By Dr. Shantha Yahanpath
MANAGERS should not only do planning for their companies but also plan for their own total wealth plans (www.totalwealth.lk). Some managers spend a life time planning for their companies, but not for themselves and their families.
While wealth management has been marketed as a total solution, it still focuses on financial aspects of “wealth”. It does not bring out the “total needs” of an individual and then plan for the financial aspects accordingly. It is life planning based on total wealth planning that ultimately drives wealth and career success.
Let’s look at the extreme. Take, for example, a person who has worked all his life in trying conditions at the cost of family or health. Are these not so common scenarios? Real success cannot be measured by money alone. We should ensure that our success contributes to our total wealth.
There is a difference between achievement and satisfying achievement. One might not find satisfying achievement in creating only “financial wealth”. On the contrary “donating wealth” could also become a key contributor to satisfying achievement as some tycoons have proved recently.
The latest to join the wave of “donating wealth” or philanthropy is the 26-year-old Facebook founder, Zuckerburg. He has essentially followed the footsteps of Bill Gates.
The benefit (utility) of giving is often not fully understood.
Supporting finance theory
The Preference Theory and Utility Theory are not new. We have used them in financial evaluation of investments but we have hardly used them in making investments in our own lives.
Value at Risk (VAR) is also used mainly in the finance sector to identify the likelihood of bad outcomes. VAR looks at the magnitude of the bad outcomes that can occur with a specified probability within a defined time interval. But how many managers would have used these to evaluate the likelihood of “bad outcomes” for them and their families.
Real Options Analysis (ROA) is also used to analyse the “options” or opportunities available for businesses. The methodology is used in making major investment decisions.
In life, also we have to make decisions. In fact some of them are major decisions – life changing ones. Then, why have we failed to develop a process to manage our lives to harness total wealth?
Wealth management conundrum
As one of the most successful financial planners puts it “My high net worth clients do not need pure financial planning really, because they have enough to retire on for this generation and, in some cases, for the next as well. What they really need is what you call Total Wealth Planning. I have to be more than a financial planner to satisfy these clients.”
The wealth management value propositions for executives are often flawed due to the lack of understanding of the client. The managers do not or cannot articulate the non-financial side of their needs.
But the non-financial side is also wealth. At times, they do matter more than the financial needs. The same applies to risk. Non-financial risks – e.g. risk of divorce, risk of health problems, etc. – are difficult to articulate but ultimately they can affect wealth including financial wealth. Here is the need for total wealth.
A neat quadrant called Total Wealth Quadrant (TWQ) is now available to understand the interdependencies of total wealth – family wealth, physical wealth, spiritual wealth, and financial wealth.
Further, a range of metrics to measure the “balance” of different drivers have also been developed. It is only when you press the “non-financial buttons” that people come up with the total picture. Two different scores are calculated using the computer-based calculator. Very soon wealth managers will have to wear the hat of a life coach and what really matters is where the client wants to be in total wealth terms.
Agile and flexible methodology
The approach is relevant to blue collar workers as much as the high net worth individuals. For example, it may be even more important to manage physical wealth for blue collar workers. As a truck driver puts it, “Total Wealth Quadrant (TWQ) showed for the first time how poor I score on family and physical wealth and if I fix them it will help me to score well even in financial wealth.”
The models, processes and metrics can also be used in life insurance selling and life coaching area in general and in relationship management in particular.
A calculation methodology supports the metrics of the TWQ. Managers can use the calculator and run several scenarios and the process of calculation is as useful as the final scores but the scores ultimately “reveal it all”. In some cases early warnings are obvious and in others it may take time.
The risk management is also different with total wealth planning. The risks are inherent in all four quadrants but we often do risk profiling based on financial wealth. Traditional risk profiling does not take into account the health and family risks.
Spiritual or “inner wealth” may also have risks. Life is not about “financials”. Life is about relationships and living, and, the scarce resource for most high net worth individuals is time. We have to optimise everything around time. Time is the limited resource.
You can be rich but poor
The total wealth approach assists in “reinventing” yourself by:
nUnderstanding your total wealth
nIdentifying gaps in total wealth
nDeveloping and implementing total wealth based life plans as opposed to pure financial goals driven plans.
nAdjusting and realigning strategies.
nEvaluating nonfinancial risks
A good understanding of the above will progressively assist in wealth accumulation, relationship management, investments, wealth de-accumulation and inter-generational wealth transfer. And, we need to do these in total wealth terms.
As one CEO commented: “I did not know that I was rich but poor all this time.” He was indeed rich in financial terms, but very poor in total wealth terms.
This is a new approach to wealth management. It is more robust not only in total wealth terms but also in financial wealth terms. It brings all key drivers of life under the umbrella of total wealth so that managers can enjoy satisfying achievements.
Once you learn how to view wealth through the prism of total wealth it helps you to embrace a more balanced and fulfilling approach to wealth management including financial wealth management.
The approach is agile and flexible. We can use it to strengthen relationships and family bonds. The feedback from managers thus far has been very encouraging. The programme details are at www.totalwealth.lk.
(The writer is Director, Agape International – a Sydney-based consulting firm – and lecturer in finance and strategic management. He can be reached via email@example.com.)