Brunel - Sept 20 0800h

Goals-Based Wealth Management In Practice
CFA Wealth Management Conference 2011

Calgary, Alberta, Canada
September 20-21, 2011
Jean L. P. Brunel, CFA
Chief Investment Officer, GenSpring Family Offices
The information contained herein is obtained from sources that are believed to be reliable and is provided for reference purposes only and no representation is made as
to its accuracy. It should not be construed as legal or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor. The
information is neither an offer to sell nor a solicitation of an offer to purchase any securities. Such an offer will only be made to qualified investors by means of a private
placement memorandum and related subscription documents. Please consult your GenSpring Family Offices representative for additional information.
2011 GenSpring Family Offices, LLC. All rights reserved.
Three Main Points

1. A different environment
2. Process architecture
3. Managing the process
2
A Different Environment
The world has changed and clients are asking for
different solutions
2008 meltdown changed investors
not a cyclical event

disappointed return expectations
illiquidity surprises
no diversification when it was needed
Das, Markowitz, Scheid & Statman [2010]
hitherto debate on optimality

academic imprimatur
3
Process Architecture
Integrated wealth planning
Goals-based asset allocation in practice
A practical model
4
Integrated Wealth Planning

Wealth management brings multiple disciplines together
Describing investors goals
Estate, financial, philanthropic, investment
Understanding asset location
What matters to the family

Identify the worst nightmares
Changing ones lifestyle
Failing descendants
Identify the most cherished dreams

Personal, dynastic or philanthropic
5
Goals-Based Allocation in Practice

The starting point behavioral portfolio
The first iteration
A new iteration:
Three sequential branches
Multiple questions
Several feedback loops
6
Three Fundamental Goals

HNW investors usually have three distinct generic goals
that compete for their attention
Personal:
Meet current and unanticipated needs
Maintain future flexibility
Dynastic:
How much should my children get?
What about generations beyond them?
Philanthropic:
Active or passive philanthropy
Philanthropy as a family value
7
The Behavioral Finance Portfolio

Investment Risk
Dynastic
Aggressive Strategies
Dynastic
Philanthropic
Passive
Philanthropy
Flexibility
Changes in dynastic
lifestyle and active
philanthropy
Personal
Lifestyle
Balanced Growth Portfolio
Balanced Portfolio
Tax-efficient,
conservative portfolio.
Risk taken only to
preserve long-term
purchasing power
Shelter & Food

This design, initially proposed by Meir, Statman, illustrates the fact that we have
different views of risk for different goals
8
The First Iteration

Describe the
main goals of our
investor
Optimize
portfolios across
the whole
Dollar weigh and

prioritize these
goals
Structure a subportfolio for each

goal
9
A New Iteration
Experience suggested the need for further refinement to recognize
families special issues and their main nightmares
Family Assets
10
A New Iteration
The first step is to distinguish between internally and externally
managed family assets
Family Assets
Internal
Controlled &
managed by the
family
External
Controlled by family
& managed through
external managers
11
A New Iteration
Within the internal asset category, one can further look into the risk
associated with individual pools of assets
Family Assets
Internal
External
Cap. Pres.
Growth
Low risk,
income
producing
Family business
ventures
12
A New Iteration
The second step involves isolating the assets needed to meet the familys
lifestyle
Family Assets
Internal
Cap. Pres.
External
Growth
Lifestyle
Non L.S.
Declining
balance
portfolios
Assets not
currently needed
to support
lifestyle
13
A New Iteration
Within the lifestyle assets, one needs to distinguish between short- and
medium-term assets as inflation affects them differently
Family Assets
Internal
Cap. Pres.
External
Growth
Lifestyle
Short
term:
3-5
years
Non L.S.
Long
term:
6-15
years
14
A New Iteration
The third step is to uncover the familys needs beyond life style
Family Assets
Internal
Cap. Pres.
External
Growth
Lifestyle
Non L.S.
Short Term
Cap Pres.
Long Term
Growth
Other
15
Why Seek or Avoid Growth?

