Quarterly Newsletter 3Q 2018
July 15, 2018
What does financial independence mean to you? Turns out that if you can identify your financial objectives (and we can help you do this), a healthier outcome is on the horizon. #financialadvisory #financialobjectives #cwcculture #chrisweil #wealthaddiction #advisoryrelationship #howmuchisenough
Money is a good servant but a bad master.
If we assume that there is such a thing as a healthy way to live (a sensible assumption, it seems to me), then it makes perfect sense to avoid addictive behavior and, if caught up in an addiction, seek by whatever means to free oneself from its grip. For however addiction may manifest itself, it inevitably compromises, and always painfully, what we understand to be a healthy way of life.
This is obviously not new news. Nor is it news that people can become, for example, addicted to work. (Who has not known a dedicated “workaholic”?) But what is new, at least for some, is the idea that wealth accumulation itself can become an addiction.
When it comes to a deep understanding of addiction, I am an amateur (as are most of us). But while we may not understand its various technical descriptions and definitions ... with addiction -- as Supreme Court Justice Potter Stewart famously said of pornography -- we know it when we see it. And we know how destructive, how fundamentally unhealthy, any addiction can be to the addict, his or her family, friends, co- workers and community.
I know, from personal experience, how pleasant it is to make money. I know, from personal experience, that most people feel pleasure from making money. I also know that most people are not addicted to money making and wealth accumulation. I know that whatever pleasure they may feel about these matters has not been translated into the compulsive behavior characteristic of an addiction. Nevertheless, I believe the issue of wealth addiction is worth a discussion. The sociologist (and playwright) Philip Slater described “wealth addiction” in his 1980 book of that name, but the malady has generally received little attention in the literature on addiction since then. Nonetheless, it seems to me wealth addiction has, like any addiction, the potential to manifest with anyone at any time, waiting, so to speak, in the wings. And perhaps it should be, as it is not, a component of any wealth management/financial advisory discussion, taking its place with concerns about investments, estate planning, risk management, philanthropy, tax planning and the
rest. There are all too many examples of families fractured by disputes over wealth, including claims that certain family members are being short-changed (that is, not receiving “enough” where “enough” means “as much as I can get”).
So then, how to begin?
One good way “in” is to ask the question “how much money is enough” and see what follows.
It has been said, by people who should know better, that you can never be too rich or too thin. It is obvious that you can be too thin but I suspect there would be a lot of controversy as to whether you can be too rich. For those who believe there is no “enough” when it comes to wealth, it seems to me that they could be right, or wrong, depending on the answer to a more fundamental question: “What is the intention behind your open-ended accumulation of wealth?” There may be good reasons for “never enough” and, if so, “never enough” may well be justified.
I can imagine a Bill Gates saying that there is no such thing as "enough money" because the needs that he, and other philanthropists, are dealing with are so massive that even a doubling or tripling or quadrupling of the amounts of money now available for philanthropic use wouldn’t come close to resolving the health, poverty, food security and related matters that concern them. We would probably all agree (I certainly would) that this is an example where “you can never be too rich” makes sense.
Bill Gates is an extreme example. There are thousands of people of much more modest means who would argue that there is no such thing as enough because, to the extent they were able to accumulate an uncapped “more,” they would simply increase their gifting.
Then there are the cases (statistically rare, but highly publicized) of people (entertainers, athletes, writers, inventors, entrepreneurs, etc.) who are showered with money as the result of what amounts to the monetization of large-scale public acceptance of who they are and what they do. (Think, for example, of the authors of the Harry Potter and Game of Thrones franchises, the salaries of star athletes, the stock and option holdings of founders of successful companies, and so on.) In these cases, wealth accumulation is more often a by-product of their vocational activities and is capped only by stopping the activities. And even then, there may be no stopping the money machine. At “retirement,” existing capital (stocks, real estate, royalty income and so on) may themselves continue to grow over time, and there may be no particular reason (or for that matter, realistic method) for capping the growth.
There is also the case of a wealthy family with an abundance of heirs and beneficiaries. What is for the patriarch and matriarch a material amount of wealth turns out to be much diminished when allocated to the accounts of the numerous children, grandchildren and other heirs. A desire to increase the share of each of those who are the ultimate recipients of family wealth strikes me as a good reason to “uncap” the upside and argue that more is better.
More controversially, suppose we hear that you can’t be too rich from someone who is politically active and knows that there is (usually) a correlation between the amount of money spent on a political campaign and its success. It is generally assumed (and with sound basis) that, in elections, the candidate or issue that commands the most financial resources has the best shot at winning. Someone may well defend the idea that there is no such thing as enough if he or she intends to use open-ended wealth accumulation to finance candidates and issues of choice and expects that the more money accumulated, and therefore spent, the more successes he or she will enjoy.
