Episode 39 – Financial Planning Is a Prerequisite to Successful Investing

Welcome to Market Perspectives, a Mercer Advisors podcast. Today’s episode is titled Financial Planning is a Prerequisite to Successful Investing, and it’s the first of our investment pillars here at Mercer Advisors. I’m Josh Zumbrun. I’m the Director of External Communications here at Mercer Advisors, I’m joined today by Don Calcagni, our Chief Investment Officer. Don, thanks so much for being with us this morning.

Thank you, Josh. I’m excited to be here. This is one of my most passionate topics that I love discussing with clients and our audience.

So I mean, to set the stage here, right?

Take, at Mercer Advisors, we take a very evidence based approach to everything we do, right? Tell kind of our listeners about just the foundations of this and why this is so important to how we approach investing.

Well, mean, I mean, the first thing to to to consider is that we are fiduciaries.

And so first you need to ask yourself, well, what does that really mean? And what it means is that we are in a special position of trust and care as it relates to our relationship with our clients, as it relates to managing their wealth, as it relates to providing them counsel.

And so the way I think about that, Josh, is that we have a moral obligation to incorporate the absolute best evidence based scientific thinking into how we go about managing our clients’ wealth and the advice that we give them. And so when we look at each of these five pillars that form the foundation of Mercer Advisors investment philosophy, each and every one of those can be substantiated by decades of real world empirical data, real world learnings that we’ve observed in working with clients. So everything here is well informed. And I think that that is our obligation to our clients, right? If you are hiring somebody to provide you advice, I would think that you want the absolute best peer reviewed scientific thinking available as it pertains to whatever it is you’re trying to accomplish.

So I’ve just pulled the five investing principles up on screen here for those who are watching. And for those who are listening, today we’re really just going to dig into that first principle. So Don, tell us about this principle. Financial planning is a prerequisite to successful investing.

Yeah. Mean, Josh, I think there’s this confusion between investing and financial planning. Investing is not financial planning. Financial planning by itself is not investing.

Financial planning is an exercise by which we identify what our objectives are, our future objectives, what it is we would like to accomplish. Financial planning is all about determining where we want to go. Investing then informs how we’re going to get there. Investing is the time machine that gets us from where we are today to where we want to be at some point in the future.

If you think about any investment portfolio, one of the most important questions you need to ask yourself is, well, what’s my time horizon? Is it one year? Is it five? Is it ten?

Is it thirty? Right? Well, all of that is a function of what are we trying to accomplish? Are we just looking to do a home renovation in twelve months?

Are we looking to send our child college in five years? Or are we looking to retire in thirty or leave some sort of bequest to a charity when we pass away? So understanding the time horizon is critical to understanding what the investment portfolio should ultimately look like. So there is lots of confusion in our industry where we totally, very sloppily use financial planning and investing interchangeably.

They are not the same thing. Now, Josh, in terms of the evidence, right? I made a claim a few moments ago that every one of our principles is substantiated by reams, decades of evidence. And I just wanna give our listeners an anecdote.

When Cornelius Vanderbilt passed away in eighteen seventy seven, he was the wealthiest man in human history. He had a wealth of one hundred million dollars in eighteen seventy seven. The challenge is is when he passed away, he didn’t leave any instructions to his son Billy for how to manage that wealth, how to transfer that wealth.

So much so that by nineteen seventy, nineteen seventy three, all of the Vanderbilt fortune was entirely gone. There were no millionaires in the Vanderbilt family in less than one hundred years of Cornelius’ passing. And that’s because there was no plan. And very wealthy families, they know this.

We have a saying, shirt sleeves to shirt sleeves within three generations. It is exceptionally rare that wealth lasts more than three generations. So we often say that, look, building wealth is difficult. What’s even more difficult is sustaining that wealth and successfully passing that wealth onto future generations.

That is a failure of financial planning. That’s not an investment failure. Wealth and families have access to the very best investment opportunities on the planet. Where they fail is in not having a financial plan that clearly articulates what success looks like, what they are investing for, what their liquidity, risk tolerance, and growth needs are.

And because they don’t have that financial plan, ultimately their wealth dissipates. And by the way, the Vanderbilt situation, it’s not isolated. If you go back and you look at the Forbes four hundred from, I think that was nineteen eighty two when they had the inaugural list, right?

The first The

poorest person on that list had one hundred million dollars in nineteen eighty two.

Just doing simple arithmetic, if everyone on that list, Josh, had invested just in the S and P five hundred Index in nineteen eighty two, now we have over sixteen hundred billionaires.

We don’t have sixteen hundred billionaires in the United States. We have less than one thousand.

If you think about it, these are failures of financial planning and these are not isolated incidents.

Not only do we have less than one thousand, but they’re largely a different group than they were even then. There’s very few people that were on the original list where either they or their families are still there forty years later. And all they had to do would have been kind of the most basic planning and investing.