One should not simply assume that a family
SHOULD seek growth because it has been the
norm hitherto
Unexpected inflation
Lifestyle changes
Generational fragmentation
Mission related investing
Decision risk minimization: scorekeeping
Other
16
A New Iteration
Within the non-lifestyle dedicated assets, it is still important to
understand differences and specify what is needed and how
External
Lifestyle
Short Term
Non L.S.
Long Term
Cap
Pres.
Growth
Other
Nominal or
Real?
Liquid or
Less?
What?
How?
17
A Practical Model
The fundamental concept:
The advisor is a TRANSLATOR.
The family expresses goals in its own language.
The advisor translates them into financial and
investment language.
18
A Few Initial Caveats

Like any model, it is important to understand
capabilities and limitations
Key assumptions must make sense
Avoid determinism
Promote discussion of trade-offs
Provide sufficient feedback loops
Protect against misunderstandings
Stay humble and flexible
19
Key Assumptions and Inputs

The process starts with the crucial inputs, which
combine generic and highly personal family data
Capital markets assumptions
Financial asset totals
Current lifestyle needs
Anticipated lifestyle inflation
Life expectancy of principals
Asset holding structures
Any other issue?
20
Key Case Assumptions
A family with financial assets of $35 million

Current annual spending $1 million
No internally generated income
G1 aged around 50
Inflation expected around 3%
21
Separating Internal & External Assets

Internal capital preservation: $2 million
Apartment complex with rental income
Internal growth: $1 million

Venture capital start-up
Managed by member of G2
22
Assessing Lifestyle Needs

First 5 years: $4.7 million
Return assumption: 4%
Next 10 years: $7.2 million

Return assumption: 6%
Feedback loop
$11.9 million is less than total assets
Family is comfortable with findings
Plan on replenishing as appropriate

To maintain the 15-year horizon
23
Dealing With What is Left

Additional lifestyle goal
Provide for at least another 15 years
Opportunistic goal
Reserve 10% of portfolio for themes
Growth goal
Provide for dynastic and philanthropic goals
Maintain adequate liquidity
Do not over-commit to private equities
24
Personal Goal Summary

Amount ($000)
Share of Total
ST Lifestyle
4,716
13.5%
LT Lifestyle
7,206
20.6%
Lifestyle Refills
7,653
21.9%
0.0%
Capital Growth
8,925
25.5%
Internal Investments
3,000
8.6%
Thematic Needs
3,500
10.0%
35,000
44.1%
Low Tolerance for Losses
Total
25
Creating the Policy Portfolio

The process involves the interaction of two important
components
Individual sub-portfolios
Solely driven by client goals
Sized by translating client needs
Unique combination for each individual
Sub-portfolios constructed through modules:

Modules are driven by return/risk profile
Modules are matched to individual goals
Client preferences integrated in process
Each client portfolio is unique

26
Resulting Portfolio - $ Amounts

Tax-Aware
Cash
U.S. Municipal Bonds Inv. Grade
EAFE Fixed Income Hedged
U.S. Municipal Fixed Income HY
EM Debt
Non-Directional Hedge
U.S. Equities
EAFE Equities
EM Equities
Directional Hedge Eq L/S
Private Equity
MLPs
REITs
Commodities
Global Macro
Managed Futures
Opportunistic Themes
Internal Capital Preservation
Internal Growth
Total
4,716
5,765
6,033
Lifestyle
3,061
3,500
3,500
Non-Lifestyle
Liquid
LT
OpporGrowth Growth -tunistic
ST
LT
MT
CP
LT
CP
2,806
495
424
2,450
432
519
1,026
181
633
390
69
230
53
990
1,211
1,478
193
193
97
422
536
233
233
116
643
123
532
532
266
1,470
543
362
92
61
452
452
230
230
692
461
5,425
263
263
2,000
1,000
Internal
Policy
CP
Growth Total
6,672
1,177
1,859
4,337
1,782
1,782
891
4,814
814
1,327
884
825
825
412
2,278
814
136
136
3,500
2,000
4,716
5,765
6,033
3,061
3,500
35,000
5,425
3,500
2,000
1,000
1,000
1,080
1,080
3,500
2,000
1,000
35,000
27
Resulting Portfolio - % Share

