Wealth Management

Table of Experts:  Protecting Your LegacyWealth Management Team

Thomas Connelly, President & CIO, Versant Capital Management, Inc.

Liz Shabaker, Principal & COO, Versant Capital Management, Inc.

Scott Horn, President, TFO / Scott Porter, Sr. VP, Bennett & Porter


Excerpted from The Phoenix Business Journal, July 14, 2017, Pages 17 – 22

 Moderator: Why is it important to educate and prepare future generations for managing their family’s wealth?

Liz Shabaker: A tremendous amount of wealth is about to be transferred to the next generation. Most kids don’t have experience with wealth management or know what their goals and objectives are or should be. They want to be good stewards of the wealth that typically their parents or grandparents have created. To prepare them, and have them be successful so that money doesn’t run out for

the next generation, you need to really get in and start having important conversations early on.

Moderator: What does early look like?

Liz Shabaker: Every family is different. Some families are very open about their wealth, about transferring it, and knowing exactly what they want to do with it. Others struggle with how much is too much to leave

to their kids. They don’t want to demotivate their kids by giving it to them too early. Again, every family is different, but to the extent that you can start when they’re young children and teenagers, that’s ideal. It’s never too early to teach skills around money and finances.

Scott Porter: Not that it has to be about big sums of money. It can literally be simple stuff. How do you spend your allowance? How do you balance a check book? It doesn’t have to be this overwhelming large amount of wealth. The same principles apply for how you spend 100 dollars as it does to 100,000 dollars.

Scott Horn: One of the concerns that wealthy families have is that wealth starts to define the family instead of the wealth being a tool for the family to live the life they want. It’s critical you understand that wealth is nothing more than a tool. It’s not who you are. It’s not what you are. It’s just a resource you can use to live life more enjoyably. More productively.

Liz Shabaker: That’s an important factor because often families are in front of the attorneys who are drafting these documents, but they haven’t really fleshed out what their financial goals or objectives are. Their documents may not reflect what they want to have happen with their financial futures.

Tom Connelly: The point was made, wealth doesn’t define you. You don’t have to be wealthy, but there are programs that are being started in high schools and colleges that focus on financial planning and the management of wealth – really basic toolkits that could add a lot to a person’s standard of living.

Scott Porter: I think another important part of what an advisor can do with helping with that is sometimes it’s difficult for apparent to have those conversations with their children. Talking about money can sometimes be uncomfortable, especially with the older generation. Having an advisor that can act as an intermediary and start that conversation can sometimes bridge that gap.

Liz Shabaker: I agree. The earlier you can get to know the kids, the better. You start to build that relationship and trust evolves from there.

Moderator: When hiring a financial advisor, what’s the one thing that you think people don’t think about enough?

Scott Horn: It’s unfortunate that most of our industry makes it very hard for people to understand how advisory firms get paid. So frankly one of the questions that people should really be asking is, how do you get paid? Not only how much, but what drives the revenue? Because you want to make sure your advisor’s giving you advice based on what’s best for you and not necessarily what gives them the most profit.

Tom Connelly: Alignment of interest is huge. That would be my number one, as well. Instead of trusting yourself or your employees to not act based upon self-interest, you can actually structure the business to discourage or prevent conflicts of interest. For example, you can say we’re not going to have proprietary products. We will sell advice, but we won’t be tempted to sell our own products.

Liz Shabaker: Many people may not understand the different layers of fees and what they’re paying for. In prospect meetings, we make every effort to educate people about their options.

Moderator: We talked about fees. When people are planning and they want to hire a financial advisor, of course, expense comes to mind. What are some of the ways a financial advisor adds value to a client?

Tom Connelly: We provide value in terms of services offered or solutions to problems. There’s actually some science and a lot of art to putting investment portfolios together. If that is done right, it can increase returns, reduce volatility, and give the client a better chance to achieve their planning objectives. Different types of investment accounts have different tax characteristics. You may have your own bank account or brokerage account, but you also might have an IRA or a 401(k), so we try and figure out what are the best choices to go in those accounts, because some are messier tax-wise than others. It’s an important consideration.

Then there’s the issue of what’s called behavioral coaching in the industry. People are hardwired to make decisions to help them survive out in the wild, but not make good investment decisions. This, of course, begs the question: Can they sort out good decisions from bad

Moderator: So, when you say we’re hardwired to make bad investment decisions, is it because we’re reactionary?