Put it into an index fund, right? That’s all they had to do, right? They didn’t have to do anything fancy. They didn’t have to do private equity and venture capital and we would have significantly more billionaires today.

But you raise a point, Josh, is that less than ten percent of billionaires today can actually trace their wealth to any of the families that were on that nineteen eighty two list. And so for our listeners, I’m referencing, information, some research that was done by Victor Haghani and James White in their book, The Missing Billionaires. I highly recommend this book to families that are trying to think through how to make better financial decisions. And I think the core, the most important takeaway from Victor and James’ book is you need a financial plan, right?

Otherwise you’re going to be building this bridge to nowhere. The financial plan identifies where do you want to go?

How do you define success in the future? What are we investing for? Why are we putting our life savings, our family’s wealth at risk?

Financial planning is about identifying those goals, those objectives, and then from there backing into reverse engineering into what are the strategies that we need to deploy? What does our asset allocation need to look like? What does our tax planning need to look like in order to achieve those objectives? And again, I often hear Josh that, well, some families are so wealthy, they don’t need financial planning. That is the dumbest thing I’ve ever heard, right? What you’re saying is that I’m just going to start investing even though I have no idea what a successful investment experience would look like.

That’s why we need financial planning. Financial planning helps us build that bridge from where we are today to where we want to be tomorrow.

And so, Don, this is something that I didn’t appreciate myself until really going through it. I didn’t realize kind of how profound the difference is between or how profoundly complementary investing and financial planning are. They’re really two very different things that you need to be doing in coordination. And so kind of explain help unpack that a little bit. What is the distinction that you’re making between investing and financial planning? And why is it so important?

So let’s zoom out for a moment. Financial planning is a comprehensive exercise where families work with a team of trusted advisors to build, manage, sustain, and transfer their wealth across time.

That’s what financial planning is designed to do. Now let’s think about that exercise for a moment.

Building, managing, sustaining, and transferring wealth is admittedly very much a function of investing, but it is a function of so much more. It is a function of tax law. It is a function of public policy. It is a function of family governance.

How our investment decisions, how our financial decisions made within the family when life invariably changes, right? Maybe a new grandchild comes along. Maybe there’s an unexpected death. Maybe there’s an unexpected unplanned for massive liability claim against the family due to some sort of accident, right?

So, building wealth is a function of law, of taxes, of so much more. It’s a function of our behavioral responses to what’s happening in the world around us. We live in a highly politicized environment at the moment. And I can’t tell you how many families fall into this trap around trying to make investment decisions based on their political views.

These things are dangerous, right? Yeah. So, understanding that wealth is a function, building wealth is a function of so much more than just an asset allocation. It’s so much more than just picking the right stocks or something like that, right? Certainly investing is critically important but Josh, let me give you a very simple example. Take someone who has built up a significant amount of money in a four zero one ks plan, right?

A lot of people would look at that and say, well, I’ve got a million dollars in my four zero one ks plan. No, you don’t. In reality, the government has a liability claim against your four zero one ks plan in the form of income taxes. Well, the income tax can be anywhere from zero to as much as basically forty percent. That’s a big swing, meaning that you could have a million or you could have as little as six hundred thousand. And if you’re in a high tax jurisdiction like California, Illinois, or New York, it could be even less.

So taxes and investing, and that’s just one very simple example, Josh. They are intricately, intimately connected.

Right? So investing in a vacuum without paying attention to taxation, without paying attention to estate planning law, without paying attention to public policy, without paying attention to how families are governed, how they make an investment in financial decisions, all of those things could be very detrimental if you’re not paying attention to those things. So investing is one piece, a very important piece admittedly, but it’s one piece of a very complex exercise that goes into building, managing, sustaining, and ultimately transitioning wealth across time.

I went through this recently myself and it gave me this appreciation. I think of myself as someone with simple finances, but the reality is, you know, my wife and I each had 401s, know, some had been rolled over into an IRA, a brokerage. We have two kids who are six and three. So we’ve got five two nines. We’ve got a twelve year horizon before the one goes to college, fifteen before the other goes to college.

Retire, you can start claiming distributions from the four zero one at age fifty nine and a half. And suddenly that’s not as far away as it used to be. And you start putting all these variables together and it’s really important to kind of put money in the right buckets and sequence these things. And it’s about a lot more than picking the investments. You sit down and even with a fairly simple life situation, you realize that this part of it is extremely important.

No, absolutely. You know, I keep saying this, Josh, that financial planning is about identifying where we want to go, what we want to accomplish, right? It’s about identifying goals, putting time horizons around those goals, quantifying those goals, right? How much capital, how much savings, how much wealth do we need to accomplish those goals at some future state?

You mentioned 529s. You know, college tuition is off the charts, right? So planning for those things. But that’s what financial planning does.

