In a 2018 report, UBS outlined how a purpose-driven approach to wealth management could be achieved through the 3 L’s: Liquidity, Longevity, and Legacy. At its core, the 3L strategy is a blueprint for families who want to understand how they can better allocate all of their assets and liabilities to meet their objectives. But how might we turn these financial terms into something more visionary, so that the next-generation feel inspired to take charge of this future?
The answer could well be in framing through a paradigm of growth and legacy, borrowing metaphors from nature. We call this approach PPO – or planting pine nuts, pine trees, and oak trees. Pine nuts are the nutritional stock (savings) for immediate and near-term needs. Pine trees, are what you plant (invest) with the expectation of producing a revenue stream during your lifetime. Finally, the oak tree, what you plant (invest) for posterity, for the benefit of your children, grandchildren, further generations to come, and society at large.
Attuned with the family’s balance sheet and life goals, the pine nuts, pine trees, and oak trees approach – PPO for short – flips the typical financial decision-making journey. It is often the case that the mix of asset classes and investment products becomes the inescapable and obvious consequence of the family choices about lifestyle, tranquility, and legacy in different brackets of the future. This may be counterintuitive and unconventional, but proves right time and again.
The PPO roadmap
Your future starts tomorrow, and it can take you (and each of your loved ones) to as long as 100 years of age, or more. Whether you are a successful millennial entrepreneur or you are already looking to retire from an executive position at your family business and explore other happiness pathways, a PPO approach can allow you to make sage decisions now and chart a path to a brighter future. Ultimately it boils down to living a life with purpose, on your own terms, and making every day count to achieve what matters the most to you and your family. Below are seven key steps and principles to follow in a PPO roadmap.
- Identify the family’s tangible and intangible assets and liabilities, and available resources, for both pre-retirement and post-retirement periods. Write down your big picture family balance sheet, so as to figure out how they can work together across life and market cycles.
- Consider thoroughly through your family’s lifelong financial goals and objectives. Be ambitious and caring – do not hold back. If money was not an issue, what would you want your life and theirs to be like? Can you pinpoint the needs and wants? If the unexpected knocks on your door –as it often does– will you be ready?
- Organize your personal finances into three key dimensions – pine nuts, pine trees, and oak trees. Distribute your assets into them and (re)allocate them confidently when necessary. You can then rebalance those three strategies according to their purpose, market whims, and circumstances.
- Optimize portfolios by timely aligning your investment and allocation decisions with the family’s intentions and potentially higher capacity to cope with uncertainty.
- Ensure you build a dynamic plan which is flexible enough both to bear the long-term risk and return and which can support your spending also during volatility and unpredictable needs.
- Be tax aware from the bottom up.
- Be disciplined and consciously avoid emotional biases that can bring along imprudent decisions.
This plan will be the canvas you will draw on to protect and grow your wealth well into the long-term and through to the next generations. To begin with, take all your financial objectives, split them into three groups, and deliberately create a specific investment strategy for each of them.
Pine nuts – feeding the immediate and near-term spending
The pine nuts sub-strategy addresses the funding of your expenses and settlement of your debts during the next two to five years, after factoring in a margin for the unexpected. Given the short-term purpose, this slice of your financial strategy should rely on recurring income streams, such as labor and real estate rents. These should be considered as stable and very liquid assets – those which are expected to maintain their price regardless of market variations and quite easily and rapidly convertible to a means of payment. This could be deposits, savings accounts, high-quality fixed income instruments like that of highly-rated state or company debt, and annuities – as well as accessible resources such as emergency savings and borrowing facilities.
You should ultimately think of it as your low-hanging fruit. Knowing that they remain available despite any turmoil that might arise should give you peace of mind and increased confidence to hold more volatility in other portfolios. This will prevent you from making harmful investment decisions –like hurriedly de-investing in assets you bought for the long-term and are not yet ripe.
Pine trees – planting the sprouts of lifelong prosperity
The pine trees sub-strategy should have a growth orientation and be configured to meet your family’s financial goals for the rest of your lifetime. These allow you to accompany potential capital increases in the family business in order to keep its control under the family wing and assure its strategic independence. They also serve to maintain and improve the family’s well-being such as long-term healthcare needs, primary residence, mortgage pay off, second home, disability insurance, and advanced education. – as well as supporting post-retirement needs that go beyond pensions or retirement savings vehicles.
Typically this translates into a well-diversified investment portfolio with a significant exposition to public equities – historically the asset class with the best long-term returns’ track record. Different families will choose to hold more or less stocks in their portfolios, according to the life stage and investor profile of the leading individual. But stock markets and private equity markets for that matter are good allies in reducing the concentration of the family’s wealth in the family business, reducing alongside its industry, geographical, relational, and individual risks.
Oak trees – planting an intergenerational and philanthropic legacy forest
The assets that are in excess of what you require to meet your own lifetime needs are the platform to improve the lives of others. . Not only could you support your children or grandchildren financially, transferring your wealth over generations, but you might also share your good fortune with the wider world. This could translate to sponsoring organizations and projects you relate with which make important contributions to your local community in areas like education, health, or culture. Investment portfolios in the Oak trees sub-strategy can be – and typically are – invested more aggressively, in assets with the greatest growth potential, since the time horizon associated is much longer-term – usually several decades in order to fund multigenerational goals. This might include stocks of high-growth and high-quality companies which are not profitable yet but are compatible with venture capital, impact investing, or collectibles.
Interplay of horizons
In the pre-retirement age, you will want to have near-term expenses covered by pine-nuts assets and focus on being mostly invested in growing your retirement funds through pine-trees assets. In the short term, the strategy might still be empty by then.
But as you approach retirement, your pine-trees goals should be completely funded, and you ought to be looking into one or two of these strategies Firstly, starting to move assets into the pine-nuts sub-strategy to make up for losing income such as having an investment portion enough to allow spending in excess of social security, pensions, and business interests.d As a result, you might want to move some assets to the oak tree sub-strategy.
Conversely, should you be taken by surprise by the market, you could also review your pine tree and oaktree sub-strategies and borrow back from the latter to the former. Nevertheless, during the golden years, you should aim to live calmly on your pine tree assets, wearing them down slowly, and let your oak tree bucket be still and to increase its value.
With these principles in mind, you can put your own future-proof PPO strategy into practice. By putting them in place and thoughtfully following up, you will plan for today as much as for the long-term, and adjust each third as convenient, as per your own family trade-offs.
If you take the time and effort to place your dots looking forward, it will be much easier to recognize your hand’s influence when connecting those dots in hindsight.
Acknowledgements: Co-authored by Emília Viera, Nuno Lopes Gama, and Mónica Guimarães. v