What do the wealthy need from their financial advisors?

Become a Patron!I've had two conversations lately that got me thinking about a question which, for obvious reasons, doesn't come up in most people's lives: what do you do after you've exhausted all the obvious financial planning tools?

Financial planning isn't complicated, it's just hard

Most people have been trained to think about financial advice in terms of investment decisions, so when they say "give me some financial advice," what they usually mean is, "give me a stock tip." If the stock goes up, they think you're a financial genius, and if the stock goes down, they think you're a con man.That's why I always try to tell people, I have no idea what the stock, bond, commodity, real estate, or any other market is going to do over any time horizon. Not just over 6 months, but even over 30 years, the performance of individual investments is something I have no insight into.That makes asset allocation inherently unsatisfying work, as important as it is. At the end of a 30-year period, a well-diversified portfolio will have some holdings that have increased in value by much more than others, which may have even fallen in value over the previous 30 years. What is the point of diversification if it means you end up holding crap that weighs down your overall return? Why not just buy winners?Financial planning for most people can be boiled down to three inputs, in order:

1. savings rate
2. asset location
3. asset allocation

This is an inconvenient for some people because it doesn't feel like saving is something your financial advisor is doing. But if you raise your IRA contributions by 9.091%, from $5,500 (the 2018 contribution limit) to $6,000 (the 2019 limit) I can guarantee your contributions will be 9% higher. Holding your savings rate fixed, I can make at best an educated guess about the effects of asset location (predicting future tax rates) or asset allocation (predicting future market performance).The flip side of this is that by far the most important thing anyone can do to get their financial house in order feels to most people completely impossible. You earn $80,000 a year? Not anymore. Now you're contributing $19,000 to your 401(k) and $6,000 to an IRA and you make $55,000. Thinking about having a kid? Congratulations, now I need you to save even more.In other words, one of a financial advisor's most important jobs is to make you feel much poorer than your friends, family, and colleagues.

What financial advice do the wealthy need?

This is a question I want to pose as carefully as possible, since the wealthy want the same thing from their financial advisors as everyone else: a good stock tip. But obviously the wealthy need a good stock tip even less than everyone else: if you're earning more than a couple million dollars per year, you can keep your money in cash and you'll still die a millionaire.I think there are at least five important buckets financial planning can fall into for the very wealthy:

• Permission to spend. This is the flip side of financial advice for the working and middle classes. A financial advisor severely restricts the amount of spending money a middle class professional has available by directing as much of it as possible into tax-advantaged accounts. But someone who maxes out their contributions in January of each year may still be flying across the country in economy twice a week when they can easily afford business class. They may need permission from someone they trust to spend money on their own comfort.
• Permission to give. There's a cliche in financial planning circles to insist people "save every raise." In other words, if you can keep your living expenses flat, you can contribute more and more money to your retirement accounts each time you receive a promotion, raise, or cost-of-living adjustment to your salary. But this is obviously irrelevant to people who earn far more than any of those contribution limits, which is why I suggest "giving every raise." If your living expenses are already fully covered by your existing pay, then in a year where you earn a significant raise or bonus your quality of life won't be affected by giving it away.
• Permission to stop. When people luck into high-income fields there's an almost inevitable temptation to "run up the score" and earn as much as possible as long as the gravy train is running. But obviously there's no material reason to continue working once you've saved enough to satisfy your needs, and some people aren't able to give themselves permission to stop. That's another role a trusted advisor can perform.
• Permission to change. If "permission to stop" means retirement, "permission to change" means redirecting your time and energy towards other activities. Change is hard, in some ways harder than retirement: the very idea of a "serial entrepreneur" is based on the premise that someone who successfully gets rich once, increasing an initial investment 1,000- or 1,000,000-fold, has some ability to replicate that performance. But of course, after founding one successful social network, Mark Zuckerberg didn't found dozens of additional social networks, because he recognized he simply got lucky the first time. Instead, he incorporated another company to dispose of his wealth, which seems to keep him busy and happy.
• Estate planning. I put estate planning last on this list because it's what most people think of first when they think of financial planning for the wealthy. And obviously there are techniques you can use to reduce the tax and administrative burden on your heirs when you pass. But it doesn't take more than a glance at the techniques actually employed to evade estate taxation to wonder what, exactly, the point is supposed to be? I don't mean that wealthy people should feel a "patriotic duty" to pay estate taxes in order to "reduce the deficit" or any such nonsense. I simply mean that I find it absurd that the wealthiest people in the wealthiest nation in human history spend any time at all worrying that their heirs will have to pay taxes on their inheritance, let alone organize all their affairs around minimizing those taxes. It seems to me that what many wealthy people need to hear from their financial advisors is simply that "your heirs will be fine." That's not an easy thing to hear, but financial advisors aren't supposed to give easy advice; they're supposed to give true advice.

