You Hold the Keys to Our Best Ideas

David Bokman, Managing Director, Co-Head of Family Office Resources

Brian Mulley, Executive Director, Head of Portfolio Construction

At first blush, this exchange may suggest that the advisor, while trying to be helpful, may have misunderstood her or his client. But maybe there’s something else going on here.

So often, clients or prospective clients ask us “What is your best idea?” That’s a fair question. One of Morgan Stanley’s core values is “Lead With Exceptional Ideas,” and we are committed to always bringing you and your family our most innovative thinking. When it comes to family wealth management planning, however, it is critical to remember that you hold the key to our best ideas. And, for reasons we’ll explore, there may be sensitivities that make it challenging to unlock those ideas. Understanding and overcoming this reality can lead to breakthroughs far more powerful than any single idea we can bring you in isolation.

You might assume that our “best idea” is an investment thesis, such as “What undiscovered small-cap manager should I add to my portfolio?” or “Is it time to increase the share of active management?” But, in fact, those questions are often hard to answer thoughtfully without first exploring the broader context of your overall planning. It may seem counterintuitive that an understanding of your estate plan, or even your family dynamics and philanthropic vision, could drive investment decisions, and even affect something as discrete as which small-cap manager to select in a given portfolio. But it does.

For example, assume you have created long-term trusts for children and grandchildren, or even charity, and that you have structured those trusts so that they will not be subject to estate tax when you die. Those trusts may have different “hurdle rates” of return, or investment horizons, than the assets you have retained for your personal use.

One entity may need a different type of small-cap manager than another based on its unique cash flow, liquidity needs or risk profile. Further, sophisticated estate planning often involves transfers of assets from one entity to another. In those cases, we need to consider the impact of having the small-cap manager in an account that ultimately will be making distributions to another account. These are all questions that require a more nuanced understanding of your broader objectives. And those objectives change over time, which means we need to have an ongoing conversation in order to make it more likely that we will be able to achieve the desired outcomes. Even more to the point, sometimes our best ideas may not even involve investment strategies at all. Instead, as just one example, they may relate to how you may use your financial capital to empower your descendants, rather than watch your financial wealth impede their initiative and stifle their ambition.

So why don’t broader planning issues lead every conversation? The truth is that both you and we bear some responsibility. You may be uncomfortable raising those issues with us because you haven’t resolved all the emotional and family dynamics that underlie the plan.

For example, is the fairest approach to treat all children equally; or is it actually fairer to take into account that some children have greater resources, or greater challenges, than others? Do you continue to pursue, as a group, the philanthropic passions of prior generations; or do you allow younger family members to pursue their unique missions?

Some Common Situations May Be Illustrative and Help to Make Our Point

·         Family members can become too attached to concentrated stock positions and fail to address the emotional and family consequences of selling a part of the family legacy in favor of a portfolio that is more responsive to current realities.

·         A similar bias in favor of the familiar can cause clients to gravitate toward investments that are comfortable rather than pursue a fully diversified portfolio. For example, a successful tech entrepreneur may unconsciously overweight private equity investments with a tech focus, whereas a beneficiary of a large trust with “old economy” stocks may unconsciously underweight those same technology-related investments.

·         Adoption of a particular estate plan may produce long-term tax benefits far greater than the impact of any conceivable change in your asset allocation.

·         Even more dramatically, creating a family mission statement that reflects the work of the entire family, or building a framework within which to make decisions about shared family enterprise, may reduce the potential for devastating family conflict, thereby having a greater benefit in financial and emotional terms than the adoption of any particular estate plan.

·         Procrastination can lead families to maintain a successful investment in a trust for children when the better tax answer may be to move it back to the estate of senior generation family members to “lock in” estate tax benefits.

·         More generally, while it is advisable to address wealth management planning in “quiet” periods, more often, such planning is deferred and conducted in reaction to events such as a sale of the family business, a divorce or an unexpected death.