Scott Horn: As a child, you touch a hot stove, you learn never to touch a hot stove again. In our world, as the stock market goes down, the portfolio goes down, some people panic and don’t want to go back in again. They don’t want to get burned. Those emotions sometimes get in the way of good decisions. Our job is to help them along the way, balance through the times when greed dominates. Balance through the times when fear dominates. Make sure they’re making long term rather than emotional decisions. It’s one of the most important things we do.

Liz Shabaker: The investment portfolio is one tool to help you achieve your goals and objectives, but we know that investing isn’t just a numbers game. We nurture lifelong relationships to get to know clients and their families, align with their values, and help education succeeding generations. Sometimes we have to raise critical issues, even if it’s not in our firm’s best interest. All of these conversations around wealth are important. That is where our added value comes in.

Scott Porter: Another huge value that I think we add as advisors is putting a plan together. I think a lot of people if they see the plan 10, 20, 30 years out and they see their current investments and how they’re going to work, it helps put them at ease. It’s seeing that road map that puts them at ease, because a lot of people haven’t taken the time to actually put a plan together. And then, once we have the plan, sticking to it because a lot of times things change. Markets change.

Moderator: What are the steps that you need to take before you start putting together this investment plan?

Liz Shabaker: You have to flesh out what those goals and objectives are. What are they trying to do? If a client’s risk profile is conservative and their goals are aggressive – how do we marry those two together? And what trade-offs need to be made to have a meaningful road map?

Scott Horn: I really think it’s critical that they know that their plan isn’t the end because the plan is never perfect at the beginning. It evolves. So, one of the things that you want the client to understand is that they don’t have to have a perfect vision of their plan. You certainly want to flesh out what’s important to them, what their goals are, what their objectives are. But it doesn’t have to be perfect. It has to be reasonably accurate. Then you start building upon that, and you develop trust in the plan over time.

Tom Connelly: Dr. Dan Gilbert, a Harvard psychologist, who has also appeared on PBS, wrote a book called Stumbling on Happiness published in 2006. In it, he said if you’re a witness in a crime situation, the witness can’t always remember all the details of the event, they remember the seminal issue. And then they fill around the details of the event from where they are now. The goals for the future are the same kind of thing. We formulate what we think we want in the future based on where we are now, but when we actually get there, it may be something totally different. So, planning for the future is actually an evolutionary process that unfolds through time.

Liz Shabaker: Initially many clients don’t think they have enough saved to sustain their own lifestyle, so having those larger conversations about future generations – they’re not ready.

Scott Horn: It’s our job to give them honest, candid advice. What are the things they can do today and into the future to give them the best chance of living the life they want to live?

Scott Porter: And it can work both ways, a lot of times we think of everyone just worried about having enough to survive on retirement. But there are some clients that could feasibly retire but they’re too worried. And so, we’re actually telling them, “Yes, you can retire now.” You have both sides of the spectrum – people who you know don’t have enough, that are spending too much and people that have a lot and are not spending as much as they could.

Moderator: You often work with people that are executives, that run their own companies. They are savvy and may not think they need advice from a financial advisor. What are the advantages of hiring an advisor versus the do-it-yourself approach?

Scott Porter: We get it a lot from people that feel like maybe I can do this on my own. One of the things I see when I sit down with a lot of people is they’ve never been with an advisor. They have investments all over the place. They have two or three brokers accounts. They have a couple of annuities that they bought years ago, not quite sure why. They have 401 Ks with old employers. Just truly just kind of a mess. We’re looking at all of these statements and everything and trying to organize their life. Say here’s all the things that you have. Let’s see which ones are still good, that we could hold onto, and what do we need to get rid of.

The problem is a do-it-yourself investor can’t know all the different facets about what goes into their plan. It’s not just the investment themselves. You also have to think about taxes, insurance, estate planning. How do I perpetuate this wealth to the next generation? To think that they can really understand and know all those different pieces, and can put it together when they are also running a small business, it’s just too much.

Liz Shabaker: Well, and the behavioral biases also come into it. They might be watching Kramer or some other person on CNN, and are just flying by the seat of their pants.

Scott Porter: Sometimes they don’t know what they don’t know. I met with a small business owner a couple weeks ago that was doing really well, and his biggest concern was taxes. I asked, “What are you doing to mitigate that?” He had a 401(k) plan that he was putting as much as he could into. And I said, “Great, have you looked into a defined benefit plan?” And he said, “What’s that? I didn’t know I could do that. How does that

work?” So, I talked to him about how he can put away almost a couple hundred thousand dollars into a tax deferment.

