What’s your re­tire­ment num­ber? Who cares? Amer­ica’s Top Wealth Ad­vi­sors are dan­gling sec­ond homes, char­i­ta­ble foun­da­tions and lav­ish va­ca­tions as they bor­row from be­hav­ioral sci­ence to re­write their ad­vice play­books.


What’s your re­tire­ment num­ber? Who cares? Amer­ica’s Top Wealth Ad­vi­sors are dan­gling sec­ond homes, char­i­ta­ble foun­da­tions and lav­ish va­ca­tions as they bor­row from be­hav­ioral sci­ence to re­write their ad­vice play­books.

When a long­time client an­nounced she wanted to buy a mil­lion-dol­lar va­ca­tion home on Martha’s Vine­yard within the next ten years for cash, fi­nan­cial ad­vi­sor Lori Van Dusen didn’t flinch. The woman and her hus­band, then both fiftysome­thing sur­geons, were al­ready sock­ing away enough to main­tain their life­style in re­tire­ment. And Van Dusen, founder of LVW Ad­vi­sors in Pitts­ford, New York, ex­pects clients to share their goals, even those that might seem like a stretch.

That’s be­cause she man­ages her clients’ money (about

$2 bil­lion of it) in three in­vest­ment buck­ets: one for es­sen­tials (putting the kids through col­lege, main­tain­ing life­style in re­tire­ment), one for as­pi­ra­tions (that luxe va­ca­tion home or round-the-world trip), and one for legacy (phi­lan­thropy and be­quests). Martha’s Vine­yard was an “as­pi­ra­tion,” so Van Dusen started in­vest­ing the woman’s an­nual bonus in a port­fo­lio with a more ag­gres­sive as­set al­lo­ca­tion than the cou­ple’s ba­sic re­tire­ment kitty. The sur­geons were okay tak­ing the added risk, the ad­vi­sor says, be­cause “they knew even if the money was lost, it wouldn’t change their life­style.” Af­ter just six years, they had enough to buy the house.

Van Dusen, ranked 69th on our an­nual list of Amer­ica’s Top Wealth Ad­vi­sors, has prac­ticed this sort of goals-based wealth man­age­ment for three decades, mak­ing her an out­lier. For most of those years, the con­ven­tional ap­proach was to de­ter­mine a client’s over­all risk tol­er­ance (based on an­swers to a ques­tion­naire, age and to­tal wealth) and then man­age all their money as one di­ver­si­fied port­fo­lio, de­signed in line with mod­ern port­fo­lio the­ory to max­i­mize re­turns for that level of risk. Ad­vi­sors might help clients bud­get for goals, but it was a sep­a­rate func­tion.

Now, how­ever, big firms such as UBS, Ray­mond James and Bank of Amer­ica’s Mer­rill Lynch are push­ing their ad­vi­sors to adopt some vari­ant of Van Dusen’s goals-cen­tric in­vest­ing ap­proach. This shift has a lot to do with eco­nomics—both the eco­nomics of the ad­vice busi­ness and the grow­ing in­flu­ence of be­hav­ioral sci­ence on fi­nance.

Aca­demics such as Richard Thaler, who won last year’s No­bel prize in eco­nomics, have per­sua­sively de­scribed how “men­tal ac­count­ing” leads peo­ple to re­gard money dif­fer­ently depend­ing on what it’s to be used for. They’ve also ex­plained how hu­man ten­den­cies (e.g., hind­sight bias, loss aver­sion) lead too many in­vestors to buy at the top and sell at the bot­tom.

“If the mar­ket co­op­er­ates, you get wishes. If it doesn’t, we pull back to needs.”

One ob­jec­tive of goals-based in­vest­ing is to min­i­mize mis­takes such as panic sell­ing. Thaler, a pro­fes­sor at the Univer­sity of Chicago’s Booth School of Busi­ness, ar­gues that match­ing clients to a port­fo­lio through a tra­di­tional risk-tol­er­ance ques­tion­naire just doesn’t ac­com­plish that. “Peo­ple do not know their risk tol­er­ance. They can­not pre­dict how they will re­act to some­thing like the fi­nan­cial cri­sis,’’ he told Forbes. But Thaler adds this cau­tion: “Goals-based in­vest­ing is eas­ier to say than to im­ple­ment.”

In­deed, fi­nan­cial ad­vi­sors might not be so keen to adopt goals-based in­vest­ing were it not for in­creased pres­sure to jus­tify fees av­er­ag­ing 1% of as­sets a year. Tra­di­tion­ally, they’ve pointed to their port­fo­lio con­struc­tion and stock­pick­ing skills. But in­dex funds have over­shad­owed stock pick­ing, and in­di­vid­u­als can now get pro­fes­sion­ally con­structed port­fo­lios match­ing their de­sired risk level (or, al­ter­na­tively, their goals) from robo-ad­vi­sors for just 0.25% of as­sets a year. To earn their keep now, ad­vi­sors must of­fer a more per­son­al­ized, high-touch ap­proach.

