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, nancial advisor Lori Van Dusen didn’t inch. e woman and her husband, then both ysomething 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.
at’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. e 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.” A er 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 diversi ed 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 rms 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. is shi has a lot to do with economics—both the economics of the advice business and the growing in uence of behavioral science on nance.
Academics such as Richard aler, who won last year’s Nobel prize in economics, have persuasively described how “mental accounting” leads people to regard money di erently depending on what it’s to be used for. ey’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.
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 rm.
is year UBS rolled out to its 7,000 advisors a platform that draws on both behavioral nance and liability-driven investing—the technique pension-fund managers use to match pools of money with liabilities due at di erent dates. e so ware 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 o en want to give money away, but only once they’re sure they have enough le 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.
AMERICA’STOP 250 WEALTH ADVISORSA record bull market has most investors smiling today. But when the tide turns, America’s Top Wealth Advisors will lean on relationships and innovative strategies like goals-based management to hold on to assets. Below are 100 of America’s Top 250 Wealth Advisors. For the full list, go to www.forbes.com/topwealth-advisors.