Winning in Wealth Management

There are as many ways for wealth to grow and flourish as there are for it to shrink and disappear. Wealth management is a burgeoning financial service in the Washington region as people strive to propagate and protect their assets. This month's roundtable discussion focuses on the many investment tools and strategies available to high net-worth individuals and families. Racing to the financial finish line is much like a marathon; by training beneficiaries, aiming for flexible fund choices, and building a strong monetary base, it is possible for wealth to endure for generations.

MATHIAS: Please describe your firm's investment approach.
WILLIAM MUNDY: We work with people who want to create, preserve, or transfer wealth to the next generation.

MATHIAS: And these are primarily older people?
MUNDY: Not these days. We have young and successful people who are thinking about what they want to do with the money they've created.
HILDA OCHOA-BILLEMBOURG: We're a global asset management firm that identifies inefficiencies, which conserves capital. Our open architecture platform allows us to hire the best people to actively trade securities.
BRIAN MACDONNELL: My group focuses on helping individuals in the preservation of wealth growth and transfer for several generations.

MATHIAS: How do you feel about the perception that Washington is an attractive market because of its large, high net worth population?
MUNDY: Washington is one of our top two or three markets on the East Coast. The number of providers in the city who offer financial planning and wealth management services is an indication of the area's success.
MACDONNELL: Loudoun County previously considered a farming county is now the richest in the country. Montgomery and Fairfax counties have always been held in high esteem as well.

MATHIAS: What is the minimum account size your firms will accept from an individual investor?
MACDONNELL: We work with the following ranges-$.5 million, $1 to $5 million, and $10 million and up.
MUNDY: We deal with a minimum of $2 million of liquid assets. Our sweet spot is between $5 and $25 million. OCHOA-BILLEMBOURG $5 million.

MATHIAS: What are some long-term issues of concern confronting your clients? MACDONNELL: Statistically, 70 percent of wealth does not transfer past the second generation and that's a concern.
OCHOA-BILLEMBOURG: The major concern that intergenerational wealth transfer creates is how to manage and motivate human capital. Children who inherit wealth find it hard to motivate themselves to overcome the normal stresses of life, and because they develop great insecurities about their own ability to generate more wealth, they tend to use it up. Between taxes, poor planning, bad investments, and poor human capital management, the third generation becomes poor again.

MATHIAS: These days, people can possibly live 35 to 40 years after retirement. How does that affect your strategy? How do these people cover their needs, protect their assets against inflation, cover their life expectancy a n d s t i l l h ave something left for their heirs?
MUNDY: For the second part of your question, I think an individual can withdraw somewhere between 4.5 to 5 percent from the principal and not outlive their resources, depending on what their age is.

MATHIAS: Does that mean their portfolio must earn well above those percentages so as to reinvest a portion as protection against inflation?
MUNDY: Correct. When we come across this specific issue, there is a disciplined process for the client to determine exactly what they need, now or in the future, to retire in the lifestyle to which they are accustomed. We have a variety of statistical models that we use to help them to do that.
MACDONNELL: "How much you need to live?" seems to be the toughest question out there, because people don't know what they're going to need in the future. That's when you sit down and do a financial plan and you work through that number.

MATHIAS: Do you see this as a major concern?
MUNDY: Yes. Even if someone is immensely wealthy, they still want to ensure that they have enough and that they won't become destitute or dependent on their children.
OCHOA-BILLEMBOURG: People tend to underestimate the amount of money they will need to retire on. To resolve that, a lot of people have to go back to work.

MATHIAS: Do non-financial issues come up during the planning process?
MUNDY: Absolutely. Where do you want to live? Do you want to go back to work? The trend is that more people want to have a good quality of life in retirement, and they equate that to meaningful contributions, either in work or to foundations or charities.

MATHIAS: Let's talk about a subject that holds interest for all Washingtonians: real estate. Do you have an opinion on the market and the implications for your investors?
MACDONNELL: The housing market in Washington is always dynamic. When I talk to clients, I'm not particularly worried about the housing market or what impact it will have on their retirement, unless they did not have a level of financial assets where they could weather a potential temporary storm in the real estate market.
MUNDYThe housing market is great here. One of the things I worry about is the lack of diversification. Some people are very heavily into real estate, and when you get a turn like we're going through now, it's painful for them.

