Want to be in control of your wealth? Un-clutter your investments

Often people find that the wealthier they are, the less control they have over their money. Investment advisor Liz Miller believes this is a by-product of success: As people make more money, they randomly invest in different instruments and end up with a cluttered portfolio.

According to Miller, president of Summit Place Financial Advisors and author of Clutter-free Wealth: A Goal-oriented Guide to Gaining Control of Your Affluence, the secret to mastering one’s finances is to first identify short-term and long-term goals and then align investments with these goals.

In a conversation with Knowledge@Wharton, Miller discussed some common investment mistakes that people make and how these can be addressed.

An edited transcript of the conversation follows.

Knowledge@Wharton: For many well-to-do families, it seems as though the more their affluence grows, the more they lose control over their money. You write in your book that over time wealth portfolios sometimes seem to become like cluttered garages. Why does that happen?

Liz Miller: I think we reach this point of clutter and this feeling of lack of control as a by-product of success. This is particularly true for those who have built their own success. Early in their career people find that they are able to save a fair amount and typically they go to a friend or go online to a mutual fund company and make a purchase. Sometimes, that first purchase is an insurance product. As they become more successful and add to their savings and investments, they also start realizing that they need something different, that they need to diversify. But they may not have a clear idea about what they want. So, a lot of times, wealth gets cobbled together until a time when they realize that they need a professional advisor.

Historically, even if that first advisor was with a well-known brokerage house like Merrill Lynch or Morgan Stanley, that advisor [would probably] have seen only a portion of the investments and wealth of their client because there were limits to what they could give advice on. So, if a person went out for professional advice, they would still be periodically putting together their own list of everything they have to see what their total wealth was. That is how we get to this point of a cluttered garage and this feeling that a lot of wealthy people have of not knowing what they own or not being in control. It’s not that they aren’t making decisions, but that there isn’t enough confidence in how it all fits together.

Knowledge@Wharton: What is the most cluttered wealth portfolio that you have encountered? What did the investor or family do that failed to deal with the clutter as it was building up?

Miller: It is the mix just as I described to you. One of the most cluttered portfolios that I have seen was a family where there were specific areas that were cluttered. Investments are easy to de-clutter. So if somebody has a variety of accounts it is easy to simplify that. We do some consolidation, help them understand what is in each account, and then start taking steps to clean up both asset allocation and asset location. What stays very complicated is a collection of insurance policies …. some of them are what we call cash value policies. There is no easy way to simplify that. Yes, there are things you can do to roll them into each other or create a new product, but that in and of itself can get very cluttered — figuring out what role they play, how to work with them, continuing to use them, etc.

“I think we reach this point of clutter and this feeling of lack of control, as a by-product of success.”

The other piece that got very cluttered, with reference to the particular family I am thinking of, was the grandchildren’s accounts. They wanted to help with the future education of their grandchildren and so they started opening 529 accounts [a tax-advantaged savings plan]. This is a very common and easy thing to do, and it’s a favorite recommendation of lawyers and accountants because of the tax benefits. But this family had eight different 529 accounts for the grandchildren. It is very hard to do anything with those. In this case, we simplified it by taking [some steps which included] a co-mingled family trust. This met the family’s goals in many different ways and was a much better vehicle.

These are the kinds of clutter that accumulate over time. It’s not that the original decision was a bad one. It’s just that success breeds complexity. It’s like a cluttered closet of clothes. Some of them just don’t fit very well anymore.

Knowledge@Wharton: A lot of investors and wealthy families try to un-clutter their mess and deal with complexity by employing experts like accountants, lawyers, brokers and so on. Do you think that sometimes that adds to the complexity rather than reducing it?

Miller: My firm targets clients that have about $5 million to $25 million in wealth. I think that is a particularly difficult range. The incredibly successful families with hundreds of million in wealth usually have a family office and a dedicated staff to take decisions on their behalf. But there is this middle ground where successful individuals and families have to coordinate their own professionals. There are very few coordinated efforts for them.

We talk about this in the book. We have a chapter about building your team because there is a level of complexity where you need the expertise of a qualified state planning attorney, a qualified accountant, a financial advisor who understands the nuances of different trust structures and taxable and non-taxable accounts. You are not going to find all of that expertise in a single person. What we talk about in the book is how do you find those allied professionals and then identify your quarterback, your trusted advisor. Because to reach the level of confidence where you can lead the life you want, you need to have one of those professionals help coordinate the other professionals for you.

