alternatives (or
combination of alternatives) to consider:
 Integrated solution approach: Developing in-house applications to meet end-to-end new
business requirements.
 Service Bureau /ASP Model: Information technology service providers offering
integrated end-to-end processing infrastructure and services including core of business
processes of wealth management.
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 Stand-alone commercial software product/solutions: Pre-packaged solutions that can be

focused to specific part of services or provide comprehensive end-to-end processing.
7. To provide enough resilience and high business relevance, any of the considered option
and associated technical structure should keep due provisions for the following key
elements:
 Rule based processing to manage complex business rules and service definitions.
 Client profile / data management to cater a profile driven solution offering.
 Complex decision support and client oriented analytics.
 Flexibility to incorporate manual processing interfaces in applications.

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CORE ELEMENTS OF WEALTH MANAGEMENT

Services
In most basic sense, wealth management services involve fiduciary responsibilities in providing
professional investment advice and investment management services to Institutions, funds
(Pension/mutual/Hedge), corporations, trusts as well as HNWIs. In the present context of our
discussion,we would keep our focus limited to HNWIs. Some of analogous terms used for wealth
management could be considered as Portfolio Management, Investment Management and many
times Fund Management or Asset Management. Depending on the mandate of the services given
to the Wealth Manager, wealth management services could be packaged at various levels:
a) Advisory
Wealth manger’s role is limited to the extent of providing guidance on investment / financial
planning and tax advisory, based on client profile. Investment decisions are solely taken by the
client, as per his /her own judgment.
b) Investment Processing (transaction oriented)
Client engages wealth manager to execute specific transaction or set of transactions. Investment
planning, decision and further management remain vested with the client.
c) Custody, Safekeeping and Asset Servicing
Client is responsible for investment planning, decision and execution. Wealth manager is
entrusted with management, administration and oversight of investment process.
d) End-to-end Investment Lifecycle Management
Wealth manager owns the whole gamut of investment planning, decision, execution and
management, on behalf of the client. He is mandated to make financial planning, implement
investment decisions and manage the investment throughout its life.
Wealth management services comprises of following key function areas:
a) Financial Planning:
 Client Profiling
Client profiling takes in account multitude of behavioural, demographic and investment
characteristics of a client, that would determine each client’s wealth management requirements.
Some of key characteristics to be evaluated for defining client’s investment objective are:
 Current and future Income level

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 Family and life events

 Risk appetite / tolerance
 Taxability status
 Investment horizon
 Asset Preference /restriction
 Cash flow expectations
 Religious belief (non investment in sin sector like - alcohol, tobacco,
gambling firms, or compliant with Sharia laws)
 Behavioural History (Pattern of past investment decisions)
 Level of client’s engagement in investment management (active / passive)
 Present investment holding and asset mix
b) Portfolio Strategy Definition / Asset Allocation
Defining Portfolio Strategies and Portfolio Modeling
After establishing investment objectives, a broad framework for harnessing possible investment
opportunities is formulated. This framework would factor for risk-return tradeoff of considered
options, investment horizon and provide a clear blueprint for investment direction.
Investment strategy helps in forming broad level envisioning of asset class (Securities, Forex,
Commodity, Real State, Reference and Indices, Art/Antique and Lifestyle Assets (Car, Boat,
Aircraft), market, geography, sector and industry. Each of these asset classes is to be
comprehensively evaluated for inclusion in portfolio model, in view of defined investment
objectives. While defining the strategy, consideration of client preference or avoidance for
specific asset class, risk tolerance, religious beliefs is the key element, which would come into
picture. Thus, for a client with a belief of avoidance of investment in sin industries (alcohol,
tobacco, gambling etc.) is to be duly taken care of.
c) Strategy Implementation
Having decided the portfolio constituents and its composition, transactions to acquire specific
instruments and identified asset class is initiated. As acquisition cost would be having bearing on
overall performance of the portfolio, many times process of asset acquisition may be spread over
a period of time to take care of market movement and acquire the asset at favourable price range.
d) Portfolio Management

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Portfolio Administration involves handling of investment processes and asset servicing. This
would also require tax management, portfolio accounting, fee administration, client reporting,
document management and general administration relating with portfolio and client. This
function would involve back office administration and custodial services to manage transaction
processes (trading and settlement) – interfacing with brokers/dealers/agents, Fund managers,
Custodians, Cash Agent and many other market intermediaries.
e) Strategy Review and Alignment
Recalibration of Portfolio Strategy based on performance evaluation and future outlook of the
investment, portfolio strategy is evaluated on periodic basis. To keep it aligned with the defined
investment objectives, portfolio strategy is suitably re-calibrated from time to time. Many times,
review of portfolio strategy would be necessitated due to change in client profile or expectations.
Rebalancing, Reallocation and Divestment of Assets Any re-calibration of strategy and consequent
change in portfolio model would require rebalancing of the assets in portfolio. This would be
achieved through rebalancing the asset (divesting over-allocated part and acquiring under
allocated), relocation (from one sector the other or from one instrument to other instrument in the
same class) or complete divestment.