It identifies where do we want to go and then investing, tax planning, estate planning, all of that exercises the construction of the bridge that gets us from where we are today to where we want to be tomorrow.

John, and real quick, you made a quick distinction there between a financial plan and financial planning. Explain the significance of that distinction really quick.

Well, financial plan is the noun, right? That’s the blueprint that the architect gives you and says, okay, here’s where we are today. Here’s what we’re agreeing to do over the next one, three, five, ten, thirty years, right? But it’s a written document and it should be in writing in my opinion, right? That way we can go back and reference it and hold ourselves accountable.

We hit our savings goals? Did we invest based on how we had agreed to when we built the financial plan? So that is a document, but it is a living, breathing document. This is the difference between a financial plan and financial planning.

Life changes. The most dangerous financial plans are financial plans that are so rigid that they are inflexible, that they cannot be quickly and rapidly adjusted all the curveballs that life is going to throw our way. All of us are going to experience failing health at some point. And I wish I could find the expiration date on my body somewhere, that I knew exactly when I was gonna pass, but I don’t know that, right?

And so we need to build financial plans that can be adjusted as time goes on. So financial planning is the exercise of constantly revisiting our financial plan. It’s this exercise of constantly revisiting what we want to accomplish in the future. I mean, Josh, the things I personally wanted to accomplish when I was twenty two years old are not the things that I wanna accomplish today when I’m in my 50s.

My goals have changed.

And I think that’s life.

New grandkids will show up. There will be premature deaths. There will be changes in our health. There’ll just be philosophical changes perhaps to how we wanna live our lives. And so financial planning creates flexibility, right? It’s our opportunity to go back and revisit the blueprint and say, you know, I wanna change what I’m aiming for. My definition of success has changed.

And that’s life. That’s humans. That’s just part of being a human being. And so that’s why I love what we do, Josh.

This is a very human experience. And what it does is it connects finance with our humanity. And being human, I mean, we’ve all experienced this, life changes. So it’s okay if our financial plan changes.

Our money works for us. We don’t work for our money. And that’s the idea is to look at that financial plan as a living, breathing document that through the exercise of financial planning, we can organically adjust as life changes.

And Don, because of this view that financial planning is the prerequisite to successful investing, you talk a lot about a fortress balance sheet framework in thinking about how we approach this. And so I wanna put this framework up on the screen for those who are watching. And Don, kind of explain the fortress balance sheet and why, you know, why this investing principle leads us to think about kind of the portfolios and balance sheets we’re building in this way.

Yeah, I mean, started with this metaphor some time ago. You know, my wife and I were in Europe and we’ve been to Europe a number of times. And I’ve always just been so impressed with seeing these medieval castles that have stood the test of time and they’re beautiful, right? I mean, these are works of art that are hundreds, they’re centuries old, right? Some of them, some of the older ones are even like over a thousand years old and it’s just amazing to see that these structures have stood the test of time. And so I got to thinking, you know, what do families need to do to build balance sheets that can stand the test of time?

And not just stand the test of time, but also successfully achieve all of the things that we require as families in order to manage our wealth across time. And I think the first one is growth. There’s these five things and the first one is growth. Well, we need our wealth to grow on an inflation adjusted basis. If we want to maintain our lifestyle, we need to stay in front of inflation. So we need to grow.

Second, we need income. We need to enjoy our wealth today. We have expenses today that we need liquidity. We need income to help us cover those expenses, whether it be paying for tuitions or vacations or healthcare or whatever the case may be.

So growth in income, I think most people intuitively understand that, right? And I think that’s why our profession is so fixated on investing and often conflates investing with financial planning is because we’re focused on growth and income. Those are critically important. I’m not saying otherwise.

The third one is liquidity and these are different.

Owning stocks, you could argue is liquid. They’re liquid. They’re liquid to a degree. They’re liquid until they’re not.

All investments have varying degrees of liquidity. Right? Things come up where we need liquidity. It could be an investment opportunity, it could be a capital call for a private equity vehicle, it could be something like an unplanned liability expense, could be a healthcare expense, an unreimbursed healthcare expense, where we need sudden massive liquidity in order to deal with a large expense, perhaps, that comes into the family. So liquidity would be the third, making sure that we’re not locking up our capital in a way that is inaccessible for very, very long periods of time.

Fourth would be protection. And this is an area where most families don’t actually pay a lot of attention, but protection in the form of insurance, property and casualty, life insurance, protecting the family against liabilities, unplanned for liabilities could be a devastating fire, could be a flood, could be a health event. But it’s more than just those things, right?

Protection also speaks to family governance. Have I prepared my spouse, my children, other members of my family to make financial decisions for when I become incapacitated? Do I have a will in place? Do I have a trust in place?

Do I have a strategy for how I’m going to deal with someday when my cognitive abilities begin to fail me? I’m dealing with this personally at the moment. I have a family member, my mother that is struggling with dementia.

