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How a financial advisor can help create and preserve wealth

However, you cannot expect your financial advisor to be the purveyor of miracles.

I’ve engaged with many clients over my many years as a Wealth Manager with NFB Private Wealth Management and these discussions often include, especially when it’s a potential or new client, a chat around expected returns. A wealth manager’s role in our view is not so much as to create wealth but rather to preserve it.

A concept that goes hand-in-hand with this is that often your private business can deliver, on average, a long-term return higher than the market but this comes with a very different risk and liquidity profile as well an outcome that is far more binary (succeed or fail) than a diversified investment portfolio. It is, for this reason, that we suggest that business owners’ diversify away from their own business. You just never know what will happen. 

There a few thoughts that follow on from my introduction:

Wealth preservation does not mean that you make no return; in fact, it entails pursuing a return which is at least equal, but preferably and most likely in excess, to inflation. Your probable return above inflation will be shaped by your risk piffle which, in turn, has its drivers. A return above inflation ensures that you keep the purchasing power of your savings. Said another way, your baseline outcome should be like maintaining and hopefully growing the real (inflation-adjusted) value of your investments.

If you have not saved enough money, then no matter how skilled your financial advisor is or how low your costs are it is unfortunately highly likely you will never have enough money as you would need or like. It’s very important to be realistic about the purchasing power of your capital at retirement; what may seem like a big lump sum may not deliver as high an income as you would like. This also supports the idea of starting to save as early as you can and as much as you can.

So, how can a financial advisor help you create wealth?

During your career: It is important to know how much you need to save to reach your financial goals. These goals can include short, medium- and long-term objectives. A financial advisor can work out how much you need to save and where to save whilst taking into account liquidity, tax and risk. Any projections that someone does for you are, perhaps stating the obvious, hypothetical and come with a few health warnings:

  • Most calculators assume linear returns which pretty much never happens (sequencing risk).
  • Rather err towards inputting returns on the lower end of your expectations.
  • Increasing or decreasing your inflation and return expectations over a period has a significant impact on the outcome.

At retirement: After you’ve spent a good chunk of your life working you are unlikely to be able to recreate your wealth. At this point, your advisor should guide towards a plan that:

  • Doesn’t put your capital at an excessive or unnecessary risk;
  • Caters for a sustainable income taking in to account your probable ad-hoc requirements and importantly for the unlikely (which somehow often ends up happening); and
  • Considers your generational wealth ambitions.

During retirement: Your retirement plan should fit at the time you retire but from thereon ‘life happens’. Regular meetings with your advisor are central to being able to take stock of the prevailing market, tax and regulatory environment, and importantly, your changing personal circumstances.

My article has until now homed in on the savings aspect of wealth creation and preservation. The concept of wealth creation and preservation goes beyond just the value of your investments:

Disability: If you are partially or permanently disabled during your working life you have unexpectedly ended your ability to earn and save. A thirty-year-old who’s earning R1m a year will – assuming a 6% growth in income per annum – earn R118m over their 35-year working career (R15m in present value terms). Nobody expects anything to happen to them, but you need to make sure you are covered for any unplanned loss in income because of disability or ill health, and that this will not stop your wealth creation ambitions. Income protection and severe illness cover tend to be grudge payments but they are very important.

Death: I recall reading that JP Morgan, the founder of the well-known company, lost a significant amount of his wealth on death because of bad planning. For some of us, wealth creation and preservation are focussed on the now, but for others, the focus is on the generational continuity of accumulated wealth. Appropriate planning from a financial advisor can optimise the tax position of your estate and ensure you have enough liquidity to meet your obligations. This planning manifests in:

  • An appropriate blend of investment products;
  • Sufficient life cover if it is necessary; and
  • A Will or Wills that are congruent with your wishes and prevailing legislation.

I’ve tried to outline the important role that a financial advisor can play in your financial wellness, and amongst other things, guide you towards wealth creation and preservation. What I have also tried to convey is that the process is not something that you can abdicate, and you cannot expect your financial advisor to be the purveyor of miracles. Wealth creation starts with you but will be amplified, simplified and solidified by engaging a good financial advisor.

Good luck!

ADVISOR PROFILE

Stephen Katzenellenbogen

NFB Private Wealth Management

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