The Essentials of Wealth and Risk Management | AWM Insights #170
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Episode Summary
The concept of “making it” or crossing the finish line in your Wealth journey is like the tooth fairy. It would be awesome if it existed, but it doesn’t.
Preserving your wealth is a full-time job, and if done well, it’s a job that will be carried out past your lifetime. Working with a financial “Quarterback” helps your wealth grow and protects you from the unnecessary and avoidable risks that can erode your wealth.
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Episode Highlights:
0:00 Intro
0:31 What are the risks that can destroy your wealth?
3:16 Why not all kinds of risks are bad
3:45 The importance of Estate Planning and Family Dynamics
7:05 The Importance of Liability Planning
8:25 Death and disability planning
10:00 The importance of having a financial “Quarterback”
11:33 Text us!
+ Read the Transcript
Brandon Averill (00:02): All right everybody. Welcome back for another episode of AWM Insights. It's Brandon and Justin here. We've been taking a little journey down this path of the multi-generational wealth formula that we often go over with you guys in meetings. Really the simplified formula for how wealth works, how we compound it, and the excitement that can come out of it. And we've dug into the weeds a little bit, but kind of come to the culmination of this is how wealth is created and we'd be remiss if we didn't hit on probably something that's pretty important. The risks to blowing this whole thing.
Justin Dyer (00:39): Arguably the most important.
Brandon Averill (00:41): Yeah, absolutely. And so I think really the reason we want to talk about this is we've laid out this full structure. We've taken weeks to talk about it. There's a lot that goes into it. And we could execute this thing 100% with the most beautiful structure of all time, and it just takes one little thing to blow the whole thing up. So we definitely need to talk about it. We talk about it a lot with you guys in our meetings. We work behind the scenes quite a bit in a lot of this stuff, but it's pretty important. And so we're going to hit on some of these risks, some of those things to make sure that everybody's considering as we walk through it. So Justin, what are some of the things that come to mind for you when you start to step outside the wealth formula and what are the things that maybe keep us up at night and hopefully we work on so it doesn't keep our clients up at night?
Justin Dyer (01:32): Yeah. For me, the number one, and this is really my area of focus, is bad investments. That could take a number of different forms. It could be outright, plain and simple. As plain as day as that word is. You make a bad investment, it goes to zero. It could also be poor financial structure, overly illiquid when you need to be more liquid. What does that actually mean? It basically means your cash is tied up in an investment or a fund that you have no control over and you need the money tomorrow. So that's poor financial structure. Poor liquidity planning is another way to think about it, but really bad investments can blow up a multi-generational wealth formula, a net worth, whatever phrase you want to use there. And you need to really think about it. There's actually a podcast, a Tim Ferris podcast, I'll give him a shout-out.
(02:29): He was talking with Nassim Taleb, written a bunch of interesting books. The guy is incredibly intelligent. He used to be a financier, but he dealt with options a bunch in that life. And part of that conversation was how dangerous options can be. And it just brings this idea back to my head, right, where people are chasing after some bright shiny object, putting their money in an investment they don't fully understand and doing it in the wrong size effectively, where it just can really, really, really put your priorities. Going back to why we're talking about this in the first place, putting your priorities at risk. And so we really think about mitigating that as much as possible. It doesn't mean we don't have investments that go down. That's an important distinguishing fact here. But there's a big difference between investments, especially public market investments that have volatility go up and down on a daily basis versus just outright bad investments, whether it be a bad thesis, someone doing something they don't fully understand how it's going to behave, et cetera, et cetera.
(03:37): So bad investments is really up there, number one for me. And then you get into kind of the transfer of the wealth, of your investments being the big portion of that. And that's where estate taxes or improper estate planning can really put the transfer or this formula at risk. Estate tax is pretty straightforward if you didn't plan ahead for that. And when you inevitably pass away at some point in time, most of our clients are probably going to be in a net worth situation where they have an estate tax. And if you don't plan for that ahead of time, guess what? Most of that money is going to Uncle Sam. You might be okay with that, but plan ahead of time and make that decision before that decision is really made for you. And the way to get around that is through what we call estate planning.
(04:25): I've alluded to that. That also dovetails into a third risk that I'd hit on, which is family dynamics and the transfer of wealth throughout multi-generations. There's a shirt sleeves to shirt sleeves saying, which essentially means that money doesn't transfer intergenerationally very well. And usually that's because of family dynamics. Family dynamics you will hear is not the technical aspect or the technical nature of this entire formula. You can get this entire formula spot on and this is why we're talking about this as a risk, and then there's just poor family dynamics. You as an individual, you as a family, you as a couple didn't put the time, the effort and the energy into translating your values to the next generation, whoever they may be, your heirs. And that's just something we focus quite a bit on because it really can ruin, and we use the multi-generational term in this formula for a reason, but it can ruin that transfer of wealth.