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ATTRIBUTES OF HIGH NET WORTH INDIVIDUALS

1. They live well below their means:

They may make a large income, but they don’t live like it. They are, as Stanley says,
“Frugal, Frugal, Frugal”.  They live in an older house, drive an older car and don’t spend
a lot of money on life’s luxuries (often because they don’t enjoy them).   At an interview
they did of millionaires, one deca-millionaire when asked if he would like an expensive
glass of wine responded that he drinks only two things, scotch and two kinds of beer –
Bud and Free.   For those wealthy that were married, they almost always found that the
spouses were also frugal.  If one spouse is a hyper-consumer, it is extremely difficult to
end up with a high net worth.

2. They allocate their time, money and energy efficiently in ways conducive to building
wealth: 

Wealth accumulators spend more of their time in doing things that are conducive to
creating wealth – budgeting, planning and setting goals for their future.  They work hard
towards their goals, and are more likely to be spending time planning their goals.  Those
who are high income earners but that do not have a high net worth do not spend as much
time in these activities.  In fact they found that PAWs (prodigious accumulators of
wealth) spent almost twice as much time every month in planning their investments as
did UAWs (underachieving accumulators of wealth).

3. They believe that financial independence is more important than displaying high
social status: 

They don’t care about living in the right neighborhood, having a big house, driving the
newest cars or shopping at the trendiest stores.  These high net worth individuals care
more about providing for their own financial independence and work towards that goal.

4. Their parents did not provide economic outpatient care: 

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The parents of these high net worth individuals did not subsidize their lifestyle, or give
them a bunch of money. They made their own way, working hard and succeeding on their
own terms.  Children who receive economic outpatient care (EOC) often are stripped of
their motivation to work hard and achieve, and as a result often do not become PAWs.

5. Their adult children are economically self sufficient: 

The children of high net worth individuals have been taught how to live a frugal lifestyle,
how to accumulate wealth, and often have been taught how to succeed on their own
without help from their parents. Because they don’t receive EOC, and in general are self-
sufficient, it allows their parents to accumulate more and be better off later on.

6. They are proficient in targeting market opportunities: 

The high net worth individuals are good at seeing opportunities and taking advantage of
them.  They aren’t immune to the fear of failing that all of us have at times, but they
overcome their fear and act upon good opportunities when they see them.

7. They chose the right occupation: 

Those who have a high net worth almost always are doing something that they enjoy –
and they work hard at their chosen career.  Just because you’re not an entrepreneur or a
business owner doesn’t mean you can’t be wealthy. You just have to choose a career that
will provide a reasonably decent income, and live in a way that is conducive to building
wealth.  Find a career that you enjoy, work hard at it, and live frugally – and you can
build a large net worth.

These 7 attributes of high net worth individuals really expose the framework for living a life
based on sound financial principles.  The attributes prove that it is possible to live well on much
less than you make, and have plenty left over to save, invest and give.   It can even be done by
individuals who don’t make a lot of money, as long as they are disciplined.

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The attributes speak to the power of educating yourself and your children about money, and
practicing sound money management through the use of budgets and financial plans.   They
show that displaying high social status often means that you won’t be financially secure. The
attributes show how money is a tool to be used, and should not be an end in itself.  Those who
understand that are often happier, and in the long run, wealthier.

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QUALITATIVE CHARACTERISTICS OF HIGH NET WORTH

INDIVIDUALS

High net worth individuals have the following characteristics:

A) Complexity
Prince states, .The worlds the Ultra-Affluent move in are especially complex. The personal and
financial situations of the Ultra-Affluent tend to be more intricate due to their wealth. External
Macro-environmental factors (e.g., tax and estate laws, as well as other regulations affecting
their sphere of action) weigh in. The Ultra-Affluent are not unconstrained in their control over
their capital. The very policies that constrain them also create significant complexity..
This characteristic of complexity describes the financial affairs of the Ultra-Affluent. Their
financial affairs are much more involved because they need to structure assets to maximize their
value and ensure their preservation. The Ultra-Affluent confront more intricate financial issues
from embedded capital gains to effective tax management. Among the ultra-affluent, advisor
referrals dominate. Therefore, the answer to sourcing ultra affluent clients is building bridges to
advisors who have such wealthy clients.

