Why investing should be the last thing a wealth adviser does

Since I started in this business (a long time ago….), it has always had the ability to do two things. First, capture a lot of attention, and especially when something big is going on. Right now is almost a perfect example – the tech and AI booms have us all in a bit of a rapture either because you’re in and it scares the hell out of you that markets might collapse, or because you’re not in and you have history’s greatest case of FOMO (that’s "fear of missing out", for the luddites).

The second thing the finance business has an amazing ability to do is to get involved in every aspect of people’s lives. The "financialisation" of everything is quite remarkable – even air travel has become a standard tool of credit card companies to get flyers to engage in the finance business.

The continual innovation in the finance business is part of the reason home prices rose so much, part of the reason for annual credit card fees, part of the reason the engagement of women in the workplace has risen so sharply, part of the reason that superannuation has survived so long.

We could write an entire piece on each of those things, but the point is this – in spite of how omnipresent finance is, and capital markets are, to so many people’s lives, it should be the last thing private client investors think about when they’re crafting portfolios.

That’s right – when you’re thinking through the build-out of your private client investing portfolio, the last thing you should think about is actual investing.

Allow me to demonstrate.

When building a private client investment portfolio, you really should start with the end in mind. The portfolio is the outcome, not the goal. This is why I’ve always been so confused by stockbroking as a business – if the portfolio you’re building isn’t in pursuit of a plan, how is it not just flat-out gambling??

That’s because buying stocks willy-nilly solely because someone else tells you they like those stocks is gambling. Investing, when done properly, is not gambling. Not even close.

But back to investing for private clients – how does it make sense that the actual investing part is the last thing to think about? That’s because, again, the portfolio is the output, not the input. In no particular order, the inputs are as follows:

LIQUIDITY – if your personal balance sheet is full of commercial real estate, or full of private loan deals, or full of creditor arrangements that you’ve made off-market, the last thing you need is to have a portfolio built by someone like me that directs capital to private equity, or to venture capital, or to illiquid parts of the capital markets like hedge funds, or maybe even to private credit.

The value of liquidity to a private client is only ever one of two numbers – it’s either 0% or 100%. You either don’t need liquidity, or you need it yesterday. That being the case, liquidity matters, liquidity has a price, and as an investor, you should be willing to pay that price. Because when it matters to you, it’s going to really matter.

INCOME AND SPENDING – I am too often gob-smacked by how often I see “financial plans” being built with little-to-no regard for income and spending. If your current income is sustainable and it covers your current day-to-day spending, that elongates your “risk runway”. Your risk runway is how far out in the future you need to start paring back your risk positions, or at least starting to think about it. The longer that runway, the longer you can (prudently) be tilted into growth to make sure that whenever you dial your growth and your risk down, there’s as much capital there as (prudently) possible.

RISK TOLERANCE – pretty standard, right?? But what does it mean. Does it mean you love real estate? Does it mean you have your age in bonds? Are you a natural sceptic, or pessimist even?

Well, everyone gets to define it however they want but if you asked me, risk tolerance is mostly about when you need the money. Next month’s rent is in cash, zero risk tolerance. Your superannuation, that’s in the share market, much more risk tolerance.

But it is critical to get this right, however you want to gauge it, before you start talking about investing ideas.

LIFE GOALS – are you trying to grow your assets into the biggest pool humanly possible? Or would you prefer your assets simply sustain you until the good Lord takes you from us? Or is it something in the middle?

There’s a chance that this is actually the central question from which all of the other questions (and answers) stem. This is the question you can’t fudge the answer on – have a firm answer.

LEGACY GOALS – if you don’t have kids, do you have other legacy ideas? Maybe charity, or maybe other family members? This is similar but different to life goals in that it is the end result of all of the answers, as opposed to the central theme that builds the portfolio.

THE REST OF YOUR BALANCE SHEET – this is critical, or it should be at least. Diversification is one of the few free lunches in (investing) life. Ignoring what might be the biggest asset in someone’s stable just because you don’t see it, or control it, is a massive mistake. For example, if a client walks into a wealth manager’s office and says they have $3 million for someone to manage, there is often a solution that gets discussed around asset allocation. 

Sounds good, right? Not always – one of the first questions should be, what else is in your balance sheet? If it turns out that this client runs a significant real estate business, it’s probably not a good idea to buy real estate with the $3 million they just gave you. Or if they have a large and concentrated in position in Google, or in BHP, or in Coca-Cola, you should probably look to avoid tech, or mining, or consumer goods in the portfolio you build.

To conclude, that’s a lot of steps to go through, and it delays the deployment of your new client’s capital. Which delays your earning of fees if you're an adviser. But it is the right thing to do for the client because when new clients come to your office, often with their life’s work, and ask you to be the steward of that life’s work, it isn’t about the adviser, and it isn’t about your firm, and it isn’t about markets, and it isn’t about the finance business – it is solely about that client, their family, and their goals.

Then you craft an investment portfolio. Not before.

Good luck out there.