Thinking for a Change: Insights and Applications from the World of Behavioral Finance and Decision Analysis (Vol.I, No. 1) Creating and Sustaining Financial Independence

An ongoing series of random rants and musings for smart people who are interested in achieving and enjoying financial independence by uncovering hidden risks, challenges, assets and opportunities.

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In this series of articles, we will walk you through many of the professional, financial, and personal challenges that you could possibly face on the road to financial independence.  From the dangers of poorly worded e-mails to the intellectual errors that derail our best-laid plans, we will not only warn you of the surprises that life and business might put in your way, but we will also provide you with tools you can implement to evaluate risks and make good decisions.  Of course, as lawyers, we will focus on the protection and transition of wealth, but we will also focus on creating wealth in all of its forms.

First, learn how and why to protect your financial future against virtually every form of disaster, both seen and unseen.  By doing so, you can position yourself to take advantage of those opportunities that life also tosses your way and to enjoy the time you have left on this planet.  And by giving some level-headed attention to transition planning, you can ensure that your children and other successors are properly prepared and positioned to weather the inevitable storms and capture resulting opportunities.

This series focuses on the best ways to protect yourself from most types of professional, financial and personal crises and what to do if you are caught in the grips of one or more of them.

We will reveal the basic principles of wealth preservation, implemented by affluent families and apply them to a much broader array of individual, family, and business situations.  It includes unconventional definitions of wealth, money, happiness, risk, and financial independence, explains the most effective ways to achieve financial independence, and provides a variety of practical strategies for protecting assets, investing wisely, maximizing family wealth, and reducing unnecessary income and transfer taxes.  It examines the essential lessons in building a successful business, professional practice, or investment portfolio and in protecting assets, and explains the many pitfalls and dispels the many myths and misconceptions clogging the information highway, and outlines the strategies and techniques that can be used to overcome the internal and external threats to accumulating and preserving wealth over multiple generations.

This strategy is based on some fundamental principles and distinctions, discovered from our own experiences and observations, both in managing our own financial affairs and in working with a full range of clients over several decades.  We are acutely aware, however, of the possible impact of hindsight bias and the temptation to explain history by attributing cause and effect relationships to events that only appear causally related.  More on that (and other etiological biases) in later installments.

The business, social, and economic environment over the past 20 years has been one of accelerating change.  This environment has been accompanied by global ideological conflict and economic competition for both markets and jobs, world-wide competition for resources, the information explosion that has accelerated with the proliferation of portable information processing and communication devices, and the tendency of products and services to be treated as commodities.  Living and doing business these days has become more complex, in a world that can seem increasingly chaotic, characterized by turbulence, unpredictability, uncertainty, and confusion.

More recently, surveys and confidential interviews with client families have revealed a growing list of concerns, as revealed in the following questions asked by many of the senior generation:

  1. Will I have enough money to live on for the rest of my life?
  2. What if I outlive my money?
  3. What if people knew what I really spend every year?
  4. Should I feel guilty if I don't want to leave my children a large inheritance?
  5. Should I feel guilty that I really haven't donated all that much to charitable organizations and programs?  It seems that the needs are endless and no one who requests money for these causes ever stops to ask what I want.  
  6. I'm starting to see my friends' parents and my parents starting to slow down physically and mentally and experiencing a growing list of health problems.  How do I ensure that their needs are taken care of?
  7. How do I ensure that my future medical expenses do not consume all of my assets before I (or my spouse) die?
  8. My tax advisor and financial planner recommend that I accelerate lifetime gifts to my children and grandchildren to save tax.  I understand the logic behind the financial models, but what if it turns out that I need that money?
  9. I find it very hard to say "no" to my children.  I don't want them to suffer and I do want  them to benefit from the financial success I've achieved.  At the same time, I'm afraid that if I do help them, they may never learn how to produce on their own.
  10. What if I don't trust my children, my employees or my advisors to do the right thing?
  11. I am just inundated with conflicting financial advice.  How do I know what advice to trust?
  12. How can I help my children become better educated about financial, business and economic matters when I don't even know who or what information to trust?
  13. What can I do to ensure my own health and happiness, as well as the health and happiness of my children and grandchildren?
  14. As I've become busier and accumulated more property, my financial and business life is much more complicated and I have difficulty staying on top of the details.  Is there help available?
  15. Over the years of working to put my children (and now, it seems, my grandchildren, too) through college, I seem to have lost touch with the important people in my life.  How do I rebuild deep and meaningful relationships with my family and friends?
  16. I receive many inquiries from people who want something from me - mentoring, business and career advice, financial support, etc. - no one ever stops to ask what they can do for me in return.  I enjoy providing advice, encouragement, and occasionally, access to my network and financial resources, but I never see if and how my advice and assistance is used and what results are produced.  How do I handle these in the future?  Equally important, who can I turn to for the same advice and assistance when I need it?
  17. My daughter wants to change careers after an advanced degree and 15 years of experience.  What advice should I give her?  "Do what you love and the money will follow" sounds like a meaningless platitude.  On the other hand, I don't want her to spend the rest of her life working to sustain a life she doesn't enjoy.
  18. My son's position with a major corporation has just been eliminated.  He now finds himself out of work, with a small safety net in the form of a decent severance package, but his wife's salary alone will not support the family and he's also got two kids in college and one applying to schools now.  No one seems to be hiring at his level of experience.  He's willing to work for smaller benefits in exchange for an opportunity but no one believes him.  There seem to be a large number of positions advertised for which he is suited; however, his resume seems to disappear into an electronic black hole, and there are companies out there who are capitalizing on the opportunity, promising to help him get a job at higher pay, in exchange for a rather hefty fee (with no guarantees).  How do I help him and his family without depleting my own savings?
  19. I am the first generation of a successful family business.  Some of my children are involved at various levels; others are not.  I am aware of the statistics that state that approximately 20% of family businesses actually survive through the third generation.  How do I ensure that my children are ready to take over and how do I (or should I) make other assets available to my other children to equalize their financial opportunities?

These concerns are composites of the many questions we have seen raised by senior family members who believe they are about to enter the much heralded "transition" of wealth from one generation to the next (here's the news: they are ALREADY IN the transition).  They raise important issues about the relationship of money and financial assets to other values, such as personal and family relationships, meaningful and interesting work, family legacies in the form of knowledge and experience, and developing successor leaders of enterprises of all kinds.  To be continued...

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Article written by John R. Bedosky, Esq.  For more information, contact Mr. Bedosky at (607) 231-6795 or via email at jbedosky@hhk.com.

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