Moderator: Scott (Porter), please explain how that works to our readers.

Scott Porter: Most small business owners are familiar with 401(k)s because most people have those, and that allows you to defer a part of your salary. But for most people, 18 to 24 thousand is the max that you can put into a 401(k) plan. You can set up a defined benefit plan that is not subject to the same contribution limits. It’s set up towards a certain amount of retirement benefit that they’re going to have. When you run the numbers, and you have to have an actuarial put together the numbers, they can put away, sometimes five to ten times as much as they could in a 401(k), into a defined benefit plan. And they can do it in addition to their 401(k). Just that alone -think of the tax savings and the time value of money.

Liz Shabaker: But small business owners are required to do it for all of their employees, which is why they often don’t.

Scott Porter: It works great for employers that have no employees or maybe just one or two – particularly if the employees are younger. The ratios are still going to come out very good for the small business owner.

Moderator: Scott (Porter), I want to stick with you for a moment. Talk to me a little bit about what an alternative investment is and why it’s important in a portfolio.

Scott Porter: A lot of our clients are unaware of all the different types of asset classes that you can invest in. They are familiar with 401(k)s that are somewhat restricted to stocks, bonds, and cash, but there are other asset classes that you can access through alternative investments. An alternative investment is something that doesn’t correlate with stocks, bonds, or cash. It’s going to move differently. It going to perform differently. By incorporating an alternative asset into a portfolio, we’re lowering the volatility. A lot of alternative investments are real estate-based. They just don’t trade on the public exchanges so we’re not seeing the daily fluctuations. They are a lot harder to find. The average person is not going to go out and just find alternative investments. One of the great things that we do at our firm (Bennett & Porter) is help find some alternatives that make sense in a portfolio, that will add diversification that truly make the portfolio work better long-term.

Moderator: In putting together that portfolio, there are so many options. How do you begin to have that conversation? Everybody wants to invest in the area that’s going to get the highest return, so how do you sit down and balance a portfolio when you’re putting it together?

Liz Shabaker: It all goes back to your own investment beliefs and what your firm stands for.

Tom Connelly: Our firm (Versant Capital Management) has a set of investment beliefs we use to guide us in assembling a portfolio. What you really want to focus on is not the surface labels on different types of investments. You want to look at the underlying return drivers and the risks associated with them. Underlying return drivers produce returns over time – these may respond differently to different economic or market conditions. As Scott (Porter) was saying, they may or may not move in concert with each other. And they may also be international in flavor. And then Scott brought in the idea of alternative investments, and they may have different underlying return drivers, if you will. You have all these ingredients for a stew that you can mix together to produce different tastes that you like or nutritional requirements that you need.

Scott Horn: As Tom referenced, we all have defined investment philosophies. Our firm (TFO Phoenix), for instance, views it from a long-term perspective and we don’t believe chasing the market is going to be successful long-term, in fact we think it’s detrimental. The other part is clients need to be confident and comfortable with their portfolio and why it is built the way it is. If somebody is risk averse, and you put them

in a very aggressive portfolio, the portfolio will go down at some point. There will be a moment in time where it’s down 10 or 15%, and if they can’t handle it, they’re likely going to want to sell at the absolute worst time.

They have to be comfortable and confident that they can maintain discipline, and again, this is one of the key reasons I think you hire an adviser, to help you get through the rough times.

Liz Shabaker: When Tom was talking about return drivers, we’re looking 10 years forward, instead of just relying on historical data.

Moderator: You’ve clearly worked with a lot of wealthy families. What change have you seen in what they expect from an investment adviser?

Scott Horn: Twenty-five years ago, all clients wanted was an adviser to help them beat the market.

Today, they’re much more interested in how we help them prepare to live the life they want. How do we help prepare their kids and grandkids to inherit the wealth they likely will inherit, in a way that they can continue to be productive and happy human beings? There are far more conversations about that, than there are about whether the S&P was up or down 10% last year.

Liz Shabaker: It’s important to remember that wealth isn’t just money. It’s family name. It’s what they do for their community. It’s what they pass on as their legacy. It goes far beyond money.

Scott Horn: We’ll often talk to families about the four different forms of capital: Financial, intellectual, social, and human. Are all those capital sources in their family healthy? If they are, their financial plan is likely on the right path.

Scott Porter: I agree with Scott (Horn). I think the question used to be, “How do I beat the market?” Now the question is, “How do I not get beat up by the market?” People that have gone through the 2008 crashes and the 2001 crashes. They still remember that, and they’re worried that as they’re now in retirement or getting to retirement, they don’t want to go through that again because they don’t have the time, necessarily, to wait for it to rebound.

