“We let clients know when it’s time to get selfish,” said Chuck Bean, when referring to one of the five high-net-worth markets his firm currently serves.
Bean, President and Director of Wealth Management with Boston-based Heritage Financial Services, was commenting on inherited wealth, and the tendency for high-net-worth families to want to help their children and grandchildren. All well and good, Bean noted, until it starts to negatively affect the parents. It’s all part of a larger pattern Bean and his team are currently seeing.
“We’re managing clients’ cash flow and spending habits regardless of portfolio size,” he told ThinkAdvisor on Monday. “Managing their expectations is the single biggest challenge we face right now. It’s something that comes up on a weekly basis during our client review meetings and the financial planning committee meetings we hold at our firm.”
“With the stock market up nicely this year, he added, clients feel that their spending habits can increase. But, clients need to realize that within their diversified portfolio, there are other asset classes that are not performing as well. Their spending level must be consistent with a prudent withdrawal rate based on a long term expected return from the entire portfolio.”
“Everyone has budgetary issues, regardless of net worth,” he emphasized. “For this reason, we employ a simple green, yellow and red light system to show them where they are using our financial planning spreadsheets. We tell them what they can afford and not afford to spend in order to secure or maintain their retirement.”
Heritage manages $825 million in assets for about 300 core families with investible assets “in the low singles of millions to low tens of millions” range. In addition to inherited or family wealth, the other four markets they serve include retirees; single and widowed women; business owners and entrepreneurs; and professionals (with a heavy emphasis on physicians).
Sophisticated clients typically require sophisticated strategies.
“As far as alternative investments, depending on the client, we allocate anywhere from 10-25% of the portfolio in total,” Bean explained. “We have about 10% in managed futures, which have been a sore spot in the portfolio since 2009, but historically has helped hold up the portfolio in bear markets. We also have about 2.5% in gold, which has also been down, surprisingly, even with the government shutdown. And, some clients have small allocations to hedge funds, private equity and private credit to help enhance risk adjusted returns.”