Conclusion

As I mentioned, this is an issue that has recently come up in a number of different contexts, and I plan to revisit it from multiple angles in the future. Hit the comments to let me know what you think: what financial advice do wealthy people need — with a special emphasis on the advice they need but don't want?Become a Patron!

"Effective altruism" is as stupid an idea as "smart beta"

A spectre is haunting the United States — the spectre of "effective altruism." This is the idea, lifted from the corridors of financial capital, that philanthropy can and should be streamlined, optimized, A/B tested, and transformed to make sure each dollar is deployed "effectively."The other day I saw Dylan Matthews, in honor of "Giving Tuesday," write about his own recommendations for effective altruism ("Made possible by The Rockefeller Foundation"). Dylan Matthews is a very weird guy (he gave his kidney to a stranger), but I don't have any doubt he's a good guy trying to do his best, and modeling your philanthropy after his (with or without the kidney donation) is a perfectly good way to get started if you're interested in giving away some money.What baffles me is what "effective" altruism is supposed to be so deliberately contrasted with.

Shoveling cash into a raging furnace is an admittedly bad idea

You can imagine a completely altruistic person, finding they have no use for their money, deciding to go down to the boiler room of their apartment building, opening the grate, and throwing carefully bundled stacks of $100 bills into the fire. This is a perfectly reasonable exercise of self-abnegation, or "altruism," and I would have no serious objection.You can also see how this would be ineffective: it wouldn't work. Nothing would happen. Burning physical bills in the boiler room, or dumping sacks full of coins in the Potomac, would not have the slightest effect on the economy of the United States or the well-being of anyone anywhere in the world, no matter how many people indulged in the conflagration. That's because the monetary supply of the United States has nothing to do with the number of notes and coins in circulation; it's completely controlled by the policymakers at the Federal Reserve.This silly thought exercise is merely to point out that I understand perfectly well the meaning of "ineffective" altruism: when your sacrifice is completely pointless, you are being altruistic, but not having any effect, i.e., ineffective.

Almost no forms of altruism are like this

What bothers me about the "effective altruism" canard is that the Dylan Matthews of the world consider any form of altruism that is not optimized according the preferences of the speaker by definition "ineffective," and that simply makes no sense unless you ask another question: effective at what?Take, for example, the Wounded Warrior Project. The Wounded Warrior Project gets a lot of criticism since it's a fairly elaborate hoax. They spend very little money on what a normal person would consider "philanthropy," and an enormous amount on fund-raising and salaries for their executives, salespeople, press agents, etc. In the fiscal year ending in 2017 one in four contributed dollars went to...raising more dollars.But the Wounded Warriors Project isn't "ineffective" in any obvious sense. It may not help "wounded warriors" much, but it also doesn't incinerate cash: it pays it out in fundraising contracts, advertising, staffing, travel reimbursement, office leases, all the normal activities a sprawling, $200 million organization engages in ($371 million in net assets at the end of their 2017 fiscal year). If you wished it out of existence tomorrow, you wouldn't increase the effectiveness of altruism in the slightest, you'd just create some vacant office space, empty bus stop ads, and unemployed con artists.Now take another form of altruism the "effective" kind is juxtaposed against: simply giving money to panhandlers on the street. This violates all the rules of effective altruism: you're giving to an uncertified recipient, without conducting adequate research, at home instead of abroad. So it must be ineffective, right? Well, that depends: ineffective at what? If you think a panhandler is going to tear up your money and throw it away, then we're back in furnace territory. But if you think the panhandler is going to spend the money, then it seems to me your altruism was perfectly effective: in the course of handing a dollar from your wallet to a panhandler, you successfully transferred one dollar in value to its intended recipient. Zero overhead, tax-free, and no credit card commissions.That sounds to me like 100% effective altruism!

