Good advice often ends with zero money

Whilst we do this at Koda Capital every day, one thing the Australian "wealth management" industry, broadly, has done too little of is to demonstrate how we can help private clients with full-service wealth management. It goes far beyond portfolios, or investments, or global capital markets.

It should centre around making the financial lives of our clients better, less stressful, and more suited to their goals, tailored to those goals in fact. Instead, what we did in Australia, to a large degree, was to change the name of the job while keeping everything else the same.

Let me show you.

In the old days, young people joined stockbroking firms and were trained by senior brokers to become brokers, and then senior brokers. Later, superannuation delivers a wave of "managed funds", so instead of just ASX stocks, brokers started talking about those funds too. Then, a few years back, those exact same people at the exact same firms suddenly became "private wealth managers."

Same people, same firm, same training, same economics, same outcome. How did stockbrokers magically become wealth managers?

It’s because private wealth management became the “it” industry in finance, largely popularized by global giants like Morgan Stanley under Australian CEO James Gorman. He made a very deliberate shift towards reliable, fee-paying private clients to stabilize earnings and drive strong growth in Morgan Stanley stock. And it worked.

In Australia, however, our local industry wasn't quite as nimble. While the Royal Commission focused heavily on major banks, insurers, and super funds, the boutique stockbroking and private wealth sectors were largely spared. And because nothing broke, essentially nothing changed so stock selection, fund evaluation, and the broking around it remained common, in the hope that portfolios simply went up.

The big banks, mostly, sold their advice businesses so that’s where we have kind of settled. But we shouldn't have. Private client investors should demand more from their financial advisers - broad advice covering structures, tax, the role of super, family governance, legacy, goals, succession, and philanthropy. Not specialist advice, because that's what lawyers and accountants are for, but the ability to match a client situation to a solution that doesn't always have to be complex, but that requires professionals to tailor the solution.

Even basic retirement planning often misses the mark. Take a common scenario: if you’re a retiree with more money than you need, you should technically run out of money when you die. Sounds strange, right? Not at all.

Let’s look at a real-world example. Meet Barry (Generation 1, or G1), a 74-year-old retired finance professional with a 25-year horizon. His wife recently passed, dropping his living expenses to $125,000 per year for the next five years, scaling down to $100,000 thereafter as he travels less and spends more time locally with his two children (G2), and four grandchildren (G3). Barry owns his $4MM home outright, has $1.8 million in his SMSF, and he has $1.2 million outside of super, all of it sitting in a classic 60/40 portfolio.

This is where simple spreadsheets often fail because a 60/40 portfolio may average 8% annually these days, but it may also fluctuate wildly year-to-year, from -4% to +15%. Simple spreadsheets run the real risk of giving false signals about whether you will run out of money, and maybe more importantly, when that might happen.

That's called sequencing risk.

Proper planning tools usually tell a much more accurate story: Barry will likely make it with nearly $3.5 million left (at a 50% confidence level), and over $1 million left even at a 90% confidence level - plus his primary home. And we've very conservatively planned for him to live until 99.

This is where the concept of asset bucketing steps in.

Barry only needs $2.2 million in his personal spending bucket to feel 75% secure. He probably needs less than that, truthfully, but regardless, because he doesn’t need the rest for himself, he should split his assets into two buckets: one for him (that's the $2.2MM), and one for his kids (the remaining $800,000).

Rather than hoarding assets until his death, Barry should gift money to his children while they actually need it. G2 parents need financial support in their 30s, 40s, and 50s while raising G3 kids. They need help with home renovations, school fees, and cars. They don't an inheritance in their 60s when they are grieving their parents' death, their own kids are grown, and the windfall is potentially redundant.

In this model, Barry pays all of his bills, he can gift his kids $200,000 each today, another $250,000 each in five years, and still leave them his home, the remaining assets in their bucket, and any surplus in his bucket. He gifts his kids almost $1 million during his life, and still leaves them literally millions of dollars.

Critics might argue Barry could have left his kids $4 million (plus his home) if he’d hung onto it until death, instead of leaving just $1.4 million (plus his home). But by then, the money arrives way too late to matter. Instead, Barry got to see his children and grandchildren thrive, travelled with them, and helped them when it truly counted.

Importantly, he allocated the assets in his kids' bucket more aggressively - maybe 80/20, with their timeframe in mind - and then allocated assets in his bucket more like 50/50, to match his needs. The kids' assets grew much faster than his assets, and it didn't impact his lifestyle one bit.

In fact, if the planning model does a good job, Barry dies with near-zero in his bucket.

And as an industry, we should have told you all of this ages ago.

Retirees need to have the conversation around their assets being better structured, better allocated, and better performing. It's of little value to flush your G2 kids with cash precisely when they don't need it. Sheesh, they're hardly kids - they'll be in their 60s.

Good luck out there.