Wealth Management in an Hour
Note: This is a transcript of my video “Wealth Management in an Hour.” Reading this is infinitely better than watching an old man sweat through the woods.
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Good morning. Today I want to talk about Wealth Management. We all have an intuitive sense of what the practice involves but I’ve come to find that most people are being misled by that intuition. They confuse wealth managers with day traders– folks who spend all day in their underwear buying and selling Gamestop.
In reality, wealth managers are more like relationship managers who get to know you, your family, and your financial goals, and then match those goals with a bunch of canned financial services… which I’ll rattle off in sec.
Wealth managers– for the most part– aren’t going to manage your investment portfolio– at least not actively… trading every day. They’re just going to guide you to managed financial products. Think mutual funds or ETFs if you’re middle class… or that AND alternative investments if your net worth is higher than $10M.
Even the more elite Wealth Managers… again… are not traders. They’re usually tax experts or lawyers who specialize in estate planning.
If you don’t have those skill sets and you still aspire to be a wealth manager, well… you better love people and the act of listening to their goals. Because most of what you’ll do every day is that… and administrative bs… on their behalf.
There. Done. Shortest walk ever. Go be a Wealth Manager.
Still here? Fine.
I’m going to spend most of the rest of this walk deconstructing something called Robo-Advisory to give you a sense of the kinds of conversations you should have as a Wealth Manager and more importantly– why you’d have them.
If you don’t know what Robo-Advisors are… they’re a class of websites that let you manage your investments with minimal human intervention. You play a game of 20 questions with the website’s bot and based on your answers, the bot provides a formulaic suggestion about what your asset allocation should be. If you like its advice, you can give it your real money and it’ll invest that money in a way that algorithmically aligns with your answers.
Kinda cool actually. It’s not holistic Wealth Management but it's an important part. And great for introverts.
Deconstructing the questions that Robo-Advisory bots ask is useful even if you don’t want to become a Wealth Manager because thinking through the questions– and why they’re being asked– can make you a better financial planner… for you and your family.
Ok… enough preamble.
When you sign up for a Robo Advisor— with a company like WealthFront or Betterment or any large bank really— the first thing the online system is going to do… is ask you a lot of the same questions that a human financial planner would ask in your first face-to-face sit-down. Because they’re both trying to do the same thing… figure out where you are right now financially, where you want to be, and how much risk you can stomach on that journey. The Advisor— whether robo or not— will ask about a dozen questions to get to the heart of your relationship with your money.
Questions like your financial goals, your investment objectives, your time horizon for significant life events (like how long before your kids go to college, how long before you retire) and they use that information— your risk tolerance— to help you balance your portfolio— to always have what’s called a balanced asset allocation— which is a fancy way of saying “how much of your investable money should be in stocks, bonds, and short-term reserves (your bank account, money market instruments, U.S. Treasury bills— money that you can spend without paying a penalty for withdrawing it).”
The whole process is hopefully a thoughtful matching of your goals and your mindset. And as your financial circumstances or goals change, you’ll want to revisit the allocation process— to adjust your answers to the question— so your human advisor or the robo system knows how to reallocate the investments in your portfolio.
Understanding the questions that you’ll get asked is super useful in two big ways: 1) you’re deepening your knowledge of personal finance— yours—, and 2) you’re scratching the surface of the value of wealth management as a practice.
I say scratching the surface because wealth management is so much more than your asset allocation. It’s about taxes, legal structures, estate and family planning, education planning, philanthropy… and on and on and on. I’ll try to cover that in the second part of this walk.
But what I want to do first 30 minutes is to deconstruct that Robo– that first step in wealth management. To see what we can learn by prosecuting the questions that a robo-advisor asks. To try to understand how and why you’d want to rebalance your portfolio.