Knowledge@Wharton: You write in the book that the first step in un-cluttering one’s financial life is to have clarity about money values. Could speak a little about what those are and what bearing they have on the financial decisions that families have to make?

Miller: There are many different money values. I like to talk about the most common ones. Right at the top of the list is security. Do we look at our money as security? Particularly for those that are self-made or those who may have come from a background of struggle, a background with nothing at all, or a background in which they saw ups and downs to the family wealth, no matter how much they have in the bank today, they may still always think of their wealth as security. They may always have the feeling that it could go away tomorrow. It is not productive to work with such people and tell them the exciting things that they could do with their money, or investments that could give them wonderful future returns. It’s not going to resonate well with someone who, no matter how successful they have been, is always afraid of losing it. So that is a money value of security.

Knowledge@Wharton: A lot of immigrants would probably fall into this category.

Miller: You are absolutely right. What becomes interesting is if someone with that value has a spouse with a very different money value. It is equally common to find someone who is self-made and has been very successful who views their money as a measure of success. And no matter how much they accumulate, they are always looking at that as a number, and they measure their own personal self-worth and success by that number. That person is very interested in continuing to grow it, in continuing to grow it better than somebody else, even if there is very little chance they will spend it all. They are tied up in their success and their self-worth in measuring what is in the bank.

Those are two extreme money values. If these two people come together as a couple there is a discussion to be drawn out to make long-term decisions.

In a day-by-day situation, those two money values may never come in conflict in the marriage, particularly if money was never an issue. If you never had to make those difficult decisions about how are we paying bills this month, or what car are we going to buy because we can’t afford another, then those successful families never really had to unpack their different money values. But when we start working with them and talk about future values, future goals, legacy goals, we need to unpack those money values and see how they come into play for what each is trying to accomplish.

“It’s like a cluttered closet of clothes. Some of them just don’t fit very well anymore.”

Knowledge@Wharton: Could you give a couple of examples of the consequences when members of a family are out of sync on money values? How can these issues be addressed and solved?

Miller: I love to tell the story of a young couple, the children of a main client. They needed a new car, and they shared with me that they would be buying one. The next time I met with them there was clearly a tense situation, clearly disagreement, and befuddlement over all of the emotion around this car. I asked them to share the story about the car and I heard very differing views. So I looked at each of them and I said, tell me about the cars in your family when you were growing up.

One told me about a family where a new car was purchased every few years. It was always shiny and new and had the latest features. When this person became of driving age there was a car to drive. I don’t recall if it was new or a used car but it was a car with, as I would say, toys. There was nothing barebones about it. For this person, a car was a vehicle to be enjoyed, a vehicle to give a wonderful ride to wherever you were going. The other person remembered owning three cars, didn’t recall any of them being bought new, and had a family value that the car was just to get you from one place to the other. There was no focus on toys in the car. It was not viewed as something luxurious or wonderful to be in.

In this case, the husband bought the new car and brought it home. He believed he had put a lot of thought into the features his wife would enjoy. But the wife had grown up with very basic cars and she was resentful of the car that came home. The different view of money values came out clearly in the way they were raised in their approach to cars and there was this horrible disconnect. They had no sense that they weren’t communicating. They were really befuddled to find that each was unhappy and didn’t understand what the right purchase was to be. But it launched a wonderful conversation that went great from there.

Knowledge@Wharton: I remember this story from the book. The husband bought a more modest car than he might have because he was deferring to his wife, but it still caused some conflict.

Miller: Exactly.

Knowledge@Wharton: How does one resolve such conflicts?

Miller: What I have found is that if we can help open that conversation where they realize there is such thing as a money value and that they look at money differently, then we can help adjudicate disagreements over time. The most important thing is you’ve made a couple of people aware of something they have never thought about before.

Knowledge@Wharton: If some members in a family value security while others value independence or success, what implications would this have for the kind of assets in which they should invest?

“In a goal-oriented approach to affluence, it really doesn’t matter what the market does.”

