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4th Quarter Market Commentary

Gaining & Preserving Wealth

Eventually, one of the lessons we learn is that living takes money. Having lots of money is something we call wealth. Some people are good at making money and some people may never have any to spare. Nevertheless, there are rules for gaining and preserving wealth. By following these rules, you may endow your life with choices and pave the way to a full and happy life. Ignore them or break them and you may experience some very hard life lessons.

Managing Wealth requires a process. It is not a windfall, nor a lucky break. Whether you aim to create it, grow it, or simply hold on to it, there is a process to follow. Basically, it is how you manage cash flow.

Money comes in as income through work, gifts, inheritance, awards and many other sources. It can be little or abundant. A modest income may still support your personal wealth when you know and follow the process.

The other end of cash flow is spending. Are you frugal or do you spend freely with no constraints or discipline? Do you have control or leave it to other people? Many a movie star or sports figure with high income has faced near poverty by living a lavish lifestyle or letting the people around them take money from them. Mindful spending is your most important discipline in gaining and preserving wealth.

The difference between income and spending we call savings. What is your savings rate? If you have a good income, you may save thousands of dollars every month. If you have a business, you may generate significant profit or equity that you may eventually tap through a liquidity event. Similarly, if you won the lottery or received a big inheritance you may be able to save almost 100% of the money you gained.

By having income and properly managing spending, you may build or retain significant assets. This is your personal capital. Using money to make money is what that drives wealth. Just because you have assets does not make you wealthy. Many people who inherit large sums or win a lottery find themselves broke, on average in 5 years! -Simply because they don’t properly manage income and spending.

How you manage assets or capital can be very complicated. Proper accounting, investing, tax planning, insurance, legal protection, security, communication, negotiations and family all add to the complexity of managing wealth.

Moreover, many of these factors cannot be delegated to robots. Advice is not a commodity. It is personal, specific to your unique facts and circumstances, and often it depends greatly on a trustworthy advisor.

Your job is to find advisors who are ethical, competent and keep your best interest above their own. This level of relationship is called fiduciary. That is, fiduciary means doing what is in the best interests of the client at all times. Anything less is a conflict of interest and most likely a violation of professional standards.

Many advisors do strive to act in a fiduciary manner. Loyalty to you and your best interests are the key for worthy advisors. It is crucial that you vet your advisor for credentials. But, perhaps even more important that you know their ethical commitment. A worthy advisor will help you, even when it may cost them. It’s their duty to you. Find an advisor who will always fulfill their fiduciary duty.

Many risks abound in managing wealth, not the least of which is recognizing that many people are out to separate you from your money for their own benefit. So, beware! Not only do these risks come from outright criminals who resort to clever schemes and brute force, but many so-called advisors see your money as a ticket to their money.

Regulation will not protect you, since many licensed players may have the intent to sell you something or charge you for something you don’t need. Their goal is make a fee or commission regardless of whether it benefits you. These people know the rules and make sure they get the revenue, without considering the benefit to you. They try to stay within the regulations in order to avoid professional sanctions or jail. But, they are out to take advantage of people with wealth.

True story: When I began in the insurance business, my training supervisor in the privacy of his office, leaned over his desk and said to me with a smile, “You’re going to love this business. It’s a license to steal.”

Obviously, he was not aware he was talking to a young man who had recently earned a PhD in ethics and would never want to take advantage of anyone! Yet, the lesson here is clear. Find an advisor who has high ethical standards and is committed to your best interests.

So, what are the services you need from a wealth advisor? First of all, the complexities mentioned in number 2. above, strongly suggest that a number of advisors may be necessary. The training for competent advice falls into four basic categories:

  • Tax and Accounting
  • Legal
  • Mental Health
  • Wealth Management

Most people are surprised to see Mental Health on the list. But, when dealing with money, emotion is involved. So, whether it is a family matter, a business deal, personal stress, or business succession, it is necessary to see clearly the emotional factors, and to feel right about the path you may choose. In collaborative law, the team generally consists of an accountant [forensic perhaps], an attorney, counselor, and financial specialist. This is a proven process. Each professional relies on the others to handle their area: tax issues, follow the law, keep participants from triggering an impasse, and sorting out proper valuations, assets and financial products.

Most of these professionals are not competent to engage in the other three areas of the four. For example, some attorneys become licensed insurance agents so they can receive big commissions on big life insurance contracts. However, they don’t really know insurance products. So, they rely on general agents to apply and place the policies. Some law experts see such licensing as a conflict of interest. Similarly, some CPA’s hold themselves out as money managers and charge fees to handle investments. But, there is no way a tax preparer can deal with buying and selling stocks and bond during tax season. They have one focus during that time, and that’s to complete tax returns. They likely don’t even look at the stock market while trying to complete tax returns. Some people, including me, see that as a conflict of interest. They charge a management fee, but are not managing the investments. You must understand they do it because it’s lucrative. The fee for asset management is most often much greater than the fee to do a tax return.

Getting good advice is perhaps the best assurance and protection that you will successfully gain and preserve your wealth. This should be someone who has high ethical standards. They must be committed to act in your best interests at all times. They should know investments and be able to advise you on insurance products, executive benefits, and estate planning.

The advisor’s key tool for gaining and preserving wealth is modern financial planning software. Your assets are entered, your goals are refined and captured, and you have an ongoing tool. This tool serves as a snapshot and projection of future outcomes. It provides insight to use as markets change, your life evolves and new goals emerge. The software will track your assets daily. You can access it yourself on-line. When goals are at risk, the software will show the problem early, so it may effectively be dealt with. When your goals change you can adjust your plan to accommodate those new targets and objectives.

Perhaps the best thing about a good planner and wealth manager is they can use the software planning tool to help you make decisions. By plugging in various scenarios, you can ask “What if?” The program lets you see what outcomes are likely. Thus, you are able to choose an optimal strategy to achieve your goals.

In conclusion, gaining and preserving wealth is not an easy task. But, when you follow the right process and obtain good advice, you may expect to make more good choices. The result of following the right process with a trustworthy advisor is that you may successfully gain and preserve wealth and likely enjoy your life to the fullest extent possible.




David L. Harris, PhD, ChFC, CFP®
Wealth Advisor 

A Registered Investment Adivsor

(310) 318-3700

Harris & Associates is a Registered Investment Adviser. This commentary is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Harris & Associates and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Harris & Associates unless a client service agreement is in place.

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