The reality is like protection is this broader umbrella. It’s not just insurable risks that we’re trying to manage. It’s these uninsurable risks that require the family to have a governance framework in place. I know that’s a very fancy term, but it is something as simple as teaching your children about finance, teaching your children about investing and saving and diversification.

We should never assume that our children or our spouses are prepared to simply take over managing the family’s balance sheet if we have done nothing to prepare them. That’s why I like books like The Missing Billionaires and other books. There’s the Mercer Advisors investing handbook, things like that to help prepare families, to protect against the reality that none of us is getting out of this life alive. And so how do we prepare our children and our survivors to manage our balance sheet?

The last

thing And obviously you can sort of have the best growth, you can pick the best investments in the world and then lose it all to

We’ve seen this, right?

Look at the Vanderbilt family. They did amazingly well. They were in the railroad business.

And they ultimately failed to successfully manage and transition that wealth across generations, unfortunately.

The last thing here, Josh, and I mentioned this a few moments ago, is flexibility. Life is gonna change in ways that we cannot predict today. It could be divorce, could be remarriage, could be new unplanned additions to the family, could be premature deaths, it could be premature declines in our health. And so making sure that our financial plans, making sure that our fortress balance sheet allows for significant flexibility, think is critical. So those are really the five pillars that in my mind really define a successful fortress balance sheet. And I think if families do these things and if they do these things well, then I think that they will be successful in building, managing, sustaining, and then transitioning their wealth across time.

The investing matters, but it’s only part of the context. Have to kind of have this whole framework in place, Otherwise, you really run the potential of missing important things.

Investing only gets you so far.

You absolutely do, right? And this is why I think you need a team of professionals, Josh, to really coordinate across all of those disciplines that we mentioned a little while ago that go into building and managing wealth. Things like tax law, public policy, estate planning, financial markets, capital markets, asset allocation, investment theory, building on all of those disciplines and incorporating them together and making sure that they are coordinated.

That is critical, right? You can have the best portfolio in the world, but if you’re not paying attention to taxes, you could very easily just give away half of that in the form of taxation, right? So that’s the idea is to get these things working together.

And so Don, because this is our first investing principle, because it’s so foundational to how we approach things, Immersion Advisors is really purpose built to kind of fulfill this and to carry out plans and strategies in this way. Talk about why you see this as kind of really what we’re purpose built to do.

Well, I think there’s really two things to think about here. Number one, like we said a few moments ago, is that building and managing wealth successfully is a very multidisciplinary exercise.

Right? It’s complicated, right? Public policy, tax law, estate planning law, finance. And so the reality is, Josh, no single advisor can be an expert in all of these things. Just not possible. I’ve been doing this for over thirty years.

These are fairly complex areas of law and finance that need very deep coordination.

So that’s the first thing is that having a team of advisors is far superior to having just one advisor who’s a generalist. So the way I think about it is we’ve assembled a team of specialists that ultimately work with a generalist, the advisor, and the family.

But that’s the idea is to make sure that we get the best thinking, that we get the experts in the room helping us on these very complex areas of law and public policy and finance and so on. So a team of specialists, not a single generalist. That’s number one. Number two is that the most valuable asset that any of us on this planet has is time. And we never know how much we have left. Right? Not to get all mushy, but we just don’t know how much time we have left.

And so if you think about what we’ve done here at Mercer Advisors in assembling a team of specialists to work together, we’re helping families maximize and optimize the value of their time. Nothing frustrates me more personally than having to coordinate between my attorney, my CPA, my advisor, my trust officer. It’s frustrating being able to just have one phone call to my advisor and address whatever it is that requires addressing. That saves me time and time. Like said before, it’s the most valuable asset that we have. It allows us to really maximize the compounding of our wealth and really allows us to reallocate our time elsewhere to hire more beneficial pursuits, you know, maybe going fishing or just enjoying life.

And so that’s the idea, is really trying to maximize and optimize the value of our time by working with a team of specialists and not just a single generalist that would still require the family to coordinate among lots of other specialists outside of the organization. So that is the family office vision, the concept, the promise that we are making to our families.

Don, thank you so much for being here today to explain this.

Well, thank you, Josh. This is fun.

If you’re already a Mercer Advisors client, we hope you found this kind of a really interesting overview and provide some really interesting understanding into why we’ve approached things the way we have with your portfolio and with your financial plan. If you’re not a Mercer Advisors client but you’re interested in more information, you’re interested in whether or not this approach would make sense for you, go to our website, merceradvisors.com, set up a phone call. Thank you so much for being with us today. This is Market Perspectives.

This presentation by Mercer Global Advisors Incorporated, also known as Mercer Advisors, was intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Mercer advisors.

All expressions of opinion reflect the judgment of the speaker as of the

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