The word rebalance– by the way– is industry jargon. It’s used in two ways: technical and philosophical. Technically, a rebalance is doing whatever it takes to keep your asset mix in line with your goals. Example. Let’s say that your portfolio mix is 60% stock (higher risk), 30% bonds (lower risk), and 10% cash (an opportunity loss risk). 60. 30. 10. Now let’s say that your stocks overperform. They do so well that they organically change those proportions to 70 20 10. 70% stock. 20% bonds. 10% cash. An automated rebalancer– something every robo advisory has– would sell whatever it needs to– and buy whatever it needs to– to get your portfolio’s proportions from your new 70/20/10 back to 60/30/10. Rebalancing.
There’s also a more philosophical use of that word. For instance, when something has changed on your end— like you have new financial objectives or your life has transformed in some significant way— well, that change should trigger adjusting your asset mix– the underlying percentages– that 60/40/10 dynamic…. So rebalancing can also mean refreshing your goals and how they determine the percentage of your investments in each asset class. Given how your life has changed since you first answered those questions, is it time to take more risk (stocks as an asset class), or less risk (bonds as an asset class)? And again sadly, there isn’t a “no risk” option because keeping your money in your checking account means that its value is going down (think inflation)... or opportunity risk.
Regularly reviewing and rebalancing your portfolio can help ensure that it stays aligned with your goals and risk tolerance over time. You can do that with regular visits to your human advisor or by retaking the online surveys at your robo advisor.
The point here is that by answering the questions we’re about to review— the questions asked by any financial planner— robo or human— you get insight into how to manage money— your own money if you’re not a financial planner or the money of others if you aspire to be a financial planner.
So… let’s get into the questions Robos ask. And I’ll frame them as if I’m reading them for me.
Question 1:
When making a long-term investment, I plan to keep the money invested for...
2 years or less
3-10 years
More than 10 years
Why would a good financial planner ask this question?
Time is relative. And I'm not just talking about the Einsteinian notion that the rate at which time passes depends on your frame of reference. I’m talking about how in my 20s, my idea of taking a risk was rock climbing. Now, in my 50s, it’s throwing out a box of old Apple chargers. That’s risky. You never know when you’ll need one of the old ones. But– because I’m old– I can probably afford a new one if I ever need one.
What does that have to do with making a long-term investment? Well, in my 20s, the words “long term” meant something different to me than they did in my 30s, 40s, and now 50s.
So defining and redefining the idea of “long-term”-- in all its fluid complexity– is key to a good financial-planning conversation. It matters in what timeframe you’ll want to start withdrawing and spending the money locked in your investments. And not just because some asset classes have time-locks… i.e., early withdrawal penalties… i.e., CDs (certificates of deposits) that charge you for early withdrawal… because they have what’s called a fixed maturity… a fancy term for “you can’t take it out of the oven before a certain amount of time has passed.”
Even if no asset types had fixed maturity, defining what “long term” means to you is important. Your time frame is one of the two most important dimensions of your asset allocation– the other being your risk tolerance.
Financial plans aren’t a theoretical exercise. You’re mapping out your investment strategy that should be grounded in your time frames. If your time frame is short, go with a more conservative allocation to preserve your assets. Less of the kind of short-term volatility that comes with stocks.
And if you won't need the money for a while, go with a more aggressive allocation– ie., more stocks– because that gives your assets the potential to grow over time.
As a pattern, this first question is important because it teaches you that communicating about investments starts with having the planner and the plan-ee speak the same language. That’s worth any amount of time you spend on it.
Because we all use the same words. And they don’t all mean the same thing. They should. But they don’t.
Question 2:
As I withdraw money from my investments, I plan to spend it throughout…
2 years or less (short time horizon).
3-10 years (medium time horizon)
More than 10 years (long time horizon)
Why would a good financial planner ask this question?
Because life gets in the way. You might be thinking about buying a house in 2 years. Or your kids might be 3 years away from graduating high school and you’ll want to help pay their way through college. Your car might be nearing its end of life. You know these things are going to cost you and so your financial plan needs to take them into account.
Is the question meant to have you predict the future? No. This isn’t about planning for that eventual car accident or the pleasant surprise of having a child that you weren’t planning to have. It’s about what you know and can predict.
