#17: From Creating Wealth to Managing Wealth
Sometimes the biggest roadblock between graduating from creating wealth to managing wealth is our inability to change how we look at ourselves and the world we live in
What is the best way to measure the value of advice given from one person to another?
If the advice is objectively a great solution for that person’s financial situation but that person is unwilling or unable to abide by it, then it has no subjective value to them in that moment.
All that we can hope for then is that it plants a seed in that person’s thought process that may influence their ability to be receptive to the message in the future (after that seed has been nurtured and watered in a myriad of different ways of course).
Being in the financial advisory space, I am continually confronted with this dilemma.
The subjective value of my work and expertise is only as useful as the client’s ability to receive it.
I try not to get to disheartened by this since it doesn’t take away from the objective value of the work I provided.
Nevertheless, it DOES say something about my inability to deliver the message in a way that is easier for them to receive it.
And that of course is something I can always work on being better about.
I’ve written on this Substack about my difficulties in working with financial advisors who aren’t willing to engage past the limitations of the AUM model or with life insurance agents who are primarily focused on selling highly commissionable insurance products that can have devastating consequences for end clients.
And on a client level it perhaps shows up most often in my interaction with pre-retirees or retirees who have spent a lifetime saving and abiding by the concept of minimal consumption only to have finally reached the point in their lives where they have more than enough to engage in the gratification part of the delayed gratification ideology only to realize that they have no idea how to do so.
Any attempt to actually spend their hard-earned savings causes a level of anxiety and worry that prevents the enjoyment of the very thing they spent a lifetime trying to procure.
Their quality of life is actually worsened when they think about actually spending the money they’ve earned and invested—even if they have more than enough money to retire on.
This is in spite of the fact that research has shown that actually spending money in retirement makes people happier.
So retirees don’t spend the hard earned money they’ve saved because they are worried about running out of money—even when they have more than enough money to spend AND spending that money would make them happier.
They would rather continue to worry about a possibility that is extremely unlikely instead of enjoying the life they’ve created for themselves.
No amount of math and modeling can alleviate this.
Believe me, I’m the math guy and I’ve tried.
And this makes sense if you think about it.
We can’t spend a whole lifetime building an identity around the value of saving and living beneath our means and then all of a sudden be expected to abandon the fabric under which we’ve constructed our entire lives around up until that point.
To do so seems like an invalidation of the identity we’ve created for ourselves and our life’s work.
The conversation alone forces a psychological requestioning of who we are and what we’ve believed is true versus the reality we live in.
It legitimately requires us to separate the objective value and legitimacy of the advice from the biases and preconceived notions we bring to the table.
This requires a lot of emotional work on our part that we’re not always ready for.
I liken it though to starting a company.
We may be the perfect person to found a company and take it from $0 in revenue to $1 million a year in revenue.
But we might not be the right person to take that company from $1 million a year to $10 million a year.
So if we want that company to grow, we either need to find the right person to take the company over or find the right mentors and therapists to help us become that person ourselves.
But these options require us to either cede control or admit our own fallibility in the face of new issues that are fundamentally different than the ones we’ve excelled at addressing up until this point.
Both of these choices are difficult ones to make as we move past the creating wealth part of our journey and into the managing wealth phase.
But perhaps the most difficult part of this process is trying to accept that the world is a lot more complex than we’ve previously believed it to be.
And that the biggest roadblock to us accomplishing the goals we profess to have going forward is us wanting to hold on to the ideology that made us who we are up until this point.
Changing your mentality from creating wealth to wealth management
Everyone loves the idea of acquiring newfound wealth; but not many people think about what they have to do to properly manage wealth once they have it.
The process of creating wealth involves a combination of hard work, sales, risk, and of course luck.
You work hard at a career, you invest in the market, you start a business, etc.
All of those involve you working diligently to either master your craft, selling yourself to others in order to carry influence, and ultimately taking risk in some fashion (either with your career, business, or investments).
The luck involved here is that this all worked out for you; the career you chose was the right one, you found the right partner or company to work with, and/or you happened to invest at the right time.
A lot of this mentality involves front-end work and growth that is dependent on your own personal drive and agency.
How do I get the next promotion?
How do I grow my business?
What should I be investing in to maximize growth?
But managing wealth involves a fundamentally different mindset than the growth centered one.
It’s less dependent on our own personal agency and more on the tax laws that govern how our newly created wealth is taxed.
Taking risk (and a bet) to go from $1 to $10 million is well worth it because that extra $10 million provides you with opportunities you didn’t have when you had $1.
And the worst case is you lose the bet and go back to $0 where getting back to $1 isn’t as difficult.
