Wealth Management and Risk Management
Financial losses threaten our financial goals and dreams. While some losses may be due to the natural fluctuations of the stock market, no one should have to suffer unnecessary losses due to the quality of investment advice they receive or unethical business practices.
Forensic investment analysis goes behind the numbers and assumptions used by financial advisers to evaluate both the quality of financial advice and the suitability of the investment recommendations being provided.
- Forensic investment analysis, if done prior to investing, provides an effective wealth management and risk management program, a means for investors to avoid investing in unsuitable investments and financial strategies.
- Forensic investment analysis, if done after investing has already occurred, can alert an investor to unnecessary risks due to unsuitable investments and a means of avoiding unnecessary financial losses due to such investments.
Many financial advisors use asset allocation/portfolio optimization software programs to produce their investment and asset allocation advice. Most of these software programs generate recommendations in terms of broad, generic asset categories (e.g., large cap growth, small cap growth and international growth), leaving the financial advisor with the responsibility of picking specific investment products that are consistent with the software’s recommendations.
If the risk and return characteristics of the investment products recommended are not consistent with the risk and return characteristics used in producing the asset allocation recommendations, the investor’s actual portfolio can be far different from the original asset allocation projections. These inconsistencies, or “recommendation-implementation gaps™,” often result in the client being exposed to unnecessary risk due to the inclusion of unsuitable investments in their investment portfolio.
As discussed in detail in our white paper, “The Asset Allocation Quality of Advice Matrix™- What You Don’t Know Can Hurt You!,” in our “Research” section, there are a number of significant concerns with such “black box” financial planning and the resulting recommendations. Investors who have a forensic portfolio analysis performed are often surprised to find out that their actual investment portfolio is riskier than the original asset allocation recommendations and projections they received from their financial advisors and exceeds their acceptable risk tolerance level.
The Benefits of Wealth Preservation Planning
Wealth preservation planning also alerts an investor to any “recommendation-implementation gaps™” in their portfolio, providing an investor with the opportunity to avoid unnecessary investment risk and better protect their financial security.
Wealth preservation planning involves a number of related issues, including investment planning, financial planning, retirement planning and estate planning. The common element in each of these areas is the efficient use and preservation of one’s assets.
The old adage, “time is money,” certainly holds true with regard to investment losses. The importance of avoiding unnecessary investment losses due to unsuitable investments can be seen in the chart below.
| Amount of Loss | Rate of Return Required to Recover Loss | Number of Years Required to Recover Loss* | Opportunity Cost (approximate) on $100,000 investment |
| 10% | 11% | 1.00 | $11,000 |
| 20% | 25% | 2.25 | $24,000 |
| 30% | 43% | 3.50 | $43,000 |
| 40% | 67% | 5.50 | $67,000 |
| 50% | 100% | 7.25 | $101,000 |
* approximate, assumes 10% annual rate of return
An investor obviously cannot get ahead if they are spending all their time “catching up” for losses due to unsuitable investment advice. Wealth preservation planning provides a means for investors to obtain the information they need to properly protect their financial security. The wealth preservation planning process focuses on the art of combining sound, practical investment strategies and risk management techniques with common sense to construct and maintain a suitable investment portfolio.
Wealth preservation involves more than just portfolio management. Once one’s investment portfolio has been properly addressed, simple wealth preservation techniques such as 401(k)/403(b) rollovers, IRA beneficiary designations, wills, trusts and powers of attorney should be considered. In certain cases, an investor may also benefit from advanced wealth preservation techniques such as the use of living trusts, family trusts and family limited partnerships.
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