Because every time you withdraw money from your investments, you’re withdrawing their future gains. And accounting for that– when you know that your future involves a home purchase or tuition costs or [insert your big ambitious spends]-- then the plan can build around those challenges. So you’re not left at age 65 with a bungalow-sized hole, a tuition-sized hole… because in retirement, you'll want to be sure your money will last as long as needed.
My answer on this was 3-10 years– the medium term. Why? I’m in my early 50s and I’ll need to start spending my savings when I retire… in 10 years. If you’re in your 20s or 30s, your time frame will be shorter, not longer. You’ll need to account for starting a business or two, getting married once or twice, having kids if you want to stay poor, buying a nice home, etc. That’s the irony of work life. I won't need the money for 10 years because all my expensive life events are behind me. A good financial plan needs to account for all major life events in the future… whether that’s the near, medium, or long term. A good plan will use that information to suggest an allocation that will give your assets the potential to grow over those periods.
The next question is an important add-on to question to the one we just covered… which if you’re starting to fall asleep was “As I withdraw money from my investments, I plan to spend it over a period of…”
Question 3
I plan to *begin* taking money from my investments in...
2 years or less (short time horizon).
3-10 years (medium time horizon)
More than 10 years (long time horizon)
The last question was asking: for how long do you need to stretch your money? This question is asking… when do you think that’ll start?
Why would a good financial planner ask this question?
If an airplane pilot doesn’t know how long their runway is, you’ll end up in a ditch. It’s super important that you at least try to estimate the amount of time you have until you’ll start spending the money you're investing. If that’s a short runway… you need a more conservative allocation to preserve your assets. If it’s a longer runway– and you can be patient as you taxi– then you’ll have more money after takeoff.
Question 4
When it comes to investing in mutual funds or ETFs - or individual stocks or bonds - I would describe myself as…
Completely clueless
High-level understanding or
More Over - I got this
Why would a good financial planner ask this question?
Most wealth managers– don’t actually buy you specific stocks and bonds unless you’re clueless enough to ask them. Instead, they help you figure out what your asset mix should be– like that 60-30-10 mix that we talked about at the front of the walk– and then they fill those percentages with managed products– not managed by them but by the large professional money management firms. Think BlackRock, Vanguard, Fidelity, State Street, J.P. Morgan.
So whether you’re the investor or the financial planner, you need a good understanding of the product classes that you’re either about to own or sell. At a minimum: Mutual Funds and ETFs.
I described what mutual funds are– in detail– on one of my previous walks– the Fund Accounting one. I don’t remember if I’ve done that for ETFs… or exchange-traded funds (ETF).
So… let’s do it.
ETFs are a type of investment fund– an exchange-traded product– with shares that are tradeable on a stock exchange. ETFs are usually designed to track the performance of a specific index, commodity, bond, or asset class but as the industry has matured, there are lots of interesting other rationales for the makeup of ETFs. One example: ESG which stands for Environmental, Social, and Governance. ETFs that are driven by ESG are trying to appeal to investors who believe strongly in investing in their personal values. An environmentalist at heart? ESG lets you invest in companies that align with your values.
The point is that ESG moves past a blind commitment to a standard index by capturing all the non-financial risks and opportunities inherent to a company's day-to-day activities.
Or… you can go the other way with a Vice ETF. Filled with companies whose products may be bad for you, but they may end up being good for your wallet. Think tobacco, alcohol, gambling but also milder evils like chocolate.
And it's not just ESG and Vice that reimagine the organizing theme of an ETF bundle. There’s some crazy stuff out there.
Good example– there’s a TV personality here in the States named Jim Cramer. He’s a former hedge fund manager turned TV nutjob. And whether you love him or hate him – there’s an ETF designed for you. The two ETFs– released in March of this year– track the stock predictions he’s made on his show, and the ETF either follows his recommendations (Long Cramer ETF) or does the opposite (the Inverse Cramer ETF). I’d be wary because the idea of celebrity-as-financial-advisor is as good as celebrity-as-president. Good people on both sides.
Sorry. Back to ETFs. The main value of ETFs to investors– aside from being managed by professionals– is that they’re a way to diversify your investments. How do they do that? Most ETFs are filled with a wide range of underlying assets.
