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Inside Merrill's New Framework for Wealthy Families

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A unique Bank of America think tank is teaming up with Merrill advisors to help wealthy clients figure out what to do with their money. Indeed, even ultra-high net worth families worry about overspending and winding up broke.

BofA’s Center for Family Wealth Dynamics and Governance has developed four key questions for creating a robust, effective spending plan. In an interview with ThinkAdvisor, Valerie Galinskaya, managing director, and Matthew Wesley, director, unpack those questions — and reveal more about their focus on helping families to be strategic when making spending decisions.

Within a few months, the Center, which works as an extension of the advisor team, according to Galinskaya, will release a comprehensive framework to be used by and for wealthy clients to develop practical, realistic spending plans.

In an outline for “Considerations for Decision-Making Around Expenditures” (working title), a copy of which was provided to ThinkAdvisor, the Center addresses such components as a “Purpose of Wealth Statement” and recommends that clients move away from the notion of “Can I afford to spend on X?” to “Should I spend this amount on X?”

In the interview, the family governance experts explain the importance of family operating principles, which include establishing financial guardrails, and discuss what happens when the honeymoon is over for the newly rich (They feel like a stranger in a strange land).

Although established officially about six years ago, the Center’s staff has been working for a decade helping families think through the often difficult issues that wealth presents. The geographically dispersed team works with advisors’ multigenerational family clients to create spending plans and to facilitate family meetings.

ThinkAdvisor recently held a phone interview with New York City-based Galinskaya — a former management consultant — and Wesley, a former trust and estate attorney, who is located in Seattle. They say that though the main thrust is developing spending plans for the high net worth because their financial needs are more complex, knowing how to make the right spending decisions applies to all clients.

Here are excerpts from our conversation:

THINKADVISOR: You recommend developing an effective expenditure plan to avoid running out of money. Is this something the financial advisor could develop with the client?

VALERIE GALINSKAYA: Absolutely. We see the advisor playing an integral supporting role in developing the plans and helping to guide them.

MATTHEW WESLEY: In order to create a robust and resilient spending plan, you have to answer four questions. The first: Where are we now? — assess the current state, what the spending patterns are and how they’re playing out. The second question: Where are we going? This is about desired outcomes. Third: How will we get there? Come up with a concrete plan. The fourth: How are we doing?

Is there a follow-up after determining the answers?

WESLEY: Yes. It becomes a cycle going forward asking: Where are we? Where do we want to go? How are we going to get there, and how are we doing? This allows the advisor and client to check in on those critical questions at least once a year to figure out how the spending is doing against the outcomes and goals the client wants to achieve.

Do you expect significantly wealthy clients to keep to a budget?

GALINSKAYA: This isn’t about a budget. We’ve found that people who have taken the time to think about what success means to them and who [identify] their operating principles make the most effective decisions.

WESLEY: It’s thinking about the allocation of funds against people’s key goals and the outcomes they want in their life and how money fits into those pieces. Folks who have quite a bit of money are sometimes concerned about whether they’re overspending. But the bigger questions revolve around what they want to do with their money. So helping them begin to have a clear sense of purpose for their wealth and how they want to use it to develop the things that are most important to them becomes the critical [issue]. In this process, there’s a good bit of values clarification that goes on.

Does the Center help wealthy families only?

GALINSKAYA: Because family governance is, to us, about decisions, we feel it’s relevant to all individuals and all families. But for those who have a significant amount of wealth, there’s more complexity. That takes greater intentionality to make sure they’re navigating in a positive, productive way so they don’t have the unintended consequences that come with a lack of focus in applying a framework of guidelines and practices for decision-making.

WESLEY: Family governance is, to us, also about the family who is, for example, pinching pennies and having a discussion around the dinner table: Should we buy the bicycle or shouldn’t we? When people become wealthy, often they don’t think [in those terms] as much as they might be well advised to.

A period of adjustment is needed to get comfortable with being wealthy. What sorts of challenges do the newly rich actually face?

WESLEY: There are various stages of wealth identity. When most people first come into money, they’re ecstatic and euphoric. That’s the “honeymoon” stage. But soon after, they begin to realize their life has become substantially more complex, and they’re starting to grapple with significant questions. It’s as though they’ve landed in a new land and don’t know the language.

What’s the best way to deal with people who want some of the windfall a friend or relative has just received?

WESLEY: That’s part of the complexity: Somebody, all of a sudden, is asking for a loan, for example; or they say they want a piece of the wealth. That’s oftentimes one of the things that sparks the [wealth holder’s] notion of being in this new world without a way to deal with it.

So, is that where the concept of a family’s operating principles can come in?

GALINSKAYA: Yes. You develop requirements and guardrails [protecting the wealth]. For instance, the operating principle of one family I’ve been working with is to support education. So we’re in the process of developing a vehicle to help support education for their nieces and nephews. If an extended family member [asks for] money for something outside the guidelines for that, the response will be, “We value education and have established [a vehicle] to help our nieces and nephews with it.” This also helps decrease stress [for the wealth holder].

No matter what these families decide to do with their money, it’s essential that tax liability is addressed. Correct?

WESLEY: Absolutely. At some level, most clients fear going back to where they were before they had wealth. So they always want a cushion of security. They don’t want to die broke. The idea of reaching the end of their life after reaching the end of their money isn’t appealing. So they’re always guarding against the downside.

But one of the choices you have on your expenditure decision-making outline, under “Where do you want to go?”, is “Spend It Down.” That sounds extreme, if unwise.

GALINSKAYA: We find that sometimes in doing an investment plan or wealth transfer, that question is skipped over. But it’s an important point because it’s harder to know what the right choice is if you don’t know what your ultimate goal is. “Spend It Down” is very, very rare. We’ve had a few clients who had that philosophy, which was grounded in something very specific. One felt strongly about giving away their wealth with philanthropy; the other really meant spend it down. It’s incredibly important for a financial advisor, or any professional serving the client and their family, to understand this [choice].

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