Tax-Aware
4,716
ST
Cash
Fixed Income and Related
U.S. Municipal Bonds Inv. Grade
EAFE Fixed Income Hedged
U.S. Municipal Fixed Income HY
EM Debt
Non-Directional Hedge
Public Equity and Related
U.S. Equities
EAFE Equities
EM Equities
Directional Hedge Eq L/S
Private Equity
Equity and Related
Real Assets and Related
MLPs
REITs
Commodities
Global Macro
Managed Futures
Opportunistic
Opportunistic Themes
Internal Assets
Internal Capital Preservation
Internal Growth
Total
5,765
6,033
Lifestyle
LT
100.0% 80.0%
59.5%
42.5%
10.5%
7.5%
9.0%
9.0%
21.0%
21.0%
20.0%
12.0%
8.0%
3,061
3,500
5,425
3,500
Non-Lifestyle
Liquid
LT
OpporGrowth Growth -tunistic
MT
CP
LT
CP
55.0%
17.0%
3.0%
10.5%
40.0%
12.8%
2.3%
7.5%
5.0%
24.5%
15.0%
3.2%
3.2%
1.6%
7.0%
17.5%
40.0%
7.6%
7.6%
3.8%
21.0%
3.5%
80.0%
15.2%
15.2%
7.6%
42.0%
15.0%
30.0%
9.0%
6.0%
40.0%
20.0%
3.0%
2.0%
80.0%
15.0%
80.0%
15.2%
15.2%
7.6%
42.0%
15.0%
95.0%
5.0%
7.5%
7.5%
7.5%
7.5%
7.5%
7.5%
2.5%
2.5%
2,000
1,000
35,000
Internal
Policy
CP
Growth Total
40.1%
19.1%
3.4%
5.3%
1.5%
12.4%
26.5%
5.1%
5.1%
2.5%
13.8%
2.3%
28.8%
12.5%
3.8%
2.5%
3.1%
3.1%
100.0%
10.0%
100.0%
10.0%
100.0% 100.0% 8.6%
100.0%
5.7%
100.0%
2.9%
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
28
Goals-Focused Modules
The set must cover all categories of needs

Contiguous modules: sufficiently different
Individual modules: as optimal as feasible
At least four families of modules:
Tax-aware with non-traditional strategies
Tax-agnostic with non-traditional strategies
Tax-aware with only traditional strategies
Tax-agnostic with only traditional strategies
Must leave room for flexibility

29
Managing the Process

Superficially complex
Unique portfolio for each family or client
Potentially as many benchmarks as clients
Practically simpler than it looks

Goal modules: common across platform
Thus, room for standardization
Essentially amounts to mass customization

Complexity is where it belongs
Leverage across investment management
30
In Short, Three Main Points

A different environment
2008 changed needs and market opportunities
A new academic validation
Goals-based wealth management: new normal
Process architecture
Builds on existing concepts
Three-step process
Managing the process

Allows mass customization
A number of practical issues remain
31
Limits of the Process

Selected client preferences
Asset class or strategy preferences
Must be prepared to deal with exceptions
Path dependency
Transitioning a pre-existing portfolio
Dealing with concentrated positions
Investment reporting complexity

Selected strategies in more than one module
The correct use of benchmarks
32
Goals-Based Wealth Management

In Practice
CFA Wealth Management Conference 2011
Calgary, Alberta, Canada
September 20-21, 2011
Jean L. P. Brunel, CFA
Chief Investment Officer, GenSpring Family Offices
The information contained herein is obtained from sources that are believed to be reliable and is provided for reference purposes only and no representation is made as
to its accuracy. It should not be construed as legal or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor. The
information is neither an offer to sell nor a solicitation of an offer to purchase any securities. Such an offer will only be made to qualified investors by means of a private
placement memorandum and related subscription documents. Please consult your GenSpring Family Offices representative for additional information.
33

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Goals-Based Wealth Management In Practice

CFA Wealth Management Conference 2011

Three Main Points

not a cyclical event

Das, Markowitz, Scheid & Statman [2010]

hitherto debate on optimality

2011 GenSpring Family Offices, LLC. All rights reserved.

Integrated Wealth Planning

What matters to the family

Identify the most cherished dreams

Goals-Based Allocation in Practice

Three Fundamental Goals

The Behavioral Finance Portfolio

Balanced Growth Portfolio

Shelter & Food

The First Iteration

Dollar weigh and

Structure a subportfolio for each

Why Seek or Avoid Growth?

A Few Initial Caveats

Key Assumptions and Inputs

Key Case Assumptions

A family with financial assets of $35 million

Separating Internal & External Assets

Internal growth: $1 million

Assessing Lifestyle Needs

Next 10 years: $7.2 million

Plan on replenishing as appropriate

Dealing With What is Left

Personal Goal Summary

Low Tolerance for Losses

Creating the Policy Portfolio

Sub-portfolios constructed through modules:

Each client portfolio is unique

Resulting Portfolio - $ Amounts

Resulting Portfolio - % Share

The set must cover all categories of needs

Must leave room for flexibility

Managing the Process

Practically simpler than it looks

Essentially amounts to mass customization

In Short, Three Main Points

Managing the process

Limits of the Process

Investment reporting complexity

Goals-Based Wealth Management

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