The other big value is that– unlike mutual funds– ETFs can be bought and sold throughout the trading day, similar to individual stocks. This provides investors with flexibility and liquidity in managing their investment portfolios.
The point here– with question 4– is that once we ask all the questions on this walk, we’ll have a good idea of what your asset mix should be. 60-30-10… 70-25-5… whatever… And the usual next step after you know that– unless you’re rich or super-rich– is to fill those percentage buckets with high-performing, values-aligned, highly-liquid ETFs and mutual funds.
Question 5
My current and future income sources (like my salary, social security, pension) are…
Unstable
Somewhat stable
Very stable
Why would a good financial planner ask this question?
On the face of it, this question is about making sure that all the numbers you’re working with are solid. If you’re filling in a metaphorical spreadsheet that adds and subtracts and calculates more complicated things like compound interest, you want to make sure your base numbers are as correct as reasonably possible.
Scratch a little deeper though and you realize that if your answer is anything other than “very stable,” it’s a great conversation starter. What do you know that your plan doesn’t? Maybe your future income sources are “somewhat stable” because you might not be at your current company past a certain date. Or maybe it’s “somewhat stable” because your industry is shrinking. There are a million “aha!” moments in this question for the planner and the client.
Your plan doesn’t go to hell if your current or future income sources are unstable. But it does need to change. Your asset mix– for instance– could be more conservative or aggressive depending on the stability of your current and future income sources. Stable numbers will obviously make for a more solid foundation and they’ll give you more opportunity to take on investment risk with higher potential returns.
But that doesn’t mean that your investment strategy is hopeless without that stability. It just means you have to be more conservative, and less risk-taking to better serve your long-term interests.
Plus asking the question (and hopefully asking a ton of follow-ups) helps ground both sides in a commitment to revisit the plan when that thing you’re afraid of in your future changes. And you’ll be less fearful because you’ve talked through its impact on your asset allocation.
Question 6
From early September of last year through late October of last year, bonds lost 4%. If I owned a bond investment that lost 4% in two months, I would...
Sell it all
Sell a portion
Hold tight… or
Buy more
There’s usually one of these questions for every asset type that you might be getting into. For instance, that question was about bonds. The stock version would be: From September of last year through late November of last year, stocks lost over 31%. If I owned a stock investment that lost about 31% in three months, I would...
Sell it all
Sell a portion
Hold tight… or
Buy more
Notice that the risk of the asset type is built into the question in both cases… bonds, you lost 4%... stocks you lost 31%...
I won’t do one for every potential asset type but you get the picture.
Why would a good financial planner ask these kinds of questions?
First, they’re planting a seed about product volatility and market volatility… which is wise because people make bad investment decisions when they think in the short term; when they’re driven by uncertainty and fear. The heart of the question though is to understand your risk tolerance when things get tough. How well do you know yourself during times of market volatility? When there are unpredictable swings that might dramatically change the value of your investments?
No one is judging you. If you have a hair trigger, that ain’t going to change when your advisor uses his calming voice. But knowing that you have a hair trigger– or that you’re a long-termer– is a key factor in finding your temperament-aligned asset mix.
You don’t need someone to keep telling you that taking on more risk can lead to higher returns, but it can also result in substantial losses. You just need to be honest with yourself about 1) how you react to it and 2) how you wish you’d react to it.
Because then, your logic and aspirations can be baked into the algo that’s making programmatic decisions about your money.
That— for me– is the best thing about Robo. No judgment. It’s not trying to change you. It’s just asking you: what would make you most comfortable during times of volatility? And then automating that mindset. It’s baking your specific risk tolerance into the logic that buys, sells, and holds your investments. If you run when the sky is falling, it runs with you. If you double down when threatened, it mimics your bravado. It stays true to me or who I aspire to be. And that gives me (at least) a remarkable piece of mind.
Question 7
Is usually a picture that tries to visually trigger your appetite for swings in your portfolio– upward and downward. The picture will show you the greatest 1-year loss for a portfolio as compared to its highest gain for 1 year. And it’ll do that across a handful of different hypothetical investments of a fixed about of money– say $10,000.
