It’s session number 24, and we’re going to be taking our cues from the mega-rich, looking at how they manage their finances,  and seeing what lessons we can learn and apply to our own, more ordinary situations.

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This week’s reviews

Two new reviews this week, the first from Happyboys007:

“Awesome! Gives me a new perspective in my approach to money – keep up the good work”

…and the second from Muktar Mahama:

“I’ve been looking for a podcast that talks about personal finance and investment and came across Pete’s podcast. I’ve listened to most episodes twice! Couldn’t have asked for a better podcast, I particularly like the humour and manner in which Pete talks. Keep up the great work”

Thank you both very much. It is comments like that that keep me going. Muktar has also emailed me a couple of times and I’ve answered his questions that way. If you want to get in touch, go to meaningfulmoney.tv/feedback to find out how. Obviously, I can’t give advice that way, but I may be able to answer a general question.

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Introduction

I’m often quite scathing about the mega-rich. It’s not just envy on my part: we do read stories about dodgy tax-avoidance schemes and things like that which don’t exactly endear the super-wealthy to ordinary folk like you and me. Of course, the rich can afford legal, accountancy, financial planning and investment teams who are the best of the best. And they can afford to put in place structures such as family trusts, which have many benefits.

But I got thinking the other day, about whether it is possible for ordinary people to use some similar techniques to get some of the same benefits that the rich folk enjoy. So let’s look first into the mind of the wealthy, and see what we can learn:

Everything you need to KNOW

1 – Rich folk plan across generations

There is a statistic (can’t remember where from) that says that where wealth is handed down across generations, the third generation is the one that runs out of money. Apparently, the size of the fortune makes no difference. It seems that the generation twice removed from those that made the fortune are profligate enough to blow what has been left by the middle generation.

Yet there are families who have been wealthy for centuries. How do they do this? Well, apart from the obvious point that they invest in things that continue to make money for them, the answer has to be that they plan their finances in such a way that they are not threatened by the odd spendthrift child or gold-digging spouse.

Life throws things at us we should really expect in some form or other. No marriage is perfect, and many of them fail. This has financial repercussions that can be planned around. Businesses fail, and family members may become bankrupt – this too can make things difficult financially for other family members.

For rich families, the continuation of the family estate arguably supersedes the needs individual members of the family. I’m sure there is room for compassion, but the family wealth will not be risked for the sake of one individual. How they achieve that is, I’m sure, down to clever use of trusts, which we talked about a little bit in session 22.

The rich are not surprised by events like a bankruptcy or acrimonious divorce, instead they plan for such things. They look at what circumstances may happen, model the impact on the family wealth, and take steps accordingly. They never avoid making painful decisions when the family silver is at stake.

2 – Rich families are institutions, and they invest like institutions

When you have a couple of hundred million to invest, you do not take out your ISA with the fund manager who advertises most frequently in the Daily Telegraph. With that amount of money, you can invest like an institution because you are one. Institutions are outfits like charities, or universities, or company pensions funds, many of which have portfolios valued in the billions.

When institutions invest:

• They don’t ever pay initial fees like bid/offer spreads
• They don’t pay retail management charges, but demand large discounts in return for a hefty investment
• They want to see investment discipline

They have the clout to demand low prices and top quality and they get it. They’re very good at setting targets for their investment managers to achieve, and at holding them to account. If an investment manager does not perform, the money will be taken from them and given to someone else to manage.

Smaller investors and their IFAs are less religious about setting target returns and holding regular reviews to make sure that those targets are met, but they shouldn’t be!

3 – Rich folk use specialists

When you’re loaded, you can afford the very best. Also, in my experience at least, rich folk are good at delegating. Not always, but often. They understand that if you stick with what you are good at, and let others do the same, you will excel. Very often this is how they got wealthy in the first place. Perhaps they were in business, found a niche and built an empire. Along the way they realised that they were good at managing, and not at accounting, typing or writing marketing copy.

By bringing in experts at each level of their business they succeeded more quickly than if they had tried to do everything themselves.

They apply this to the running of their finances too. Mega-rich families will have something called a family office, which is their own dedicated financial and administrative hub, staffed by people whose job it is to manage the family wealth, run the country estates and the like. These family offices will hire the right lawyer for a given piece of work. Or they will delegate day to day investment decisions to a discretionary fund manager (or more likely more than one).

They certainly don’t try to do these things themselves. They may have a hobby financial pot with a couple of million in it with which they might do some personal investing, but they wouldn’t bet the family money in this way. They get the right people in to do each job, and then hold those people to account for doing their job correctly.

4 – Rich folk engage with their money

That last sentence was important: the hold people to account. Rich folk didn’t get rich by being hands-off with their money. In my experience, those who make the money tend to keep a close eye on it. Perhaps this is why the following generations often spend the money more freely and eventually run out. They didn’t make the money, so they don’t feel the sense of stewardship towards it.

Even in much more normal financial situations, I have sat with matriarchs and patriarchs of families who bemoan the fact that their children or grandchildren don’t know they’re born, and worry that the money will be wasted when it passes to them. This sense of responsibility leads rich folk to be very good at engaging with their money.

They understand that money left to its own devices will not automatically make more money. It needs to be husbanded, like farmland, in order to be the most productive it can be. And so they keep an eye on things and have regular formal reviews with their advisers. They set targets and review progress towards those targets.

They demand that their advisers keep up with developments in accountancy, and changes in the law which might affect the family money. Ignorance is no defence, they expect the best from their advisers and hold them to account, making sure that they regularly engage with their advisers to get updates on how things are going.