Miller: A person who cares about protection tends to be a conservative investor while someone who sees opportunity and success generally looks for more aggressive investments and enjoys tracking them. It is not always easy to combine these two approaches. In some cases, while the couple shares their wealth, we also make them have some separate accounts in their individual names. We tilt these separate accounts in favor of their individual approach.

Knowledge@Wharton: When it comes to choosing advisors, affluent investors sometimes judge them based on how often they beat the market. What do you think of that approach?

Miller: We firmly believe that is not the right approach. As we point out in our book, in a goal-oriented approach to affluence it really doesn’t matter what the market does. Your overall goals are 20, 30 years out and are about sustaining a lifestyle, creating a legacy for a family, and perhaps creating some type of philanthropic legacy.

We work with clients and identify the major goals, and through a series of analysis put a number to it. What is the goal of this portfolio to grow year-in and year-out to have confidence that we can meet a number of short and long-term goals, whatever they might be. If we can track quarter-after-quarter, year-after-year, that the portfolio is hitting the goal we know will get us to the endpoint, how we perform relative to the market becomes irrelevant.

Knowledge@Wharton: Your book recommends that wealthy families should focus on the three L goals. Can you explain what these are and why they matter?

Miller: Within a lifetime, the shorter-term goals we call “leisure” goals. These are goals that are up and beyond your everyday life and current lifestyle and can apply at any age. They may be significant trips; they may be vacation homes; they may be things that are going to make a difference in your lifestyle. Then, for the bulk of our years where we have left our primary career behind, we talk about “lifestyle” goals, and that is the cash flow question that everybody has no matter what their wealth. So that is the second L — lifestyle. Finally, we talk about the “legacy” goals. You may have legacy goals early or later in life. Typically, families aren’t ready to talk about legacy goals until many years of having left a primary career behind, many years of living successfully off their portfolio or in what we traditionally call a retirement.

Some of the legacy goals are financial but many of them are emotional. How and when do I start gifting to my children and my grandchildren, and how do I do it in a way that I can continue to maintain good financial values for them like their incentives to save. How can I support the families they are building without taking away the path that is important to them to follow with their children. These are the questions we find ourselves working with more often than the easier question of how much money do I want to leave and to whom. So those are the three L’s — leisure, lifestyle and legacy.

“We can reach our goals with a simple, straight-line approach.”

Knowledge@Wharton: How should investors align their investments with these goals? Could you give an example where this worked and where it did not?

Miller: Sure. The reason the three L’s can be helpful is that they also have a timeframe to them. In the case of a legacy goal, for instance, it’s not uncommon for us to sit down with someone who has many years of life ahead but has already decided what they want to give to their children. This is a very measurable, long-term legacy goal. It could be 20, 30, 40 years off. Investments to reach that goal could be long-term in nature. They could also have a little more risk to them because there is so much time before they need to be achieved. Leisure goals by nature are generally short-term. So those are at the other end of the spectrum. We need to protect those funds. We need to think about how we are going to invest those funds to make them available. I haven’t seen too many times when this has failed.

What I do sometimes see, and this is more with our second generation of clients, is that they fail to share their leisure goals with us. While we are investing for them for the long-term, on very short notice they tell us that they have come up with an investment opportunity in an apartment building or that they are buying a second home somewhere. So then there is a quick liquidity need that has not been worked into the portfolio. We can always meet that need, but it definitely ends up with suboptimal performance.

Knowledge@Wharton: Speaking about legacy, how can investors un-clutter their approach to philanthropy?

Miller: That often gets cluttered the same way a portfolio does. Early in life there may have been a short list of things you wanted to support. You may have supported them once a year with a check. But then that list keeps growing. It is very generous, it is a very wonderful, but it can get cluttered. It can also take away from the ability to decide which of these causes are more important to you and where you want to commit more. That commitment doesn’t necessarily have to be only financial. You may want to give more with your time, with your leadership, with your planning abilities.

Those are some of the things we talk about in terms of thinking about philanthropy more strategically.

Knowledge@Wharton: The primary focus in your book is for wealthy investors and families. Are there any lessons that are useful for people lower down the economic ladder?

Miller: Absolutely. The gist of the book is that the reason we lose the sense being in control is because things get way more complicated than they need to be. It is all about simplifying. No matter how much wealth we have, we can keep working on simplifying it. We can reach our goals with a simple, straight-line approach. It doesn’t need lots of bells and whistles to be successful.