I think of it as turbulence on a plane. A spectrum. Mild turbulence at one end… when your seat shakes a little– means you’ll make x returns but you might also lose x. The other end of the spectrum is wild turbulence– you’re thumping up and down, almost hitting your head on the ceiling, the baggage compartment opens up above you, dropping luggage, babies flying, cats and dogs living together…. and all that means you’ll make 5x returns or… the oxygen masks will fall and you’ll lose 5x.
Those ranges spark a good conversation about your risk appetite. About how much volatility can you stomach? Minimum, moderate, or hold on to your seats?
The next several questions– 8, 9, 10– are statements more than questions. And your response has to be on a spectrum of Strongly agree on one end to Strongly disagree on the other. For instance,
Question 8
During market declines, I tend to sell portions of my riskier assets and invest the money in safer assets…
Why would a good financial planner ask this question?
It’s one part gauging risk appetite– risk tolerance– and one part trying to mimic the underlying behavioral habit of the client. How would they feel if they saw a sudden change in their account balance- positive or negative? It’s a variation of the themes we talked about in the last two questions: market volatility and your behavior during upward and downward swings.
If we’ve learned one thing during this walk, it’s that your risk tolerance is the single most important element in finding your right asset mix. What do you do when the market's up or down? Do you stay on target? Or change the target? And how comfortable are you with those decisions? With that risk? With that risk mitigation strategy?
Some of us prefer a portfolio that stays on a more even keel because we value peace of mind. Others of us prefer more heartburn now for higher rewards later. There’s a standard asset allocation for every answer in that spectrum.
Another spectrum statement:
Question 9
I would invest in something based solely on a brief conversation with a friend, co-worker, or relative.
Why would a good financial planner ask this question?
It’s harder– not impossible– but harder to manage an investment portfolio if the client keeps changing their long-term strategy. That’s why the question is framed as “a brief conversation with a friend.” It’s virtue signaling: I– the advisor– know that you the client are not impulsive, that you do your homework, and are smart enough to know good advice when you not just hear it but research it.
It isn’t asking a really obvious question so much as planting some seeds– anchoring the client.
To be fair, no one I’ve ever met is actually stupid enough to answer this question with complete honesty. Oh yeah, I’m a complete flake when it comes to money: impulsive, hate doing my homework, and I take pride in the fact that I can’t differentiate between smart and dumb money.”
No one says that.
They would if they were honest and self-aware. But that’s a high bar.
Question 10 - another spectrum statement:
Generally, I prefer an investment with little or no ups and downs in value, and I am willing to accept the lower returns these investments may make.
Again, some well-intentioned psychological manipulation… a little anchoring… but ultimately, trying to refine the client’s comfort with risk and volatility.
OK… so those are the 10 keys you’ll answer when signing up for Robo-Advisory. Not the exact questions but a decent representation of the kinds of questions you’ll get asked. Every single service will also ask about your current asset allocation.
Because they’ll assume as I would– that they’re not your only investment advisor/service… and they want to make sure you’re not planning in a vacuum. No advisor– robo or human– assumes that you’ve been living in a box– that this is the first time you’re investing. So… they’ll ask you to enter how much of what you’re already invested in is in stocks, bonds, cash, etc.
Essentially– your current asset allocation (as a percentage of all your investments everywhere). Not just with this particular advisory.
Why would a good financial planner ask this question?
Everyone I know uses more than one bank, more than one advisor. Not because their bank sucks or their advisor sucks but because it's become a common practice to diversify across multiple providers.
And your asset allocation at Advisor #2 shouldn’t ignore what you have at Advisor #1. Or if this advisor is your first, your asset allocation shouldn’t ignore the stocks your company issued you… or the bonds your grandparents bought you… or the portfolio you inherited.
When you’re talking to the advisor– human or Robo– and you answer all the kinds of questions we’ve been talking about, there’s a very good chance that your ideal allocation percentages will be roughly 60% stocks, 30% bonds, and 10% cash and short-term reserves. If you don’t factor in all the stock you already own, you’ll be over-weighted in stocks.
