Wealth Management 101: A Primer
Keep in mind these “Four Pillars” to ensure long-term success for you — and your family
A quick review of Wikipedia defines wealth management as “an investment advisory discipline that incorporates financial planning, investment portfolio management, and a number of aggregated financial services”.
Sounds great, but what does that actually mean for you and me when we think about our “wealth” and how to grow it?
At its core, wealth management is about the preservation and enhancement of four types of capital: financial, human, intellectual, and temporal.
- Financial capital: first in your minds is probably this core Pillar, and you would be right to focus on it: it’s your tangible and intangible valuables (“assets”) such as cash, your owned home, stocks and bonds, brands, and even the gold jewellery that you wear daily. What wealth managers do is to attempt to preserve your financial capital (which means they look to invest it and, importantly, not to lose over time what you initially put into the investment) and to help you earn a “return” which, simply, is the amount earned above and beyond the initial investment. At the end of the day, a wealth manager takes into consideration a variety of factors to help you maximise the returns on your financial capital through careful selection of various investments with different risk/return/maturity profiles. This integral Pillar is all about dollars and cents and financial security, and the wealth manager succeeds, basically, if they help you ensure you have enough money for your entire lifetime — hopefully with some left over for your heirs or other types of beneficiaries, like charities or universities (i.e. scholarships or grants). Some key concepts for the “portfolio management” of your financial capital are diversification, low correlation among assets, growth vs. income / liquidity constraints, among others, and are typically guided by a professional wealth manager’s written “Investment Policy Statement” for the client which guides any and all investment activities to be undertaken on behalf of the clients and their family.
- Human capital: where financial capital is strictly quantitative, the rest of the Four Pillars are highly qualitative in nature. Your human capital, for instance, is the entirety of “you” — your personal and professional experiences, your family history, your educational background, the skills and abilities and perspectives that make you attractive to a prospective employer, even the places you’ve visited and experienced over your lifetime. Are you an amazing auto mechanic? Do you excel at public speaking? Skilled code writer? Concert pianist? Was your grandfather the US Ambassador to Turkey? Believe it or not, these kinds of data can and do figure into your human capital because they are the things that make you “a valued you”! In short, they are the sum total of the qualities and experiences that translate into your potential and actual contributions as a member of society. While rarely stated blatantly in any official wealth manager job description, such a qualified individual/firm would act “behind the scenes” to advance the human capital of your family members and you in many tangible ways, such as working with your children on financial literacy or preparing them for college. While extremely difficult to measure when compared to analysing financial capital, working closely with an experienced wealth advisor on short and long-term individual and familial goals (i.e. “governance”), for instance, could prove quite helpful in enhancing tangibly this second Pillar.
- Intellectual capital: the one Pillar regarding “you” which isn’t covered under human capital is the intellectual one, namely your mental horsepower, your “brains”. How smart are you, really? Can you calculate the square root of 1,204,493,909 in your head in under a minute? How healthy are you mentally? Do you have an eidetic memory? How do you perform in school and in standardised tests? Are you “street smart” and loaded with common sense? Do you function well cognitively? Can you assimilate large quantities of information to detect valuable patterns and then make important decisions based on such distillations? While we can only dream of a wealth manager physically enhancing our brains to augment our intellect (a la “Flowers for Algernon”) the significant resources and institutional knowledge of an entrenched financial services firm which has been around for a while can act as a “surrogate brain” which helps you to make better and smarter decisions regarding your money and major decisions in life.
- Temporal capital: “The common man is not concerned about the passage of time, the man of talent is driven by it.” -Shoppenhauer. Where financial capital is all about “money” and human and intellectual capital are all about “you,” temporal capital is all about your “time” and how you “spend” it. Financial, human, and intellectual capital facilitate our productive use of temporal capital. How efficient in achieving goals are you throughout your work day? Do you successfully accomplish your daily, weekly, and yearly milestones? How well-functioning are your personal, professional,governmental, and familial support structures? Do you “work hard and work smart”? Do you have enough financial capital to hire enough people and technology to perform tasks which allow you to focus on the most valuable uses of your own time? How is your overall physical and mental health, and are there any problems which act as an impediment to the healthy use of your time? How focused and how good are you at identifying and eliminating time-wasting interactions and processes? Do you have enough “time” to recreate deeply and healthily? While classic wealth management has previously incorporated the first Three Pillars, it would be derelict not to include the most precious resource any of us have into the study of wealth management — that of time itself. While a capable wealth manager can certainly enhance your temporal capital by performing expertly many tasks that you would otherwise have to do yourself, as well as by enhancing indirectly your own “temporal efficiencies,” there is a quick and easy personal tool for managing directly your temporal capital. It involves estimating a monetary value of your time, on an hourly basis, and then deciding on how to use that time to result in net-beneficial outcomes (the value of which would exceed that hourly estimate “benchmark”). For instance, if you value your hourly time at $75, then attempt to engage in tasks that will most likely result in you “earning” greater than $75 for that hour spent. While not a hard-and-fast rule for each and every hour of one’s life, you will be amazed at how you begin to think about the reality of temporal capital once when you place a monetary value on it!
Incorporating the Four Pillars when contemplating your current and future wealth will help you to understand how you judge your successes in life and to be better equipped at managing your financial and personal assets for the maximum benefit of your family and you.
In doing so, you will come to understand that the concept of “wealth” is much more than just a financial term — but one that takes into consideration your income, investments, family history, skills, abilities, professional experiences, goals, and, of course, perhaps the most cherished asset of all — time.
So, whether you “go it alone” or choose a professional wealth manager to handle and nourish your various forms of capital, always keep in mind that wealth management is so significantly intricate, complex,all-encompassing, and vital to your family’s and your future that the decisions on how to administer the Four Pillars are some of the most important you will ever make—now and for generations to come.
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