A great adviser will spend time getting to know you before they give advice or make recommendations. During this process, they are trained to ask three important questions: 1. What is your investment objective? 2. What is your risk tolerance? and 3. What is your time frame?
An experienced adviser will often ask these in the course of conversation, and in more than one way, because their experience has shown that some clients aren’t great at self-assessing. Also, getting clarity on these important points will lead to better recommendations. To establish an effective investment plan, this information will be needed, along with other contextual data points, such as specific goals, tax status, liquidity needs, etc .
The third question – time frame – can be particularly challenging, because clients can have vastly different time frames for each of their goals. For example, funds earmarked to pay for college education for children or grandchildren could be needed decades before their retirement funds still need to provide funding for their lifestyle needs.
Why Is Time Frame So Important?
Financial planning is at its core a complex math problem that involves making some assumptions based on the law of large numbers, which states that the probability of a more predictable outcome increases as the sample size increases. Modern planning taps into the extensive statistical data about historical market return patterns over full market cycles (usually about three to five years) as well as life expectancy at different ages based on actuary tables. The planner uses this data along with your stated time frame to inform your decisions and help improve the likelihood that you won’t run out of money before reaching your goal.
For example, statistically speaking, a planner who uses average life expectancy for retirement planning could expect half of their clients to outlive their money – not good! A common way to mitigate this shortcoming would be to use the 80th percentile of life expectancy, providing a much greater likelihood that clients won’t run out of income before they run out of breath.
How Your Time Frame Ties into Generational Wealth
For families of greater wealth, running out of money is usually much less of a concern. This could allow them to lengthen their time horizon beyond the expiration date of the current generation if they can adjust their thinking to be more visionary.
Passing wealth through generations of families seems like it should be easy, but reality frequently proves otherwise. Working with a multi-generational advisory team can help succeeding generations in your family connect with someone closer to their age who is more likely to relate to the way they think and communicate. This often feels more natural and may improve the probability of long-term family financial success. It may also help you avoid the proverbial “shirtsleeves to shirtsleeves in three generations” curse, where wealth gained in one generation is frequently lost by the third.
An insightful family considers how the family’s wealth will impact future generations of their descendants. This affords them the luxury of enjoying the potentially higher returns that can come from long-term investments – and the accompanying longer-term time horizon – without as much concern for short-term liquidity needs. This shift toward generational thinking could require the older decision-makers, often those responsible for building the family’s wealth, to look beyond their own lifetimes when making investment decisions.
Generational thinking requires adequate training for rising generations to ensure they know how to steward the family’s wealth responsibly and in a way that positively impacts their immediate and future family members as well as the communities they live in. Even very accomplished families who tell us they have a strong desire to do this well can feel they don’t have the time and can feel ill-equipped to excel at this task. They need and want experienced guidance, which could be even more important if inflation becomes a greater issue.
Steps to Take for Generational Wealth Transfer Success
If getting this right is important to you, make sure your advisory team has significant direct experience in helping families succeed with generational wealth. Defining success is unique for nearly every family and must be informed by your family values and goals.
Multiple facets of advisory skill and knowledge will be required — including financial planning, income planning, tax, and estate planning — in addition to great portfolio management. When evaluating your own advisers, ask yourself these important questions:
- Does your advisory team have members dedicated to each of these disciplines?
- Are they communicating with you in a language you and your family members can understand?
In part 2 of our two-part “time-frame” series, we will discuss using your longer-term vision to make a difference in your community. By serving on the board of directors for causes that are important to your family, your adaptive thinking could help them become sustainable in perpetuity.
Choose your advisory firm carefully and make sure you are thinking with the proper time frame in mind. You can do this!
Joey Sager, managing director at Venturi Private Wealth (opens in new tab), has been a financial adviser for over 35 years. His love for serving others has made this a good career fit and has also led to helping the less fortunate both at home and abroad to develop sustainable, income-producing businesses to lift themselves and their communities out of poverty. He and his wife are both pilots and musicians raising two beloved children while staying active in their community.
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