Hence the question…. What else do you have?
Ok… so what have we learned from Robo?
Most of the questions on this walk have been about your appetite for risk. None of them have asked that directly because most people have a hard time answering questions about their risk tolerance. So instead of asking directly and getting a blank stare, these questions have been proxies that– when you look at them in aggregate– help you synthesize the right risk profile for yourself or for your client.
The other theme that we covered is around how a well-formed question can educate you– how it can anchor you in responsible investment practices. For instance, a well-designed question makes sure that you don’t switch strategies based on “a brief conversation with a friend.” (question 9)
And finally, we learned implicitly that we should revisit these questions when anything significant changes in our lives. Foreseen or unforeseen. Investment planning is like an effective, well-written will– you don’t just write one and forget about it. You keep updating it… as your life plays out.
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Ok… So that’s part 1 of the walk.
I’d like to make Part 2 about what’s missing from Robo– the lessons of financial planning that you can’t learn because Robo is so narrowly focused on managing your asset allocation.
Remember what I said at the beginning of this walk about how Robo just scratches the surface of wealth management? I don’t remember my exact words but it was about how people are so much more than their asset allocation. They need tax planning, estate, and family planning… education planning. They could all use a good lawyer. If they’re wealthy enough, they need good philanthropy planning and more complex tax planning. If they own a business, they need all that plus plus plus.
That’s the difference between the currently-narrow focus of Robo and the more holistic focus of a human wealth advisor.
Can that all happen through a Robo-advisory type interface?
Of course. Does it? Not today.
It’s funny but the super wealthy– what the industry calls ultra-high-net-worth individuals– have something called family offices– a team of people that do the things I just described for one family… or for a small group of families. Why?
Quick history. The first “family offices” in the U.S. were established in the 19th century by a who’s who of the nation’s wealthiest industrialists. They realized that traditional banking and brokerage– which back then was just really well-dressed men with handlebar mustaches– wasn’t enough for them. So these masters of the Gilded Age– these “tycoons of industry”– steel magnates… railroad magnates… refrigerator magnates… chose instead to pay their own teams of experts to oversee their finances.
That sounds elitist and unnecessary but to be fair, after you hit a certain level of wealth, you’re more of a financial institution– from a planning perspective– than you are an individual. So it made sense.
Family offices have flourished since the 1980s. They’re an excellent measure of income inequality… which has also flourished since the 1980s.
What do they do? All things wealth management.
If you don’t have a family office, you need to talk with your financial planner, your tax guy, your banker, your loans guy, your credit guy, your lawyer, your other lawyer. The list goes on and on. And what’s wildly frustrating is that you have to connect all those dots. Your financial planner doesn’t talk to your tax guy. You talk to both and connect the dots. Your banker doesn’t talk to your lawyer. You talk to both and connect the dots. It’s enough of a pain that people legit hate to manage their financial lives.
What a good family office does is to get all those people talking on your behalf. They connect all those dots. You don’t talk to 10 people. You talk to one.
And that’s a beautiful thing.
Can that all happen through a Robo-advisory type interface?
Of course. Does it? Not today but maybe someone listening to this walk can make it their side hustle.
What kind of Robo-Advisory-type questions would a Robo-Tax service ask?
I call it TurboTax++. All the questions asked by TurboTax when they’re just trying to fill out your tax forms but… long before you fill out your tax forms. That’s called planning. TurboTax doesn’t plan. It jumps onto the battlefield and starts shooting.
Just like Robo-Advisory was trying to understand your time-frames and risk appetite, Robo-Tax would focus on your longer-term financial goals. But instead of ending the questionnaire with an asset allocation, it would tell you how, when, and why to deduct, defer, divide, etc, etc.
If you’re not a tax person– and I’m not– you can think of tax planning in terms of the 5 R’s.
