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7 Principles of Comprehensive Wealth Management
From reducing internal expenses to rebalancing, here are effective ways to manage your wealth
By Matt Camrud, CFP ® Lead Advisor, Brighton Jones February 9, 2015
This post is sponsored.
Sponsored by Brighton Jones
The decision to hire a professional — whether for something simple like painting a house, or a legal issue — requires consumers to consider two main factors: cost and value. Cost is straightforward and determined by price. Value is subjective and involves both quantitative and qualitative measures.
For instance, what is the value of letting someone else navigate tall ladders and tight spaces in order to get the house painted?
For those considering the services of a financial advisor, evaluating both cost and value is important. Will the value received justify the fees? Will the advisor’s investment performance exceed what could be achieved without an advisor?
The term “wealth management” has become ubiquitous in the advisory world. Many financial advisors assert that they provide wealth management, but very few advisors have the in-house expertise and experience to do it well. For 15 years, Brighton Jones has implemented 7 principles of wealth management to provide Wealth Management Alpha for advisory clients.
WHAT IS WEALTH MANAGEMENT ALPHA?
Alpha refers to the excess return beyond what the market would otherwise provide. If the S&P 500 returns 10%, and Mutual Fund XYZ returns 11%, this 1% excess return is sometimes referred to as the “alpha.”
Vanguard researched what they describe as “Advisor’s Alpha,” and break down how these 7 principles contribute value over time:
Vanguard’s research suggests that the potential annualized value-add, on average, of working with an advisor like Brighton Jones is around 3%. This number will vary for each individual client, and the value-add will ebb and flow year-by-year based on circumstances, but over time, Vanguard’s research suggests that this value is persistent and meaningful.
THE 7 PRINCIPLES
If cost and value are the two primary factors involved in hiring a professional, the framework above provides a clearer sense of the value of an advisory relationship. But what do these terms mean, and how do we get from Advisor’s Alpha, which Vanguard has quantified, to Wealth Management Alpha?
The key is understanding the context behind each principle and the many additional sources of value that Wealth Management Alpha provides for Brighton Jones’ advisory clients:
- Asset Allocation and Broad Diversification: Academic research has repeatedly shown that effective diversification is as close to a “free lunch” that one can find in the world of investing. By owning asset classes that are not highly correlated over the long-term, portfolio risk can be reduced significantly without giving up material expected return.
- Reduced Internal Expenses: Relationships with institutional money managers give clients access to institutional share classes that are not always accessible to retail investors. These share classes provide substantially lower internal expenses relative to category averages.
- Rebalancing: A disciplined, systematic approach to rebalancing the portfolio ensures a more consistent level of risk over time. Regular rebalancing pares down positions that have over-performed and adds money to positions that have under-performed, a de facto form of selling high and buying low.
- Behavioral Coaching: An intelligent approach to investing cannot be successful without a barrier of sorts between the investor’s emotion and their long-term investment strategy. Multiple and repeated studies demonstrate that individual investors’ returns lag the returns freely offered by the market, with the primary source of this underperformance attributable to emotion-based decisions at inopportune times (e.g. giving up on stocks during the height of the credit crisis). An advisor can coach clients to remain disciplined.
- Asset Location: Brighton Jones portfolios employ a variety of asset classes, and some are more tax efficient than others. For clients with a mix of after-tax and tax-deferred assets, we employ strategic asset location to ensure that the less tax efficient asset classes are held in tax-deferred accounts (where they are shielded from current taxation). This exercise improves the after tax rate of return generated by the portfolio.
- Spending Strategy and Withdrawal Order: When funds are needed from a portfolio, where should they come from and in what order? In the absence of professional guidance, many might make sub-optimal decisions with respect to what asset classes are best suited for cash needs and what mix of accounts (after-tax vs. tax-deferred) should supply these cash needs. Brighton Jones provides a clear framework for these decisions, resulting in a more optimal portfolio spending strategy.
- Total Return vs. Income Investing: Individual investors often embrace the misguided view that one should only spend the “income” generated by a portfolio. In a low-yielding environment, this approach can be particularly detrimental to portfolio construction and volatility. When yields are low, individuals might over-weight long-term bonds, high-yield bonds, and stocks with above-average dividends. Although doing so might increase portfolio income, it has the unintended consequence of increasing interest rate risk, credit risk and sector overexposure. By embracing a total return approach, these risks are mitigated and clients understand that cash flow can be generated from multiple sources, including capital gains.
WEATLH MANAGEMENT ALPHA AND BRIGHTON JONES
In addition to these 7 principles, Brighton Jones provides counsel and expertise in the areas of tax planning, estate planning, retirement modeling, risk management, and philanthropic strategies. When combined with the 7 principles, the power of Wealth Management Alpha is real, both quantitatively and qualitatively. By working with Brighton Jones’ objective and independent team of experts, clients receive incremental economic value that compounds over time creating measurable long-term alpha. And clients gain peace of mind knowing their advisor has the expertise to be their advocate in all important areas of comprehensive financial planning.
Brighton Jones has been providing this level of integrated advice for nearly 15 years, and with a team of JDs, CPAs, CFPs and CFAs, we have the in-house expertise to create meaningful, measurable Wealth Management Alpha™ for our many valued clients.
 Francis M. Kinniry Jr., CFA, Colleen M. Jaconetti, CPA, CFP®, Michael A. DiJoseph, CFA, and Yan Zilbering. Putting a value on your value: Quantifying Vanguard Advisor’s Alpha. Vanguard Research March 2014
 Potential value-added is not a simple sum as there can be interactions between strategies.
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