Acknowledgments xiii
Preface xv
Introduction 1
PART ONE The Integrated Wealth Management Challenge
CHAPTER 1 Many Interrelated Disciplines 11
Multiple Sources of Capital 11
Expanding on the Corporate Analogy 13
Multiple Interactions 16
Educating Future Generations and Wealth Transfers 18
The Make or Buy Decision 20
The Creation of a Wisdom Council 21
Summary and Conclusions 22
CHAPTER 2 An Example of a Crucial Interaction: Tax-Efficiency 23
The Tax Bite and Its Impact on Compound Returns 24
A New Analysis of Capital Losses 25
An Expanded Definition of Active Management 26
Applicability to Both Asset and Security Decisions 27
Abandoning the Murky Middle: The Barbell Portfolio 29
The Potential Role and Limits of Derivative Strategies 31
Summary and Conclusions 33
CHAPTER 3 The Need for a Financial Interpreter 35
What Makes Markets Work? 36
Asset Classes, Sub-Asset Classes, and Strategies 38
Developing Reasonable Expectations 39
Performance Analysis and Reporting 42
Summary and Conclusions 45
PART TWO Investment Policy Formulation: Goals-Based Allocation
CHAPTER 4 A Brief Journey through Institutional Theory 49
Five Important Features of the Typical Institutional Investment Organization 50
A Quick Detour via Asset Liability Management 55
Summary and Conclusions 56
CHAPTER 5 Mapping Institutional and Individual Issues 57
The First Crucial Difference 59
A Second Important Difference 61
A Different Way of Defining Risk 62
The Law of Large Numbers 63
Implications 64
Summary and Conclusions 65
CHAPTER 6 Goals-Based Strategic Asset Allocation 67
The Basic Principle 67
Initial Theoretical Objections 70
An Academic Imprimatur 71
A Few Simple Principles 72
It Changes Everything 74
An Interesting Implication 76
Summary and Conclusions 77
PART THREE Goals-Based Wealth Management Implementation
CHAPTER 7 Dealing with the Implications of the Process 81
Covering a Set Number of Bases 81
Mapping Asset Classes and Strategies to Goals 85
Understanding Limitations 87
Dealing with Client Objections 88
A Three-Phase Process 90
Summary and Conclusions 91
CHAPTER 8 Creating Goals Modules 93
Developing General Capital Market Expectations 93
Describing Sufficiently Generic and Specific Goals 95
Creating Constraints Appropriate to Each Goal 98
Optimizing the Composition of Each Module 103
A Possible Example 107
Summary and Conclusions 109
CHAPTER 9 Working to Understand Client Goals and Goal Allocations 111
Identifying Crucial Initial Client Constraints 111
Determining Whether Any Constraint Is a Show-Stopper 114
Time Horizon and Required Probability of Success 115
Settling on the Appropriate Module 120
Sizing Assets Needed to Meet Each Goal 122
A Possible Example 123
Summary and Conclusions 127
CHAPTER 10 Finalizing a Goals-Based Policy Allocation 129
Two Possible Approaches 129
Working from Assets and Modules to a Whole 131
Description of Deviation Ranges 132
Our Original Example, Modified and Completed 136
Summary and Conclusions 145
CHAPTER 11 Managing the Portfolio Tactically 149
The Complexity in the Absence of a Systematic Tool 150
Introducing the Concept of a Tilt Model 153
Five Possible Variations on the Same Theme 156
A Major Pitfall 159
A Possible Example 161
Summary and Conclusions 169
CHAPTER 12 Portfolio Reporting 173
The Current Challenge 173
A Simple Analogy 178
Adding Taxes Makes Things Even More Complex 180
Summary and Conclusions 181
PART FOUR Managing an Advisory Practice
CHAPTER 13 The Currently Typical Firm Structure 187
Many Chiefs and Few Indians 188
The Root of the Challenge 189
Contrary Examples in the Legal and Medical Fields 191
A Simple Illustration 193
Summary and Conclusions 195
CHAPTER 14 Teams Versus Individuals 197
Too Many Disciplines for Anyone to Master All of Them Fully 197
Specialists, When Left Alone, Lead to Silos 199
The Crucial Role of the Team Coach 200
Only One Individual Can Play That Role 203
Summary and Conclusions 204
CHAPTER 15 An Alternative Structure 205
The Primordial Role of the Advisor 205
The Missions the Advisor Should Not Accept 207
The Difference Between Must and Does Not Need to Be Tailored 209
Imagining a Different Firm and Process Architecture 212
The Kind of Leverage That Can Be Built 217
Dealing with Objections 218
A Difficult Decision 222
Summary and Conclusions 225
Conclusion 227
About the Companion Website 233
About the Author 235
Index 237
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