Brandon Averill (05:30): Yeah, absolutely. And I think I'd even take it a step further with those family dynamics. A lot of times it's even just the passive nature of it. It's the put your head in the sand type deal, right? It's-
Justin Dyer (05:41): It's way easier to do that than-
Brandon Averill (05:43): Way easier than to face some of these potential issues that may come down. And if you think about even the math, right? As you go down generations, you're going to go from two people, theoretically, a husband and wife, you have a couple kids, right? They get married, you start to see this tree and all of a sudden wealth is distributed amongst greater number of people. And so mistakes are magnified when you get into that piece of it. And so we talk a lot about even the simple concept of what's it mean to be an Averill? What's it mean to be a Dyer and how are we instilling that in our children? We worked really hard for what we've created, whether we're in a estate planning situation or not, state tax situation or not, or whatever your wealth might be. You still have to pay attention to this because whatever you've worked so hard for, you want that to transition super well.
(06:36): And this all comes back to the values. What are the values that ultimately you want to transfer? And we just encourage all of our families to really think through that and spend the time on that type of stuff so that it's not all for naught. You put a lot of work into building this generational wealth, make sure that it can last. And so there are a couple other risks that again, probably are a little bit hopefully dealt with a little bit more. If you're at least in a comprehensive nature of a planning relationship. All our clients listening, these are certainly being taken care of. Hopefully even if you work with some broker somewhere, you've got another team and you're trying to cobble all this stuff together yourself, but proper liability structures, if you own properties, make sure they're in LLCs. A lot of people confuse tax planning with liability planning.
(07:30): The corporate structures are actually liability planning tools. So make sure that somebody's slip and fall at your rental property doesn't put your entire financial structure at risk. Make sure that you have the proper umbrella insurance. You get in a car accident, you're at fault, but it's an accident. These things happen. Make sure that you have the proper coverages in place that again, it doesn't come back and impact your entire financial structure. Same with just even your simple people don't think through, unfortunately, auto insurance and homeowners insurance.
Justin Dyer (08:04): The right coverage. Yeah.
Brandon Averill (08:05): The right coverages. Our clients know this, but cheaper isn't always better. Eric has the great saying, I think I've mentioned it before, but Geico, the little gecko. Yeah, that's not for you anymore. You got to think about who these things are built with. That's the cheapest way to go. But does it give you the protection that you want?
(08:22): And are we being kind of penny wise pound fool?
Justin Dyer (08:24): That's exactly right. Yeah.
Brandon Averill (08:25): Really thinking through all those types of liability things. And then there's death and disability, right? This ties somewhat back into estate planning. If you do have a big contract, for instance, for our athletes that you haven't been paid out yet. Yes, your family's going to get that money, but if you happen to pass away, that money's going to get paid out over the term of your contract. And now you may be leaving your family in a situation where they're in a huge liquidity crunch and put the whole structure back at risk. Or disability, loss of value insurance. Total disability, accidents happen.
Justin Dyer (09:05): They sure do.
Brandon Averill (09:05): And so these are just things that around the edges, but you work so hard on this wealth formula and we work so hard on this with you, you definitely need to be looking at stuff.
Justin Dyer (09:17): And just on your last comment, I want to add to that, it's really interesting being in our perspective because you actually see these things unfolding. I think it's really hard for an individual to understand or appreciate that accidents do happen. Severe accidents, little accidents, they do happen. And we can attest to that. I have this conversation with my wife a lot because sometimes she'll push back on some of these things and we've seen it. We've seen it happen, and it's real and it's important to protect against them.
Brandon Averill (09:45): I think it's very important, and this is a benefit to all clients listening, of having all this encompassed in one place. We talk about this, your wealth is out of one pocket, it's one net worth. It's one effective tax rate. If you don't have somebody overseeing and managing this in a holistic one place here, it gets really tricky to start to look at all the pieces and make sure you have all the protections in place. Not that it can't be done, but the onus goes on to you. So it's one of the big reasons we believe so deeply in the multifamily office model and why we're a family office and encourage people to hire family offices because then all of this stuff really does get taken care of nicely.
Justin Dyer (10:28): One quick thing to interject on. I know a lot of clients listening have seen this. If you want a copy of it, reach out, let us know.
Brandon Averill (10:35): Absolutely.
Justin Dyer (10:36): We can send a little one page PDF out and you guys can reference this formula on a regular basis.
Brandon Averill (10:42): Yeah, for sure. Hopefully this has been helpful. Next week we're going to get into... Hey, we just talked about the wealth formula. We talked about the risks that exist. I started to touch on a little bit of the team, but who do you actually want in your team to execute all this stuff for you? Why is it important that they are all part of one team as opposed to trying to piecemeal it? And some of the misconceptions, I'll put it that way, of reasons why you might want a separated team. We can get into that, but until next time, own your wealth, make an impact, and always be a pro.