First R: Reduce: A tax deduction is a provision that reduces taxable income. A standard deduction is a single fixed amount that you keep instead of paying… because there’s some local, state or national laws that says you can. Common examples are things like mortgage interest (from back in the day), or charitable contributions. Through proper planning, you can actively, and intentionally create deduction opportunities– to claim as many of these deductions or credits as is legally possible. As opposed to waiting until the day before taxes are due and praying that TurboTax will save you.
2. Replan: You may be able to legally take your tax bill (or a portion of it) that would otherwise be owed this year, and push it off– defer it– to a future year. You’re not eliminate the tax, you’re just using a legal means to pay it in the future. And that is better than paying it today because you can invest what you would have paid until it’s deferred date comes. That lets you benefit from the the time value of money.
That was the second R.
The third R: Rethink. You can rethink your tax burden by potentially moving income from the hands of one family member who will pay taxes at a higher rate to another who will pay taxes at a lower rate. There are legal ways to do this. By rethinking your income– by dividing up differently– something that’s also called "income splitting" – you can retain more of your income. With Robo-Tax, you and your family could potentially rethink your affairs so that you have equal incomes. I say potentially because this isn't always possible, but Robo-Tax could help you plan in that direction.
4. Reframe: With proper planning you can legally convert one type of income into another type that is subject to lower tax rates. Which is important because not all income is taxed equally.
5. Restructure: You can better manage your tax burden by restructuring your affairs so that some of the taxable amounts currently showing up on your tax return might not have to be reported on your tax return going forward. Planning can let you move taxable to non-taxable benefits or tax-free cash flow. Again, legally.
We’ve all heard that some rich people don’t pay their fair share of taxes. It’s not because they all turn into Cruella Deville. They hire smart tax people– or family offices– who help them push the limits that the law allows them to push.
Most of those stories about evil rich people are intentional misdirection. The spotlight shouldn’t be cast on their tax planning. It should be cast on their political giving… because they support lawmakers and laws that make avoiding taxes the privilege of those who can afford tax specialists.
Anywho… those are the 5 Rs. And I only went through them so you’ll understand that like asset allocation– which sound super complex– tax planning can also be accessible to non-specialists.
Instead of the 10 questions we asked with Robo-Advisory, a Robo-Family-Office could ask questions that add a planning sensibility to the questions TurboTax asks you every year:
TurboTax asks: Do you own the home you currently reside in?
RoboTax would ask: Do you have plans to change your residence or acquire a new home or fix up your current home?
TurboTax asks: Do you have have health insurance? A health spending account?
RoboTax would ask: How do plan to manage your health and the health of your family over the next decade? How do you plan to take care of your aging parents?
TurboTax asks: Are any members of the household attending college right now?
RoboTax would ask: How do want to manage your children’s future education? Have you consider an educational savings account (like a 529 plan)?
TurboTax asks: What major life changes happened this past year?
RoboTax would ask: What major life changes do you anticipate in the coming years?
TurboTax: Marriage this year? Divorce? Did you have a baby? Did you adopt? Did you move? Buy a home? Refinanced your home? Sell a property? Buy an investment property? Start a business? And all of it is looking in the rearview mirror.
RoboTax would look ahead.
Every question TurboTax asks you about last year is an opportunity for planning.
Did you start a business?... can become Are you planning to start a business?
Now if you work for Intuit– the makers of TurboTax– you’re thinking “hey we try. We make suggestions. We offer ideas. We do our best.”
And yeah, I get it.
My point isn’t that TurboTax needs to change. It’s that we– average everyday Joes and Janes– should get the same holistic love that family offices provide ultra-high-net-worth individuals.
My point is that if we were given those services– that integration– we wouldn’t need to separately manage our investments with one company, our taxes with another, our estate with another, our children’s education with another, our parent’s health with another… and so on and so on.
Anyone who doesn’t have a family office– or a Robo-Office for the mass consumer market– has to sign on to financialplanner.com, and mytaxguy.com, mybank.com, and mylawyer.com, and myOtherLawyer.com.
Anyone who doesn’t have a family office– or a Robo-Office– has to manually connect all those dots. You have to connect to 10 sites. Instead of connecting to one.
And that is the golden ring the next generation of hackers needs to grab.
That’s it. I hope you learned something.