Though my practice was overwhelmingly dealmakers (energy, cable, and real estate), I had one client, an heiress to quite a large position in a publically held oil refiner. Yes, she wanted to be passively financially independent of her large position, without selling a portion of this position – it wasn’t possible.
Thus, not selling any of the stock in this oil refiner became a ‘ground rule / a constraint’ on her personal financial life planning goal of passive financial independence regardless of my mantra ‘an asset is just an asset is just an asset, we manage personal financial life goals not assets’ nor fall in love with the asset.
Another client who bought into Enough – needed his financial Vegas fix. No he didn’t go to Las Vegas but he had a need to speculate. Thus, with a portion over and above Enough as defined, together we recognized what he called ‘his need for speed’ into his Las Vegas fund (which he could afford to lose – and did). Again, another constraint/ground rule that had to be recognized in planning.
Then there is the ‘world is coming to an end, everything should be safe, liquid but I still need to make 15%’ type client. I referred this individual to another planner as there was no way – enough would have been enough as he was a Worry Butt on Steroids.
In Management by Objective terms, there are four Effectiveness Areas (EA) in personal financial life planning:
· Asset Protection · Asset Accumulation · Income Conservation · Asset Conservation
Asset Protection – Addition by Capital Depletion Subtraction!!
Asset protection is typically about capital depletion due to:
· Property & Casualty loss
· Long Term Care Needs
· (Some would include Divorce)
Examples of Ground Rules on Asset Protection (which typically involves shifting risk (large losses – capital depletion) via insurance in return for taking a small loss (premiums & minimum self insurance- deductibles, stop losses, company financial rating, complaint ratio etc.)):
· Health Coverage
2. Stop loss
3. catastrophic coverage
· Vitamins – “supplemental health insurance!”
· Homeowner Coverage –
2. full replacement value of structure
3. full replacement value of contents
4. replacement value by ordinance (check your policy most don’t have this – and specifics are beyond the scope of this writing
5. underlying liability coverage
· Automobile –
3. comprehensive coverage
4. liability coverage
· Liability –
1. underlying coverages on home and auto
2. preferably a blanket excess liability on top of the underlying liability coverage
3. a separate flood insurance policy where applicable
4. where applicable Director’s & Officers insurance as well as Malpractice Insurance .
· Disability Coverage (income replacement due to disability – remember you are the working active asset creating asset accumulation etc until the goals are funded).
1. Loss of income upon partial and or total disability
2. wait period would be chosen before the benefit kicks in
3. inflation rider
4. (Social Security offset is again another subject)
5. coverage to age (65 – lifetime?)
· Long Term Care Coverage
1. Qualification (number of ADL’s activities of daily living out of 6 to qualify,
2. home health care coverage,
3. wait period, coverage years (or lifetime)
· Divorce Insurance – prenuptials, post nuptials – please no Sleepless in Seattle clap trap when 50% of first marriages result in divorce and 70% of second marriages. This is ASS-et protection. You have wills and trusts for contingent events (death) - and I never heard a spouse against those contingencies - why not prenupts, post nuptials. PS you can always change the pre and post nupts later if desired.
The point of the above is illustrative of ground rule/constraint concepts in the asset protection effectiveness area all of which are intended to minimize capital depletion (addition by reducing capital subtraction!) to allow asset accumulation and asset conservation.