B) Control
Another core characteristic of the Ultra-Affluent is control. The Ultra-Affluent characteristically
seek to exercise dominance in various spheres of life including family, community and work.
Often due to strength born from demonstrable success, the Ultra-Affluent tend to see their views
on any subject as the best ones. Due to the complexities they face, there is a strong tendency to
exercise their will. Prince also states, .When the objective is the perpetuation of the founding
fortune, the strategies and tactics that are employed do more than just ensure the tax-efficient
transfer and perpetuation of vast wealth. They create an emotional and cognitive framework in
which the benefactors must live. There is a psychological, if not legal, hold on the benefactors
that (paradoxically) makes many of them actually quite ambivalent about the situation.

C) Capital

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Prince outlines, .The Ultra-Affluent tend to define themselves more in terms of the application of
Wealth than in terms of their actual wealth. For the Ultra-Affluent, capital--another core
characteristic--is very often their measure of personal value. In general, the Ultra-Affluent
measure themselves by capital and not in terms of net worth.. Money is not the gauge by which
they generally rate themselves--it is capital because capital is the ability to deploy resources to
make things happen. This is why most of the Ultra-Affluent merge their business empires into
their self-image. And, that is why advisors need to be attentive to the interplay of money and
self-image among their Ultra-Affluent clients.

D) Charity
Public policy in the United States since the early 20th century has been to create tax incentives
for charitable actions. The tax incentives coupled with the Ultra-Affluents’ desire to be
Philanthropists translate into tremendous benefit to the nonprofit sector. What is critical to
recognize is that the Ultra-Affluent are indeed philanthropic. They are looking for ways to "make
the world a better place." Admittedly, because of the government’s decision to use tax policy to
affect social policy, charitable gifting can concurrently financially benefit the Ultra-Affluent as
well as the nonprofit organizations they support. Nevertheless, the Ultra-Affluent like the sense
of purpose charitable gifting gives them. Indeed, quite a few aspire to be major philanthropists.
The trend is for the Ultra-Affluent to gift, but taxes come into play in defining the strategies and
tactics that are used to enable the charitable gifts.

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HOW HIGH NET-WORTH INDIVIDUALS DIVERSIFY RISK

Managing money for high net-worth individuals is a complex task that needs access to various
resources, asset classes and constant monitoring.

As wealth increases, the needs evolve; from plain vanilla reactive investment strategies to active
oversight and scientific planning.

Historical data indicates clearly that no one asset class tends to perform consistently over a long
period of time. Therefore, to curb volatility and achieve targeted returns, an individual must
spread his wealth not just across asset classes, but also across management styles.

Unique Requirements

Today, sophisticated investors have access to various asset classes like equity, debt, private
equity, real estate, structured products, insurance, commodities etc. Investments can be done in a
variety of styles such as discretionary and non-discretionary equity, concentrated portfolios,
diversified portfolios, long only, conservative, hedged, arbitrage, growth, value, etc .Every
individual has unique requirements based on appetite for risk, ability to tolerate volatility and
cash flows. Additional needs of asset preservation and handover to the following generations
adds a layer of customization and complexity to the process.

While attempts have been made to broadly classify investors according to their financial
planning needs, the market has been evolving constantly.
The growing maturity of the players and evolving regulations are giving birth to newer
opportunities. Let us look at some of the newer developments in the product space.
Today a substantial part of the investors’ portfolio is on Indian shores. As regulations permit and
structures develop, we will increasingly see investors demanding geographical diversification to
minimize country risks. This will not only mean geographical access to global markets but also
access to more cutting-edge structures that fulfill possible risk-reward gaps in the portfolio.
While a few years back Indians had restricted access to global markets, today regulations permit
investors to route large amounts through global access mutual funds and limited amounts
directly.