Effective altruism and smart beta

In the world of finance, one of the greatest marketing coups of all time was the invention of "smart beta." Smart beta is the suggestion that unlike the dummies who settle for low-cost market-capitalization-weighted index funds, the knowledgable few can attain higher returns by tilting their investments towards cheap, or small, or profitable, or liquid, or expensive, or big, or unprofitable, or illiquid companies. Pick one or two or 10 "factors" and all of a sudden your beta is smart, instead of dumb.And who wants to be dumb? So the markets have been swarmed with smart beta funds, which promise you the market return...just a little bit smarter.Effective altruism strikes me as precisely the same branding exercise, in that merely saying it instantly conjures into existence the nonsensical idea of its counterpart, "ineffective" altruism, without specifying what ineffective altruism is supposed to be so ineffective at.Ineffective altruism is surely ineffective at the things it does not try to do, just as dumb beta is dumb at the things it does not try to do. You don't buy a total US stock market index fund in order to track value stocks any more than you buy it to track international stocks. But it's not broken, it's doing exactly what it's intended to do. Similarly, ineffective altruism is perfectly effective at what it is.In other words, there are no furnaces full of cash. It all gets spent.

The Better Billionaire Project

It's very fashionable in leftist circles to talk about the problem of wealth and income inequality in the United States and around the world. The problem of wealth and income inequality is, no doubt, very serious, but I take comfort in the words, "It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God."Therefore what concerns me about the consolidation of wealth is not its concentration, but the hands it is concentrated in. Particularly, how unimaginative those hands are. There's no mystery why that should be the case. To become a billionaire in one lifetime, you need to combine talent, luck, perseverance, and in a pinch you can always steal intellectual property and sell it to the Soviets.Having mastered the desktop computing, digital payment, or car insurance industries, naturally you'd be tempted to treat philanthropy as yet another industry ripe for innovation and disruption. But there are an enormous number of fields that don't require any innovation or disruption at all. They just require money.Take the case of cash bail. Cash bail is such a terrible idea even the gross framers of our Constitution wrote into the Bill of Rights that "Excessive bail shall not be required." But today, excessive bail is so ubiquitous it's treated as a feature of the system, since holding people behind bars, keeping them from their jobs and families, is one of the surest ways to negotiate guilty pleas and reduce the workload of the courts and juries who were supposed to serve as the guarantors of American liberty.Just ask the Orleans Parish district attorney, when people started posting bail for his victims: "I think they are very naive as to what they are dealing with, especially with this criminal justice system," and "It's extremely disturbing." This is someone who is fundamentally uncomfortable having to accommodate the rights guaranteed to his victims by the United States Constitution.There are efforts around the country to eliminate the problem of cash bail, which require the diligent work of staffers and volunteers in cities, counties, statehouses, and in Washington to achieve their goals. That's expensive, difficult, important work.But writing checks is easy. You can go down to the courthouse every morning, sit in the back, and write checks made out to the city or county for the amount of each defendant's bail. Your hand might start cramping after a few days, you might need to order some more checks, but this is a problem that can be solved immediately by any billionaire in the country. And as far as I can tell, it hasn't occurred to a single one of them.Is that because it's ineffective? No, it's one of the most effective thing you can do to make real, immediate change in your community. It's because it's boring. No mosquito nets, no genetic engineering, no balloons broadcasting wifi into the Sahel, just money. And money, conveniently, is the thing billionaires have the most of.

Getting started

So for this, the inaugural edition of the Better Billionaire Project, let me introduce you to the National Bail Fund Network. If I were a billionaire, or even a low millionaire, I'd go down to the courthouse myself, but I understand y'all are busy. So check out the list of member funds, contact them directly, and figure which you want to contribute to. Some are focused on immigrant justice, others on disadvantaged communities, and others on low-level offenses. Ask how your contribution will be used, what their turnover rate is (bail funds are returned when a defendant returns for trial), and how quickly they're able or willing to expand their operations.Then once you find one or more funds you're comfortable with, all you have to do is give till it hurts. Remember, you can't take it with you.