Every business begins with a vision. A businessperson sets goals, evaluates risks, employs resources and monitors progress. The success of a business depends heavily on this process. Wealth management, too, is as detailed a process, but we seldom manage our wealth with this level of seriousness.
The most common investment tendency is to look for ‘good products’ with ‘good returns’. We purchase several products from one or more salespersons and these eventually determine the fate of our wealth.
This means that, if we’ve bought the right products, our portfolio may shine. Or, we could be left with insurance policies we don’t need, stocks we know nothing about, real estate that may never sell and debt instruments that may never beat inflation. This kind of bottom-up approach leaves our portfolio at the mercy of the products. This is certainly not wealth management. It is the journey deciding the destination, not the destination deciding the journey.
Wealth management by design
The first, and most critical, step to wealth management is setting an objective. Decide where you want to go, then find the means to get there. Decide which dish you want to prepare, then choose the ingredients.
Once you’ve decided what returns your lifestyle, outlook, risk abilities, family composition demand, your strategy can be accordingly designed. Subsequently, asset allocation can step in, which, according to popular research, has the maximum impact (92%) on returns. In contrast, product selection and market timing have less than 5% and 2% impact on returns, respectively.
Even when setting objectives, clarity is the deciding factor. Several studies suggest that setting goals increases the success rate. And the likelihood of success increases when such goals are defined — clearly. One such study was conducted in 1979 at Harvard MBA. Students were asked if they had set clear, written goals for their future and had made plans to accomplish them.
As it turned out, 84% had no goals, 13% had goals, but had not noted them down and only 3% had written down their goals and plans. When they were interviewed a decade later, it was discovered that the 13% who had goals were earning twice as much as those with no goals. More interestingly, the 3% who had written their goals and plans were earning 10 times as much as the other 97% of the class combined.
In the context of wealth, when you have an objective you can build a design. And by merely designing a strategy, you significantly increase the chances of attaining the objective.
This means that you are effectively planning ‘how’ and ‘when’ your wealth will serve you over time. The way I see it, you are not wealthy if you don’t have access to your wealth when you need it the most. Wealth is expected to meet certain requirements — family needs, security in emergencies, leisure spends and future generation requirements.
If your wealth is unable to meet these requirements in a timely manner, then the purpose of wealth management is defeated. Not having wealth serve you when you need it the most is like finding your doctor’s phone switched off when you are suffering a heart attack.
Therefore, the first-step towards achieving an outcome is determining what the outcome should be in the first place. Subsequently, discussing, debating and exploring the ways and means of getting there is what wealth management is all about. Hence, identify “here is where I am and there is where I want to go” .
The writer is CEO of AnandRathi Private Wealth Management