"HEIRS TEND TO DEVELOP INSECURITIES ABOUT THEIR OWN ABILITY TO GENERATE MORE WEALTH" - HILDA-OCHOA BRILLEMBOURG

MATHIAS: People typically don't consider their aggregate portfolio: financial assets, retirement plans, real estate, a potential inheritance, etc. What are your thoughts on overall diversification?
OCHOA-BILLEMBOURG: I think they need to be put together because real estate is not a liquid asset, and the house you live in is less liquid than any other asset. Transaction costs are very high. Look at your portfolio, including and excluding your first and second homes, to assess how bad things can get before you actually have to liquidate and if you could. liquidate.

MATHIAS: What are the biggest or most common mistakes that individual and institutional investors make?
OCHOA-BILLEMBOURG: Diversifying into the wrong asset at the wrong time. MACDONNELL: Lack of diversification.

MATHIAS: There 's an old adage that one doesn't get rich with a diversified portfolio…
OCHOA-BILLEMBOURG: That is true but the only way to preserve wealth is by diversifying. People think they have a very welldiversified portfolio if they have 50 percent in stocks and 50 percent in bonds. They don't. Although it looks like it's a 50/50 portfolio, in fact, about 75 to 80 percent of your risk will be dependent on the equity market.

MATHIAS: There's tremendous interest today in China and India. Are you actively pursuing such opportunities?
MUNDY: Investors are interested. Over the last x number of years, people realize that we're in a global economy, and talk to us about how they can diversify their assets beyond domestic opportunities. They ask about China and India, and the impact that will have on markets today and more importantly, in the future.
OCHOA-BILLEMBOURG: Institutions have investments in emerging markets ranging from 2 percent to a little over 10 percent of their total portfolios. We anticipate that over the next 20 years, 50 percent of world equities will be in emerging markets.

MATHIAS: Today's sophisticated investor tends to be concerned about the long-term value of the dollar. What do you think about non dollar-denominated investments?
OCHOA-BILLEMBOURG: We think the dollar is fairly valued in purchasing power but it's really not fairly valued in terms of the trade imbalances between the United States and the rest of the world.

MATHIAS: For a standard portfolio, what percentage of assets in today's markets should be allocated internationally?
OCHOA-BILLEMBOURG: For high net worth individuals, between stocks and bonds, easily between 30 and 50 percent of assets are outside of the United States.

"THERE IS NO NEED TO WORRY ABOUT THE IMPACT OF THE REAL ESTATE MARKET ON RETIREMENT UNLESS YOUR ASSETS CAN'T WEATHER A POTENTIAL TEMPORARY STORM" - BRIAN MACDONNELL

MATHIAS: My guess would be that very few individuals have anything that approximates that.
MUNDY: My exper ience is that customarily people might have somewhere between 10 to 20 percent.
MACDONNELL: I was going to say 10 to 15 percent.

MATHIAS: Over the next three to five years, which industries do you think hold extraordinary promise?
OCHOA-BILLEMBOURG: "Clean" or "greening" industries are the place to go.
MUNDY: We have an aging population that will need different services tomorrow than they need today. So, I would focus on mega trends and find industries and/ or companies that complement those mega trends.
MACDONNELL: The aging population is the place to look.

MATHIAS: An extremely important issue for District residents is the full tax exemption for municipal bonds. Should most investors have a portion of assets in municipal bonds?
MUNDY: Sure, if it's appropriate for the individual case. For people in the tax brackets that that we focus on, municipal bonds are a very important part of their asset allocation.
OCHOA-BILLEMBOURG: I agree. Today, they're not particularly attractive because the yields are not that high compared to some of the yields you're getting on high-quality stocks. So even on an after-tax basis, you are coming out ahead with some large cap quality stocks, relative to municipal bonds.

MATHIAS: Can you make a projection of what the inflation rate and stock market return rate might be over the next five years?
OCHOA-BILLEMBOURG: Inflation, 3 percent plus 4 percent growth in the stock market; I think you'll get 7 to 8 percent in the equity market.
MUNDY: Over the next couple years, high single digit to low two digit returns, which is the norm for the market over a given period of time.
MACDONNELL: I think you're r ight on the cusp of the double digits.

Hilda Ochoa-Brillembourg is the president and CEO at Strategic Investment Group. She is a Fulbright Lifetime Achievement Awardee	Brian J. MacDonnell is the senior vice president at SunTrust Bank, and has extensive professional experience in the financial services industry

William T. Mundy is the senior vice president at Wachovia Bank and sits on the board of The Financial Planning Association	Ed Mathias is the managing director of The Carlyle Group and graduated with an M.B.A. from Harvard Business School