Goals-Based Wealth Management

Goals-Based Wealth Management
By Jack Sharr y
But, Mousie, you aren’t alone
In proving foresight may be vain:
The best laid schemes o’ mice and men
Often go awry
And leave us nought but grief and pain,
For promised joy.
—Excerpt from To a Mouse, by Robert Burns
e’ve all seen the commercials
of a couple in their seventies
(who look like 50-somethings)
enjoying horseback riding or holding hands
while walking on a beach, or a green line
leading the way to retirement. The message
is clear: Plan now for the future. But, to
paraphrase Robert Burns, our best-laid
plans often go bad and leave us nothing
but grief and pain—and potential financial
ruin. How can we better ensure financial
success in retirement? How can we make
our best-laid plans better? And once we
have a better plan, how do we implement it
in an optimal fashion?
Goals-based wealth management (GBWM)
describes a holistic process that coordinates
all of a client’s assets across each of that client’s accounts in a tax-optimal way during
the planning process and the execution of
that plan. The objective is to maximize the
capacity of those assets to achieve desired
goals. The Money Management Institute
defines GBWM as the following:
The comprehensive management of investor assets—from accumulation through
withdrawal and bequest—to help investors achieve optimal outcomes across the
multiple accounts and products often
found in a household. Elements of
GBWM include: goals-based planning,
product and investment selection, asset
allocation, and multiple-account optimi-
zation. Multiple-account optimization
includes: optimal asset location, rebalancing, protection strategies, and income
sourcing and withdrawal sequencing. The
GBWM process begins with the identification and prioritization of investor
goals. It includes tax-optimal implementation and is sustained by regularly monitoring investor milestones against stated
goals and making adjustments as circumstances change.1
Done manually, GBWM is a complicated
and time-consuming process. Clients in the
ultra-high-net-worth segment have had
GBWM services available to them for some
time (because management fees on eightor nine-figure portfolios justify the time of
teams of advisors and their assistants), but
the assets of affluent and mass-affluent clients have not supported this time-intensive
process. Due to the development of taxefficient software, however, advisors now
can help any size household with GBWM
The first GBWM software tools were aggregation and account consolidation tools
such as Albridge and Yodlee, which enable
an advisor to view all of a client’s assets,
even if they are held away at another financial institution. Next came goals-based
planning tools, such as MoneyGuidePro
and Financeware, which consume data
from account aggregators and let an advisor
develop a GBWM plan that considers all
household assets.
The final step requires software that efficiently implements the GBWM plan using
tax-optimal asset location, rebalancing, and
income sourcing and withdrawal across all
household assets during each phase of an
investor’s life. Software from firms such as
LifeYield provide this implementation tool,
which enables advisors to deliver true
GBWM services to all clients regardless of
asset level.
This article discusses the benefits of
GBWM—from planning to execution—and
pays specific attention to the increased
returns through tax efficiency that can be
achieved by managing a household portfolio according to GBWM principles.
GBWM Planning
Regardless of Mr. Burns’ pessimism, planning remains an integral part of achieving
success; the adage “measure twice, cut
once” holds true for providing financial
advice as well as for carpentry. Over the
past decade, financial firms have spent
heavily on providing their advisors with
holistic planning tools that consider all a
household’s assets—including a client’s various taxable and tax-advantaged accounts,
pensions, Social Security, real estate, future
contributions, and savings, etc.—in determining the spending capacity that these
resources will be able to support in the
future, i.e., in retirement.
Planning includes determining the types of
investments, or asset allocation, a client is
comfortable with, which may, and usually
does, change near and into retirement. An
advisor and client may go over several iterations of the plan to find the one most suitable and achievable. Such “measuring
twice” is necessary to achieve a holistic
plan that has the best potential for financial success.
But measuring twice is where technology at
most firms ends; tools aren’t available yet to
©2015 Investment Management Consultants Association Inc. Reprinted with permission. All rights reserved.
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Location, Location, Location
Implementing a GBWM plan covers several
steps including the following trading functions, which must be executed across a client’s taxable and tax-advantaged accounts:
• the initial purchase and sale of securities
to match the agreed-upon asset
• on-going purchase of securities if a client
is in the accumulation phase and is saving for retirement;
• buying and selling securities as new target
asset allocations are selected, most often
during the transition-to-retirement phase;
• selling securities during retirement to
generate necessary income; and
• rebalancing the household portfolio
during all phases so it stays in line with
its target asset allocation.
Rebalancers and optimizers that generate
trades aren’t new, but they are singleaccount tools and don’t allow tax-smart
coordination of a client’s various taxable
and tax-advantaged accounts. For example,
with single-account tools, tax-smart management is limited to avoiding short-term
gains or perhaps matching losses with gains
when trades are generated. But this is all
done only within a single account. It also
means that each account, regardless of
whether it’s taxable or tax-advantaged, will
have the same asset allocation. This singleaccount approach ignores two of the most
powerful ways to minimize investment
taxes: asset location during the accumulation and retirement phases and optimal
income sourcing during retirement.