·         Often a single issue that is currently in the news, or particularly sensitive to one or more members of the family, has a disproportionate impact on the overall plan. For example, clients in high-tax states may let recent changes in the law drive an over-allocation to municipal bonds without regard to specific risks or the investment objectives of each family entity.

·         A bias in favor of pleasant conversation can create an imbalance in an estate plan, such as a detailed focus on creative financing options for a new home for a recently married child while ignoring entirely the need to take into account his or her sibling’s substance abuse challenges when designing a long-term family trust.

At the same time, we know that we are advisors, not members of your family. So, we might be uncomfortable raising such sensitive issues for fear of provoking family tension and jeopardizing our good standing with you. And yet you may be looking to us to provide some thought leadership by at least sharing our experience about best practices among similar families when they address these issues. Sometimes just being honest about the reluctance you and we both have about engaging in these discussions can be a healthy first step. At the same time, while that reluctance may be understandable, as your Advisors, it’s our job to put such reluctance aside and, with your permission and with the delicacy and respect such topics require, address them together. We’re not only willing, but eager, to play our part.

BUT WAIT — DOES THAT MEAN I NEED TO DO PERPETUAL PLANNING? The notion that you must continually address these challenging questions may seem unpleasant, or even overwhelming. But, of course, not planning is a form of planning. So, by avoiding the process, you are essentially letting yesterday’s decisions dictate tomorrow’s outcome, even if the factors that led to those decisions have changed, as they inevitably have. In general, we prefer conscious planning to unconscious planning. Here is a sample of some “reality check” questions that we believe should be revisited on a regular basis with all members of your advisory team, including your attorney, accountant and other financial advisors:

1.       Is our estate plan aligned with our deeply held family values, and does it reflect our true mission?

2.       Do we have the appropriate amount of life insurance, and is it owned by the appropriate parties or in the appropriate structures?

3.       Do the existing trust structures take into account the preparedness of the trust beneficiaries to be good stewards of the family wealth? Do our trustee choices still make sense? Are they still willing to serve?

4.       Are there any gaps in the financial education of any family members?

5.       Have the family dynamics changed, for example, after a recent marriage or divorce?

6.       Is the philanthropic mission up to date? Are the evolving priorities of each family member addressed? Have we considered the views of newer family members?

7.       Once we’ve answered the questions above, what are the implications of those answers with respect to our asset allocation, manager selection or the mix between liquid and illiquid investments? Do those implications change our tactical thinking?

8.       On the other hand, have we taken into account the impact of our actual investment or tax experience on the objectives we initially defined? What steps must we take if one entity or another has more or less wealth than we originally anticipated?

We don’t have prepackaged solutions to every possible issue that might arise. We will never understand your objectives, or the underlying dynamics of your family, as well as you do. But we can ask appropriate open-ended questions that help bring these issues to the surface. We can share stories about similar families and the best practices for dealing with these questions. And we can point you to other resources that offer thoughtful approaches.

In short, the families who do the most effective wealth management planning consciously bring broader issues into the planning process, so that those issues don’t unconsciously affect the final investment decisions, and our best ideas may be central to addressing those issues.


This material, including all charts and graphs, has been prepared for informational purposes only. It does not provide investment advice or any advice regarding the purchase and/or sale of any investment. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. It is not a recommendation to purchase or sell artwork nor is it to be used to value any artwork.

 Investors must independently evaluate particular artwork, artwork investments and strategies, and should seek the advice of an appropriate third-party advisor for assistance in that regard as Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide advice on artwork. Investing in commodities entails significant risks. These are speculative investments and, as such, their value can be subject to declining market conditions. The value of commodities markets may fluctuate widely based on a variety of factors, including, but not limited to, price volatility and lack of liquidity. Investing in physical commodities, such as art, exposes the investor to other risk considerations such as potentially severe price fluctuations over short periods of time; storage and insurance costs that exceed the custodial and/or brokerage costs associated with the investor’s other portfolio holdings; lack of a fundamental pricing model for art; absence of an income stream compared to other investments; challenges to authenticity and ownership; and lack of regulation.

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