Moderator: It sounds like your job might be harder than it was 20, 25 years ago.

Scott Horn: I think it’s more enjoyable. I think we make a point to know our clients much better today than we knew them 25 years ago. The conversations are deeper, they’re more meaningful. Most days I feel like I’ve gone home and helped a family.

Liz Shabaker: Well, now we’re talking about more than just investments. We’re getting to know the family and what they stand for, so it’s fun! But, 2008 was a challenge.

Scott Horn: Yeah, 2008 was not fun. And by the way, I don’t think it was our messages in the end of ‘08 and ‘09 that were most important. I think it was the messages we had been delivering in ‘05 and ’06 and ‘07, and the consistent coaching, the consistent educating. Clients understood how they were invested and what the plan was. That allowed them to get through it and survive.

Moderator: I know we primarily focus on U.S. stocks, but what other opportunities exist outside of the U.S.?

Tom Connelly: There are two aspects to that. One is time dependent and the other one is kind of on an ongoing basis. Investment people break up the world into the developed world and the emerging market world (formerly called third world countries). In emerging markets, you have the opportunity to not only invest new capital in favorable demographics, but make existing capital and people more

productive. These countries can be raised to the same standard of living we enjoy here someday.

You can buy a dollar of corporate earnings in Europe or emerging markets for much less than you can in the U.S. And, of course, there is the issue of relative risk: is one safer than the other? But even taking into account risk adjustment, they are pretty good opportunities, but people are afraid of them post-crisis.

They prefer to have capital here. The pricing differentials are quite high, and these emerging markets haven’t near had the run that the U.S. stock market has had, so they’re very interesting.

Scott Horn: We live in a global world. There’s no reason not to be invested in the global market. It gives you extra diversification. It might provide additional return. And there’s ways of doing it that are no more complicated than investing in U.S. stocks. It looks the same, feels the same. There’s really not a big safety concern that I can think of.

Moderator: We’ve talked about marrying your wealth with your life mission. How do you use that tool to help future generations get engaged with philanthropy?

Liz Shabaker: So, philanthropy is an ideal vehicle to start to have those conversations with your kids and grandkids. And it’s a great way to find out what they’re passionate about. It gets them working together, whether it be grant making or other things, and it prepares them for their lifelong roles in the family, community, and workplace.

Scott Horn: Again, it’s important to teach people that the best way to learn something is to do something. If you can get younger adults or even teenagers involved in philanthropy, there’s so much they can learn. You can teach them how to oversee an investment portfolio and they don’t realize they’re being taught. They’re just, experiencing something and enjoying it.

It’s teaching a whole swath of new skills that they don’t even realize they’re learning, until they get about three or four years in. I’m amazed at the conversations they have, once they get some experience. It’s a very powerful program.

Liz Shabaker: They get quite involved, especially in grant making. Sometimes you’ll give each person a set amount that they can give to whichever charities they are most drawn to, and they then come back and make a presentation to the family. The group grant making is even more interesting. Now they have to work together to decide what organizations to support.

Moderator: We’ve heard a lot about what it takes to be a good financial advisor. For each of you, what is your philosophy, your guiding principal, when you’re working with a client?

Scott Porter: I think that it is having a purpose. We’ve talked a lot about planning, and putting a road map together, but what is the purpose of our money? What does it really do at the end of the day? It allows us freedom to do what we want to do.

One of the things I thought of when I started in this industry, was I want to be able to have the independence to truly help people attain their dreams and their goals. And, it’s different for everybody. I think that’s one of the great things about what we do.

Liz Shabaker: As a fiduciary, my guiding principal is to always do what’s in a client’s best interest, and sometimes that means having tough conversations. I want to build that trust to position them well so that they can achieve their goals.

Tom Connelly: Placing the client’s interests first is what we’ve structured the business to facilitate. We start from what the client wants to achieve, in terms of goals and objectives, and the type of environment they want to operate in. I have tried to structure all the firms I’ve been involved in, throughout my career, as if I were sitting on the other side of the table. How I would want to be treated? How would I want to interact with my advisor? That’s our guiding principle from day one, has been for almost 30 years.

Scott Horn: It’s doing the right thing, every day for the clients. We want to do is empower our clients to have financial success and live the life they want to live. We can help in that journey; that’s what gives me motivation and happiness.