Introducing the Washingtons
To illustrate the benefits that can be achieved
through GBWM, let us consider a typical
affluent couple, Joe and Jean Washington,
with the following characteristics:2
• Current age: 50
• Retirement age: 65
Figure 1: Projected Washington Household Asset Growth during the 15 Years
before Retirement
Household Portfolio Value
“cut.” In other words, firms have spent significantly on planning software, and now
they are just starting to provide advisors
with software that helps execute these plans
consistently, efficiently, and tax-optimally.
Tax Neutral Asset
Tax Smart Asset
Tax Neutral Asset Location
• Total household assets at the start of the
evaluation period: $1 million
• 20 percent in tax-advantaged accounts;
80 percent in taxable accounts
• 30 percent in U.S. fixed income mutual
funds; 70 percent in U.S. and foreign
equity mutual funds
• $10,000 annual contribution to taxdeferred accounts and $40,000 to taxable
accounts (each growing at 2-percent
inflation rate for 15 years)
• 35-percent average combined ordinary
income tax rate (30 percent federal and
5 percent state)
• 20-percent long-term capital gains rate
(associated with 33 percent federal tax
• Retirement income maximized according to what remaining assets will support
Accumulation Benefits
Asset location is the practice of maintaining asset allocation at the household level
(instead of at the account level and cloning
each individual account) and locating the
most appropriate type of security in the
most appropriate type of account registration in order to minimize taxes. For
instance, if a client’s asset allocation
includes high turn-over mutual funds, to
the degree possible, those securities would
be located in a tax-deferred portfolio;
whereas tax-efficient equities, such as those
that are held long-term, will be located in a
Tax Smart Asset Location
taxable account where lower tax rates will
be realized. Research by Morningstar has
found that tax-efficient asset location can
increase after-tax returns by 52 basis points
per year.3
According to comparisons conducted by
Ernst & Young LLP, if Joe and Jean (and
their advisor) were to ignore asset location
and instead maintain the same asset allocation in each taxable and tax-advantaged
account, they could expect the value of
their portfolio to be approximately
$2.2 million when they retire in 15 years
(see figure 1). But by keeping the asset
allocation at the household level and locating assets in the accounts most appropriate
for minimizing taxes, their investible
assets could be worth almost $2.7 million
at retirement—an almost 20-percent
Optimal Income Sourcing
Historically, best practices in generating
retirement income called for liquidating a
client’s assets in the following order:
1. assets held in tax-advantaged accounts
to meet required minimum distributions (RMDs), if any;
2. assets held in taxable accounts;
3. assets held in tax-deferred accounts,
and finally
4. assets held in tax-free accounts.
©2015 Investment Management Consultants Association Inc. Reprinted with permission. All rights reserved.
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Figure 2: Projected Washington Household Asset Value during Retirement
Household Portfolio Value
The primary motive for this order is to
maximize investment alpha, and it is based
on the reasoning that assets with better tax
treatment should be left alone to grow as
long as possible. Coincidentally, this
method matches the single-account portfolio management tools that have been widely
available: It calls for each taxable and
tax-advantaged account to have the same
asset allocation so that as one account is liquidated, the overall household asset allocation remains in line with its target. But this
approach misses significant opportunities to
increase returns through minimizing taxes.
The opportunity to minimize taxes during
an investor’s lifetime is greatest during the
income (i.e., liquidation) period. Of course,
investment taxes are incurred only when
securities are sold, which is the type of
trading in which a retired client primarily
To the extent that retirement income is generated using the four-step order described
above, a tax-smart strategy is limited to
avoiding short-term gains in the single
period for which assets are being liquidated
and income is being generated. Perhaps
losses can be generated to match any gains,
short or long, but this tax-smart strategy still
focuses on just the current or single period.
With a GBWM approach to optimal income
sourcing, a client’s various taxable and
tax-advantaged accounts are coordinated so
that a tax-smart strategy includes minimizing taxes in the current period and also
considers how taxes can be minimized over
the entire retirement period as trades are
generated to produce income now. For
example, prior best practices called for waiting to liquidate a tax-deferred account until
assets in taxable accounts were exhausted.
But this approach may produce higher
eventual tax liabilities because tax-deferred
account withdrawals are taxed at ordinary
income rates. So a client who is drawing
only from a tax-deferred account may be
pushed into a higher tax bracket. If income
is more evenly sourced from taxable and
tax-advantaged accounts throughout retirement, a client may remain in a lower tax
bracket for tax-deferred withdrawals.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Year of Retirement
Tax Neutral Asset Location
Tax Smart Asset Location
Optimal income sourcing also can significantly affect bequests. Even though the
lower capital gains rate will be applied to a
long-term holding in a taxable account,
estate taxes may be minimized by liquidating assets in a tax-deferred account instead
so that the long-term taxable holding can
enjoy a step-up in basis for heirs.
years can increase after-tax annual retirement income from $110,000 to approximately $145,000—an increase of more than
30 percent (see figure 2). In addition, even
as they draw more income from their
assets, Joe and Jean can increase their
bequest from about $875,000 to almost $1.3
million—a 45-percent increase.5
Numerous additional considerations apply
when sourcing income across multiple
accounts according to GBWM principles.
