The specific benefits people seek from their money, and the motivations for taking risk, are mainly explained by the makeup of their ‘family unit’.

The specific benefits people seek from their money, and the motivations for taking risk, are mainly explained by the makeup of their ‘family unit’.

Why the family unit matters
Goal-based investment, with defined outcomes at specified times, is a discipline for focusing people’s attention not on money and investing for its own sake but rather as a means to satisfying needs, wants and aspirations. This has two benefits:

  1. It changes the language so it is much more engaging and relevant and no longer advantages the professional agent relative to the client
  2. It provides a framework for ensuring ‘capital efficiency’ is maximised, ranging from eliminating unnecessary risks, costs and conflicts to helping solve the tension between competing goals.

Though the first sounds easily approachable and the second more technical, the reality is that both help people simplify the complexity of personal finance and narrow the range of what they need to know about. Following the principle of capital efficiency, we can design and manage uniquely-customised portfolios that use only a tiny fraction of the investment industry’s products but provide more value because they generate the outcomes that deliver the specific benefits at the specific dates defined by the client.

If you’re single…

For an individual with no partner and children, and planning not to change that situation, most of the benefit of wealth is in the form of your own spending, to the extent it isn’t supported at the time by employment earnings. That typically means in retirement. But it could also mean regulating spending to smooth irregular earnings during the working life.  There may be little to compete with their own lifetime spending goal other than philanthropy, but gifting could itself form a regular planned part of a fully-specified spending goal. The amount of spending valued is then the motivation for taking risk. Without a motive to leave a bequest, risk taking will taper with age.

If you’re planning to raise a family…

In the early stages, family raising competes directly with retirement provision for any savings capacity. Raising a family brings direct costs but also changes the requirement for property and so the property motivation competes with savings as well. The benefits of wealth then depend to a greater degree on flexibility, liquidity and optionality, which savings in a pension cannot provide. The trade-off made between pension and non-pension saving will often reflect the extent to which your employer matches personal pension contributions. But the need for liquidity and flexibility may also require a trade-off in terms of the risk approach. There is a strong motivation to let investment risk help fund the family’s middle and later needs, where time is on your side, but the earlier priorities may require less investment risk, to limit the harm from episodes of very weak asset prices.

If you’ve got the lot…

You have a home, you have a family, education costs are running down or already behind you and the main goal is retirement spending – but with an eye on helping the children financially in their lifetime as well as at second death. It’s not just age or stage that changes the approach to investing: that motivation to look beyond your own spending changes radically the benefits that continued risk taking can provide. Children (and their children) are effectively the joint-venture partners in your risk taking, even if you choose not to define clearly the time they get to benefit in any payoffs. In balancing the tension between your own spending and helping others, you may want to take into account the way the value of their enhanced spending is sensitive to time. Lifetime gifting may provide most benefit when your children are in family-raising mode or trying to buy their first home.

If it goes wrong…

There are some things that happen randomly that you can’t allow for in a model, or at least it doesn’t make sense to do so. Some can be insured against, such as early death and illnesses that prevent you or your partner earning. Insurance will then validate any assumptions in the model that do not allow for those sources of unpredictable disruption. Divorce is the most common disruptor of financial plans. Its consequences can be anticipated but it’s not avoidable through some planning solution, other than (potentially) the use of protective trusts or prenups at outset. It requires a new plan. Or two.

Working for the whole family unit

Family units including young or adult children make up the majority of our clients. Of them, one quarter have investment portfolios in their own children’s name or under bare trust managed by Fowler Drew. This does not include family trusts with clients’ children and grandchildren as potential beneficiaries.  For the other clients with children, the fact that they have family significantly affects their own financial planning. Their investments in excess of planned lifetime spending form part of the estimated £5.5 trillion of assets that will pass to the next generation over the coming 30 years.

What all these clients have in common is that we offer to support their children’s preparation for their own financial decision making, helping to lay foundations for a good relationship with money. These conversations need significant input from the parents to ensure we do not cut across how they intend to influence their children, such as whether to be protective or allow them to make their own mistakes. But those intentions may themselves be helped by discussion with us, not as advocates of any one approach but rather as an experienced and objective sounding board.  

Help with financial decisions can also reach up a generation. Many of our clients have involved us in the care of their own parents’ finances, either on a continuing basis or when specific advice is needed.   

A multi-generational application of the principles of capital efficiency makes any wealth management service more valuable in those cases where the power of wealth to deliver benefits is much broader than is assumed by typical advisory relationships, limited to the current generation of clients. In a recent survey for Fidelity International, the proportion surveyed valuing a multi-generational service was twice the proportion where advisers have even met the children, let alone have them as clients.  

What you can do