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Investment strategy
These products offer investors geographical diversification, access to emerging markets across
the world or could also offer asset class diversification for example; a global gold fund. These
enable the investor either to reduce volatility or simply attempt to outperform.
Sometimes existing products may or may not be enough to meet every gap in the portfolio.
At such times, the smart manager needs to access sophisticated products that are structured
specifically for the individual needs.
A structured product is generally a pre-packaged investment strategy, which is based on
derivatives, such as a single security, a basket of securities, options, indices, commodities, debt
issuances and foreign currencies.
A unique feature of some structured products is a ‘principal guarantee’ function, which offers
protection of the principal, if held to maturity. Structured products can be used as an alternative
to direct investments, as part of the asset allocation process is to reduce risk exposure of a
portfolio or to capitalize on the current market trend.
For example, today’s HNIs have access to structures that outperform the benchmark on the
upside and protect capital on the downside.
Private Equity
The last but amongst the most interesting opportunities that HNIs can benefit from is the
alternate space; this is predominantly in the form of private equity.
These opportunities may be in broad sector agnostic funds or in targeted verticals such as real
estate and infrastructure.
While these alternates hold the promise of larger returns, they come along with their share of risk
and long lock-ins ranging from 7 to 12 years.
At the same time, the funds try to achieve higher IRR through structured draw downs and profit
bookings that are paid to investors on realization before the final wrapping up of the fund. These
options are definitely for the larger investors and smaller investors may well be advised to
exercise caution. Thus, we see that, as wealth increases, the complexity only increases.
Managing money is a fulltime activity that requires trained professionals, who understand both:
the high net-worth individual as well as his wealth management need, to achieve a fine balance.
After all it takes all ingredients to make a perfect recipe.

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Far too many high net worth individuals suffer the consequences of pathetic advice and live to
regret it. A combination of time constraints, financial ignorance, and quite possibly egos often
impede a wealthy individual’s ability to make rational economic decisions. And let’s face it, not
all of Wall Street’s ‘finest’ have your best interest at heart.

Having extensive experience working with wealthy families, I have seen the financial carnage
that
occurs first hand. The symptoms are always the same: inappropriate strategies, excessive costs,
exaggerated risk, portfolio churning, liability exposures, lack of integrated planning and failure
to meet reasonable goals.

If you are tired of fattening up other people’s wallets at the expense of your financial growth,
empower yourself to make better financial decisions.

Wealthy professionals, because of their high incomes and high visibility, are often easy targets
for bad advice. When hiring an advisor, a considerable amount of thought and research should be
dedicated to the process. After all, it’s only your money. Here are some things you should ask
when engaging a financial professional:

• How are you paid?

• Are your recommendations in any way influenced by compensation?
• Do you have a clean regulatory record?
• What are your credentials?
• How much experience do you have?
• How much authority will you exert over my accounts?

The Certified Financial Planner Board of Standards offers some great (free) online guides on
how to choose a planner. Check out their site at http://www.cfp.net/learn/library.asp.

In your quest for an advisor, the more informed you become, the better your outcome should be.
Here are the underlying factors that often jeopardize a sound financial plan.
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Inappropriate strategies

Wealthy individuals are often successful business owners or professionals exercising a high
degree of rationalization. The same practice should be executed with your money.

Successful portfolios are based on research and reasonable expectations, not intuition. Illogical
investors attempt to guess which manager, stock or asset class will have tomorrow’s best
performance. That’s why so many have consistently failed. Successful, rational investors excel
because of a clear methodology and, of course, discipline. What type of investor are you? What
type of investor do you want to be?

For the past fifty years, modern finance has been exploring the most efficient methods of
achieving
global market returns. The findings have been a boon for individual investors who have put forth

the effort to learn about them.

The single largest driving force behind investment results is the policy decision allocating
between stocks, bonds and cash. Roughly 94% of the variations in returns are explained by asset
allocation. The factors that most investors assume contribute the most to investment returns, like
individual stock selection and market timing, contribute less than 6% to the result.

Also, by mixing risky asset classes with low correlations together, the resulting portfolio will
have higher rates of return, but with lower risk than the average of the individual parts.

Excessive costs

Here’s a quiz. Besides inappropriate diversification, what is an investor’s worst enemy? Answer:
excessive costs. Costs are mainly comprised of the following categories: commissions, taxes, and

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fees

Commissions

Many financial advisors are nothing more than glorified salespeople. The investments they sell
have a direct correlation with the compensation they receive. Given those dynamics, what are the

odds that you will receive objective advice?

Commission based advice serves only the broker and the brokerage firm. Stay away from
investments that charge your front end or back end loads or surrender charges. Commission
based compensation includes “fee-based” compensation which is a particularly evil label
referring to both fees and commissions. Don’t be fooled.

Fee-only compensation (non commission driven) eliminates the exploitation of investors, where
quality objective financial advice is the product, and the advisor sits on the same side of the table
with the client.

Taxes

I don’t know of one high net worth investor who is not burdened by hefty income taxes. Add to
that the additional drag of investment related taxes and your problem is further augmented.