Without software, applying all these considerations would be impracticable. GBWM
software enables advisors to deliver optimal
income sourcing to all clients with measurable benefits.
Doing Well by Doing Good
A Cogent Research study found that the
average investor holds 46 percent of assets
outside the primary-advisor relationship.6
A study by Cetera Financial Group found that
advisors say they feel that 75 percent of their
clients are loyal and not considering switching advisors, but only 23 percent of clients
with between $500,000 and $1 million—and
just 7.6 percent of those with between $2
million and $6 million—say they feel loyal to
their advisors.7 These statistics show that
investors have multiple financial relationships and no problem switching advisors.
Let’s look again at Joe and Jean Washington.
They’ve now reached age 65, are retired,
and need their advisor to begin liquidating
assets to generate retirement income. Their
goals are two-fold:
1. maximize income (so they can go horseback riding and stroll at the beach); and
2. bequeath as much as they can to their kids.
Joe and Jean, with their advisor, already
have increased their assets using a GBWM
strategy during the 15 years before retirement. According to comparisons conducted by Ernst & Young LLP, continuing
to use a GBWM approach for the next 25
A GBWM strategy, however, can help an
advisor know a client better. In creating a
GBWM plan, the advisor will learn about a
client’s total portfolio. Once all assets are
considered together, a GBWM plan and the
benefits are quantified, the client is naturally inclined to have the advisor manage
more of the portfolio, implement the plan,
and deliver on the significant benefits that a
GBWM strategy can provide.
©2015 Investment Management Consultants Association Inc. Reprinted with permission. All rights reserved.
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Servicing clients optimally is the primary
reason to employ software to plan and
implement GBWM, but retaining existing
assets and attracting new assets is a valuable ancillary benefit to advisors that provides solid financial rationale for firms to
invest in GBWM tools. Those firms that
invest in GBWM planning and implementation software will grow their businesses
faster and do well by doing good.
Jack Sharry is executive vice president of
strategic development for LifeYield LLC, a
developer of software to help financial advisors and investors achieve optimal after-tax
returns and income through coordinated
account management. He is also chairman of
Money Management Institute’s (MMI) GoalsBased Wealth Management Committee.
Contact him at [email protected]
1. See http://mminst.org/press-room/press-releases/
2. For the full set of assumptions and results, see
“Improving After-Tax Returns, Retirement Income,
and Bequests through Tax-Smart Household
Management,” LifeYield, LLC, a 2010 white paper
with supporting research by Ernst & Young, which
can be obtained by request at http://lifeyield.com/
3. See David Blanchett and Paul Kaplan, “Alpha, Beta,
and Now … Gamma,” Journal of Retirement vol. 1,
Continued from page 38
to most beneficiaries. Many accountants and attorneys, as well as
some financial advisors, are unfamiliar with them, too. As a remedy, the IRS allows IRA owners and beneficiaries to apply for relief
by using Form 5329, Additional Taxes on Qualified Plans, to report
the missed distribution, offer a brief “mea culpa” explanation, and
request a waiver of the penalty.
Before filing the form, the missed distribution amount should be
taken and noted in the explanation that it has already occurred.4
Form 5329 should be filed as soon as practical after discovering the
missed RMD; don’t wait until the calendar-year filing date. The
sooner the form is filed, the sooner the three-year statute of limita-
no. 2, pp. 29–45. http://www.iijournals.com/doi/abs/
10.3905/jor.2013.1.2.029. Blanchett is head of
retirement research at Morningstar Investment
Management; Kaplan is director of research at
Morningstar Canada.
4. See “Improving After-Tax Returns,” cited above.
6. See information from the Cogent study as cited in
the 2014 “Financial Professional Outlook” by Kevin
Hoffberg, who is managing director of marketing for
Russell Investment’s Private Client Services, http://
7. See Ann Marsh, “Cetera Launches Program to
Increase Advisors’ Interaction With Clients,” Financial
Planning, February 15, 2012. http://www.financialplanning.com/news/cetera-connect2client-onlinemarketing-tool-for-financial-planners-2677373-1.html.
tions runs out. In our experience to date, the IRS has not denied
any reasonable requests submitted on Form 5329. We hope this
trend continues.
Helen Modly is president of Focus Wealth Management, Ltd. in
Middleburg and Fairfax, VA. She earned a BS from George Mason
University. Contact her at [email protected]
1. “U.S. Total Retirement Market as of 1st quarter, 2014,” Investment Company Institute,
2. See appendix C: Table I (Single Life Expectancy), http://www.irs.gov/publications/
3. Private Letter Ruling 201208039, http://www.irs.gov/pub/irs-wd/1208039.pdf.
4. IRS Publication 590, http://www.irs.gov/publications/p590/.
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