“If you can tell peo­ple, ‘I’m work­ing to reach your goals,’ it’s more un­der­stand­able than if you say, ‘Your port­fo­lio has an ex­pected re­turn of 10% and a stan­dard de­vi­a­tion of 20%,’ ’’ says San­jiv Das, a fi­nance pro­fes­sor at Santa Clara Univer­sity. He ar­gues that goals-based money man­age­ment is com­pat­i­ble with tra­di­tional risk-based as­set al­lo­ca­tion—if risk is re­de­fined as the chance of not meet­ing a goal. In this con­struct, the ap­pro­pri­ate level of risk varies by goal, since a typ­i­cal in­vestor will ac­cept only a very small chance of fall­ing short of fund­ing ba­sic re­tire­ment needs but opt for a higher level of risk and re­turn when reach­ing for a dream.

Jeff Har­ring, a plan­ner in St. Peters­burg, Florida, uses Ray­mond James soft­ware to cre­ate sep­a­rate port­fo­lios for clients’ needs, wants and wishes. “If the mar­ket co­op­er­ates, you get wishes. If it doesn’t, we pull back to needs,’’ he says.

Not all vet­eran ad­vi­sors buy into the goals-based par­a­digm. “Our job is to make you as much money as we can in a given pe­riod rather than plan­ning for spe­cific events,’’ says Stephan Cas­sa­day, who man­ages $2.8 bil­lion at his firm in McLean, Vir­ginia. He of­fers clients a choice of six port­fo­lios, each with its own risk, and helps them de­cide on the right fit. A prob­lem with fo­cus­ing on goals, Cas­sa­day says, is that they change. “I’ve never met some­one who knows ex­actly what house they want in 30 years.”

In fact, be­hav­ioral econ­o­mists agree that folks don’t know what they’ll want in 30 years. “Most young peo­ple can­not even imag­ine be­ing old, much less think­ing about what fi­nan­cial needs they would have. So it makes sense to form goals in stages,’’ Thaler says.

It’s not just age. Life hap­pens. Dana Han­son, who man­ages $870 mil­lion at RZH Ad­vi­sors in Stam­ford, Con­necti­cut, with a goals-based ap­proach, re­ports that one client, upon fin­ish­ing chemo­ther­apy, an­nounced that she wanted to buy a va­ca­tion house in the Caribbean.

Yet the fact that goals change is part of the rea­son ad­vi­sors are em­brac­ing the ap­proach. If a client needs to re­port when her dreams or cir­cum­stances change, well, that builds a re­la­tion­ship you can’t get from a robo-ad­vi­sor.

Other fac­tors, too, are en­cour­ag­ing a shift. The pro­lif­er­a­tion of spe­cial tax­fa­vored ac­counts—529s for col­lege; IRAs and 401(k)s for re­tire­ment; dono­rad­vised funds for char­i­ta­ble giv­ing—pro­motes seg­re­ga­tion of in­vest­ments based

on in­tended use. And to­day’s com­put­er­ized as­set al­lo­ca­tion makes it easy to man­age mul­ti­ple in­vest­ment pots.

Ex­actly how goals-based wealth man­age­ment works varies by firm. This year UBS rolled out to its 7,000 ad­vi­sors a plat­form that draws on both be­hav­ioral fi­nance and li­a­bil­ity-driven in­vest­ing—the tech­nique pen­sion-fund man­agers use to match pools of money with li­a­bil­i­ties due at dif­fer­ent dates. The soft­ware com­bines plan­ning and money man­age­ment into three “strate­gies”: liq­uid­ity, longevity and legacy.

For a re­tiree, the liq­uid­ity pool cov­ers three years of spend­ing, funded with a bond lad­der, in ad­di­tion to So­cial Se­cu­rity, pen­sions and an­nu­ities. (The idea is to pro­tect clients from need­ing or want­ing to sell off equities in a bear mar­ket.) The longevity bucket in­cludes stocks and is de­signed to cover ex­penses, in­clud­ing long-term care, that come due af­ter three years, un­til the end of life. The legacy strat­egy, for char­ity and heirs, might in­clude an even more ag­gres­sive equities port­fo­lio, plus a donor-ad­vised fund and con­cen­trated ap­pre­ci­ated-stock po­si­tions that make sense (for tax rea­sons) to hold un­til death.

Note that both UBS and Van Dusen em­pha­size “legacy.” Very-high-net­worth clients of­ten want to give money away, but only once they’re sure they have enough left for their own needs.

A widow in her mid-50s, with a $30 mil­lion net worth, came to Katie Nixon, chief in­vest­ment of­fi­cer of North­ern Trust Wealth Man­age­ment in Chicago, for ad­vice. Her es­tate plan pro­vided $5 mil­lion for a pri­vate foun­da­tion her daugh­ters would run. “She told me, ‘The only thing I re­gret is I won’t be there to see it,’ ” Nixon re­counts. “I told her, ‘That’s the worst plan I’ve heard of. Why don’t you do it in your life­time?’ ” Us­ing North­ern Trust’s goals-based soft­ware, Nixon was able to show the widow how she could cover liv­ing ex­penses and her other non­char­i­ta­ble goals for the rest of her life and fund her foun­da­tion now.

LVW Ad­vi­sors’ Lori Van Dusen at her home in Pitts­ford, New York, amid her own goals: a grow­ing col­lec­tion of mod­ern art, in­clud­ing Josef Al­bers’ “Mitered Squares.”

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