Entrepreneurs Could Teach the Wealth Management Industry a Few Things

By Mark Barnicutt on June 18, 2021

As prosperous entrepreneurs know, successful businesses rely on cash flow; revenues must exceed expenses to result in cash profit. In order to generate positive cash flow, businesses need to effectively leverage their current assets and resources. Otherwise, they are spending more than they are earning, or (at best) breaking even.

In my view, the wealth management industry should have this simple principle at the forefront. The management of client assets should be run like a business – an asset management business. After all, I have not met a single investor who does not have any expenses on their assets. Investors have current and future needs, like funding their family’s lifestyle, building money for retirement, or generating wealth to leave future generations.

Investors and their investment advisors/wealth stewards need to think of the assets as a business, not just a pool of assets. The assets should generate cash flow to fund needs and goals, and should not become depleted over time.

The equation is the same as for any other business: Cash Flow = Revenues – Expenses.

Improper Benchmarking

Too many investment professionals do not view their clients’ assets as asset management businesses which need to generate positive cash flow.

Instead, they are focused on trying to beat the market, or some other relative benchmark. Unfortunately, investing in this way is not aligned with the client’s goals and can actually deplete the client’s capital.

Read our previous blog “Debunking the Investment Industry: Relative Benchmarking” for a full examination of this issue.

Are You Investing with a Real Market or Expectations Market Focus?

Another way to look at this is in terms of the “real market” (i.e. the business managing money for investors) versus the “expectations market” (i.e. the business of trading stocks, options, and complex derivatives).

In the wealth management industry today, advisors are too concerned with playing the expectations market (relative return investing) and they are ignoring the real market, which are the investor’s absolute cash flow needs and capital goals.

Focusing on the wrong investment outcomes (relative benchmarking, the expectations market) can lead affluent families to not have sufficient income to achieve their desired retirement income goals or meet their lifestyle requirements.

That’s a problem.

The Real Market Asset Management Business

As discussed above, the solution is to treat investors’ assets at a wealth management business, focused on the real market, not the expectations market.

Following the equation (Cash Flow = Revenues – Expenses):

  • Revenues: Interest, dividend, and realized capital gains from the investment assets.
  • Expenses: Investment management, trading, custodial costs, and realized capital losses.

Portfolios must be purpose-driven, designed to maximize absolute cash flow and meet capital goals rather than chasing illusive relative returns that can completely sidetrack investors and advisors from meeting the real goals.

Learning from successful entrepreneurs, treat the management of your assets like a business.

>> HighView is an experienced boutique investment counselling firm for affluent Canadian families and foundations. We would be happy to discuss our goals-based investment approach with you and your professional advisors.

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