Summarise what we KNOW

So here are the four things that rich folk do with their vast reserves of money:

• They plan across generations
• They invest like institutions
• They use specialists in every sphere of their financial planning
• They actively engage with their money
• This is how they became wealthy in the first place, and we would do well to learn for their example.

But you don’t have a couple hundred million lying around. You’re just a normal personal, maybe just starting out building wealth, or maybe you’ve inherited some money and for the first time, you’re feeling the responsibility of stewardship. What can you DO to apply these lessons from the mega-rich to more normal circumstances?

Everything you need to DO 

1 – Do some financial planning, don’t just take financial advice

It sometimes can be hard to understand the difference between financial advice and financial planning. Part of that is because the words are used interchangeably too often. Simply though, Advice is about products, and planning is about, well, planning!

A good financial planner should be facilitating conversations about goals and aspirations. They should be able to get you thinking about these things, maybe in a way you have never done before. To do some useful financial planning, you will need to get thinking about possible scenarios and begin to plan around them.

Are you a business owner, and you children have joined the business and you’re hoping that one day you’ll be able to pass the family business on to them? You need to think through all the implications of what might happen if that child divorces for example. Should they be considering pre-nuptial, or post-nuptial agreements to sort out, in advance of it happening, what happens to the company holding on separation?

Are you ten years into retirement, but still in good health? It might not seem like it, but now is the time to begin planning the last 20 years, by considering some what-ifs and planning for them. What if you need care? How much can you give your children sooner rather than later so that you can watch them enjoy it? Can you give them money in such a way that it stays in the family no matter what happens?

What if, what if, what if. Plan some scenarios. A competent planner will be able to model the financial impact of various scenarios for you. So they could show you the impact of making gifts, for example, or the impact of care costs on your wealth.

Financial planning is about identifying goals, and working the money to meet those goals. It isn’t just about investment returns and making more money.

2 – Invest like an institution

Investment management is democratising as I speak. The advent of platforms has made investment processes available to ordinary folk that previously used to be the preserve of the very rich. Fund management groups are bringing institutional-class management down to the masses. Remember the main things that institutional investors want:

• Zero initial charges
• Low ongoing charges
• Rigorous discipline

The best investment managers keep costs down by using things like tracker funds and ETFs, which don’t have a manager making decisions about where the money should be invested. I did an early video, number 37 about passive vs active investing. I should probably update it, but it explains the broad difference between the two.

There is no excuse these days for accepting initial charges, or ongoing charges of more than, say 1% or 1.25%. If you’re paying more than that for funds, you may be paying over the odds. Ask your adviser to justify why the costs of some of his fund recommendations are higher than this.

Set targets for a given portfolio, but give it time to work out. Review the portfolio regularly, but against some meaningful benchmark, not just against whether it has done as well as the new emerging markets fund being advertised in the weekend press.

Investing should be done with an end in mind, so make that target reasonable and meaningful for your circumstances. Have it aiming towards something tangible so that you know that portfolio is for something.

Hold your adviser and fund managers to account for the way they are looking after your money.

As an aside, I happen to believe that very few advisers have the ability to choose individual investments very effectively for their clients. Some will be able to act as both financial planner and investment manager, but they will be in the minority. I personally prefer to outsource all of our investment management to third party discretionary fund managers, whose job it is to manage against a given mandate.

3 – Use specialists

Rich folk don’t do much for themselves when it comes to organising their wealth. They have the money to pay people to do it for them. While you may not have unlimited reserves, you should still take a leaf out of their book and use the right people for the right job.

Yes, you can get a pack from WH Smith’s and write your own will. It will be, at the very best, serviceable. You can use an online will-writing firm, and give them instructions by email. But if you want the job done right, pay a lawyer to do it, and go see them face-to-face.

Yes, you can do your tax return, and if your affairs are simple enough, that’s probably fine. But a proactive accountant can justify her fees many times over by way of the tax she can save you.

Maybe it isn’t about competence but about time. If you can use the time you save by not doing your own tax return to make more money or spend more time with the grandkids, then the accountant’s fees are money well spent.

Even look for specialists within fields. If you want a trust writing, don’t use a lawyer who spends all his time doing property conveyancing. Likewise, if you have a VAT issue, don’t go to a bookkeeper, go to a VAT specialist.

Don’t do things yourself which others can do better – it’s a simple as that.

4 – Engage with your money

Be hands-on, not hands-off. Take control of your money and engage with it. If you engage with professionals to help you, choose those who seem like they will give your affairs the time they deserve.

Review your financial plan at least annually. Review your will every time your circumstances change. If you have set up trusts to achieve your financial aims, makes sure these are formally reviewed annually and the reviews minuted, particularly if there are investments involved.

Review, review, review – it’s so important.

Set benchmarks and hold your advisers to account. You are in control of your own future, you cannot abdicate that responsibility to others. You can and should delegate tasks to those with greater expertise, but the buck still stops with you. You are responsible for steering the ship, even if you have plenty of ship-mates helping you.

Summary

The rich get rich because they are focused, they know their own limits and when to bring in the experts, they think longer term than just the next generation, and they are aggressive about keeping costs down. These are excellent habits to bring to bear on your own financial planning.

Are there any other habits of the wealthy you think we could do well to adopt? Let me know in the comments

Outro

That's it for this session of the MM podcast, I hope it was helpful. Did I miss anything? Do you have any questions or comments? If so, please leave them below.

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I hope you enjoyed this session. Next time we'll be talking about Wills and Powers of Attorney

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Thanks for listening – I'll talk to you next time