In these examples (and there are many more) defensible arguments exist (whether you agree with them or not) for never being too rich. But these, you will note, involve explicit intentions - which could also include the happy financial consequence of vocational skill, brains, determination and (often) luck. But what of the far more numerous cases of those people where there is just a feeling that, when it comes to wealth, there cannot be enough?
It turns out that in many such cases, what people are really feeling is not that there is no such thing as enough, but because they are in a state of financial insecurity in their own lives and have no idea what the amount of additional wealth may be needed to cure the problem. So “no idea” turns out to mean “never enough.” It turns out, as well, that individual or family financial insecurity is almost always “partnered” with some unrealistic “plan” (in the most generous sense of the term) as to how this is to be dealt with, as well as unrealistic expectations as to what is possible to achieve. If and when a realistic plan for economic independence is undertaken, the sense that open-ended accumulation of wealth recedes.
This is true in many cases but not all. A powerful sense that there is no such thing as enough is resident in millions of people, across the wealth spectrum, from those who spend some of what little money they have on lottery tickets and at casinos to those who have huge wealth and continue to take big shots on venture capital opportunities and speculative stocks.
So, what does this all have to do with our business and the people we represent?
Even in an “affluent society” there will be people who will never accumulate any material wealth. I don’t know how big a cohort this amounts to, and I only know in the abstract how the problem is to be addressed (education, expanded employment opportunities, government programs, etc.). For better or worse, however, this cohort is not the “market” for firms such as ours. Nor, as a general rule, is another cohort of people consisting of those who can ultimately achieve some degree of financial sufficiency rather than financial independence. These are people who live pretty much from paycheck to paycheck but manage to build up retirement income sources (social security, realized home equity, IRA’s and 401(k)’s, some personal savings) that will allow them to live in retirement with some degree of financial security but generally at incomes less than they enjoyed during their working years.
By contrast, the people with whom we do business are members of two other cohorts: those who are on the road to financial independence (as contrasted with mere “sufficiency”) and those already financially independent who seek to secure, and in some cases enhance, their wealth.
It is with members of these two cohorts that we know we can be most effective. And part of that effectiveness (and this brings me back to the issue of wealth addiction) has to do with the age-old question that virtually everyone in the financial services business (financial planners, brokers, investment advisors, insurance salespeople, et al.) asks to begin a prospective new client meeting: “What are your financial objectives?”
We recognize that this can be a far more subtle question than the person asked (and, often, the person doing the asking) usually realize. If thoughtful clients can arrive at reasonable accumulation targets that match their long-term goals, their prospects, their needs and their values, then thoughtful advisors should be able to better tie their advice and management to allocations and strategies that put the client on the “right” place on the risk spectrum. For many, it will become clear that slow and steady may well be the key to winning the race. For many, it will also then be clearer what behaviors need to change to get to the finish line. And the really interesting question then becomes, what to do when you reach the finish line (i.e., acquiring degrees, licenses or credentials, changing careers, changing spending habits). For some, the right move might be to ratchet back on the risk in their portfolios. Others might consider increasing the risk in their portfolios (or rather, for the portion that exceeds the accumulation goal). For those with a plan for the further amounts they may generate, this may be a source of satisfaction. For those who seek only accumulation for the sake of accumulation, it may be an indication of addictive behavior.
This can be an important discussion to have with one’s self or with one’s family. If spouses are involved, their objectives may be in conflict. Spouses may (and often do) mis-identify objectives. There may be potential objectives of which neither spouse is aware that, if identified, would serve their mutual best interests. There may be objectives that are unreasonable or even potentially unhealthy -- where, for example, there is an aspiration for “as much wealth as possible” for no reason except “more is better” (a hint that we may be in the presence of wealth addiction).
Because this discussion is so important, it is not uncommon for us to spend considerable time during an initial meeting talking through the question of objectives. It is not our place to “correct” the choices people make. It is our place to educate and make sure that the choices are both sensible in and of themselves and consistent with the needs of the client.
At the end of the day, the identification of objectives, whether we agree on not, is the client’s call. But, when appropriate, we do make it clear that the seeds of unhappiness are sown if a financial advisory plan is adopted where objectives are “wrong” or simply not grounded in a clear understanding of how much the client wants or needs to accumulate, and to what ends.
Download the 3Q 2018 Newsletter here.
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