A rational investor should not necessarily seek tax avoidance, but it makes sense to pursue the
highest after tax return possible. The excess turnover of actively managed funds, will no doubt
lead to higher tax bills (whether or not your have a gain in the position). One of the most
effective ways to manage this problem is through tax efficient investment vehicles like index
funds. Tax managed funds that harvest fund gains against fund losses may also be a suitable
alternative. Also, consider allocating positions with higher turnover and distributions in tax-
deferred accounts where possible.

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Fees

It doesn’t take a neurosurgeon to understand that fees are a dead drag on performance. The
more it costs to run your portfolio, the less you’ll see in your pocket. Risk reward studies
indicate that investors are paying too much for what they’re getting. On average, investors in
funds with lower fees earn better returns than investors in fund with higher fees, due to the fact
that lower fees are being deducted from gross returns

Exaggerated risk

Investors get paid for accepting market risks, that’s true. But taking calculated risks is a far more
effective way to achieve your desired returns.

Investors that hold concentrated portfolios are bearing far more risk than justified by the
expected return. Concentrated issues include individual stocks, industry, sector and geographic
concentrations. There is no separately priced risk element for any of these oncentration issues,
and no additional return to be anticipated by bearing these risks.Investors should attempt to
spread the risk across various asset classes that include: Large, Large
Value, Small, Small Value, International Large, International Large Value, International Small,
International Small Value, Emerging Markets and Short Term Bonds. Employing these asset
classes in your account will result in true global diversification and tilting toward small and
value should enhance returns over time.

Portfolio churning

Whether you or your broker creates the churning, stop it! Technology has made it awfully
tempting and so easy to shoot ourselves in the foot, hasn’t it? Hey, at the click of a button we can
move thousands, even millions from one account, fund, or stock to another.
But, excessive trading has a consequence: transactions fees, taxes (in some cases) and missed
opportunities. Do yourselves a favor; get your finger off the trigger. Trading for the sake of

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trading is expensive. Develop a long-term strategy and stick to it. Portfolio turnover should really
be limited to rebalancing, distribution requirements and tax planning. Remember, if you want to
be a long-term investor, act like one!

Liability exposures

Asset protection planning is an integral part of a comprehensive financial plan. While the level of
exposure varies by profession all high net worth individuals risk being sued. Malpractice, and
errors/omissions may be the most obvious threats for certain professions (ie. Doctors, attorneys,
securities professionals). But, if you think it’s your only exposure, think again.

If you are self-employed and your business sponsors a retirement plan you are exposed to
fiduciary liability as well. Plan sponsors (that would be you) retain a fiduciary responsibility to
act with loyalty and prudence, to diversify plan assets, and act in accordance with plan
documents. After Enron (et al) the Department of Labor has been hammering down on
employers that are not in compliance, or fail to offer appropriate choices and participant
education.

Solution: find a competent, objective advisor to oversee the management, education and
administration of the plan. The plan must be comprised of funds with low expenses, a broad
selection of asset classes, and benchmark performance standards. It’s important that the advisor
assume partial fiduciary liability with you. Otherwise, the responsibility falls squarely on your
shoulders, and you’re right back to where you started.

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Lack of integrated planning

Individuals often make the mistake of having a single motive when designing their financial
plan. A comprehensive financial plan is a complex structure that should consist of multiple
planning challenges. Retirement planning, estate planning, marital planning, tax planning, asset
protection, education funding and investment management are among the many factors to
consider. If you want a successful result, no individual component of this plan should be
mutually exclusive.

There is no one-size-fits-all solution. And many of these strategies can be downright expensive,
inappropriate, embedded with commissions or hidden costs, may be lousy investments or lack
integration with your overall plan.

Let’s use in example using annuities, since many states allow them as creditor exempt assets.
Doctor A buys an annuity with a 5% upfront commission, 1.30 % annual administrative fees, and
inside the product holds mutual funds with an average annual expense ratio of 1.19%. Doctor B
buys an annuity with no load (commission), annual administrative fees of 0.60%, and holds
index funds with an average expense ratio of 0.30% annually. Presumably, both doctor’s annuity
assets are protected. But, assuming identical market performance (unlikely), which doctor do you
think will have accumulated more after 20 years?

The asset protection tail should never wag the dog or exist in a vacuum. Asset protection
planning should not come at the expense of the most optimal strategy. Your planning should be
cohesive and integrated. The goal, after all, is to preserve AND maximize wealth.

Don’t be a sitting duck. Armed with this wealth of information, you can empower yourself to
make better financial decisions and avoid financial predatory practices. Now that you have a
better idea of what to look for, who to look for and what to do, your chances of success should
dramatically improve.

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