But if you risk $10 million to try and chase an extra $20 million in wealth, the worst case is you’re back to $0 and can’t recreate that $10 million as easily.
So utilizing the same risk-taking mentality that created your wealth isn’t worth it when the marginal value of creating an extra dollar of wealth at that point is small but the amount of risk being taken is greater.
Preserving that wealth becomes a much more important goal at that point.
And the tax code allows wealthy people to do this in a myriad of ways.
So while you can’t use the tax code to create $10 million in personal wealth for yourself, you CAN use it to make sure that $10 million grows safely and with subsidies and incentives that people without wealth don’t have.
I always find it interesting how many people chase the next big opportunity without understanding the risk involved versus finding ways to maximize their return relative to risk being taken.
If I give you the option of a 5% safe return or a 10% risky return, it’s possible that half the readers will choose the safe option and the other half will chose the risky one.
Both choices can be valid depending on our risk tolerance and the risk involved.
But if I tell you that the 10% risky return risks you losing everything if you lose, and if you win you will still lose 50% to taxes but the safe 5% return will pay no taxes and you’re guaranteed to get it, then the reward to risk ratio looks entirely different.
Everyone is eager to double their return from 5% to 10% even if it means taking an inordinate amount of risk.
No one thinks about earning the same return on a net basis simply by being more strategic with their planning and taking a lot less risk.
Chasing larger gross returns is sexy.
Simple financial planning to increase the bottom line wealth is not.
But more importantly, it goes against everything we spent our whole lives doing.
We created wealth through our own ambition, risk-taking and luck.
So when we create exceptional wealth we feel it is in large part due to our own exceptional ability.
Our exceptional skillset, drive, or luck sets us apart from others and that’s why we feel we became wealthy.
In other words, we feel we are deserving of the wealth we created.
There is a proud sense of meritocracy associated with the creation of wealth.
But there is a clear confirmation bias here.
When we create wealth, we suddenly look at our new friends, neighbors, and golf club members and notice that they are as equally driven, gifted, and lucky as we are.
This bias leads us to believe that hard work, exceptionalism, and luck invariably leads to wealth creation.
However, what we don’t see in our wealthier zip codes and country clubs are the many more people who were also hardworking and exceptional, but perhaps not as lucky as us (at least not monetarily).
Or were hardworking and exceptional in ways that weren’t in environments as conducive to creating wealth (being an exceptional and hardworking parent, teacher, or waitress in rural Virginia and creating wealth isn’t as likely a possibility as being a hardworking and exceptional venture capitalist in Silicon Valley).
Shifting our perspective from creating wealth to managing it forces us to look at the world through the lens of the tax code instead of our own personal agency.
Creating extraordinary wealth involves taking extraordinary risks in some part of our lives; managing wealth involves minimizing the risk being taken through tax subsidies and redistribution of benefits being provided to us now that we have better understanding of the nuances at play.
The management of wealth forces us to accept the reality that the tax code and economic systems make preserving our wealth a lot easier than creating it.
When we’re young we think the answer to wealth is to get a high paying job.
But then the more our job pays us, the more we realize how much we lose in taxes and we realize that the marginal value of hourly work is limited after a certain point by both the hours we can work in a day and the after-tax amount we get to keep from it.
Then we realize that if we own equity in something we can be compensated off the labor of other people’s work instead of our own and that the ceiling for that is a lot larger than our own individual wealth creating abilities.
More importantly, we realize that there are subsidies for equity holders that W2 earners just don’t get.
If I make $600k in W2 income here in California, I’m losing 40% of that to taxes.
However, if I make $600k in equity in a year on the other hand, with proper planning me or my family may never pay taxes on any of that through step-up in basis or through offsetting the realized gains through the use of leverage.
If I lose $600k in equity in a given year, I can offset that against future equity gains indefinitely such that my losses that year help subsidized future gains and my tax liability is minimized.
On the other hand, if I lose my $600k W2 job and am unemployed for a year, I don’t get to deduct the loss of that income from my taxes the following year when I get another W2 job making $600k (or less).
I just have to eat the loss.
There are a plethora of more examples I can list here.
I will be doing deeper dives into these examples in future Substack posts.
The point I’m trying to raise here is that the creation of wealth is in large part a bet on ourselves.
We are betting on our own personal ability to turn that $1 into $10 million.
However, the management of wealth is in essence a bet on the tax code and the systems at play that benefit the wealthy at the expense of labor.
It requires us to shift our mindset away from “How can I control my own destiny?” and towards “How do I benefit from a system that affords me unequal benefits at the expense of others?”.
This doesn’t feel as meritocratic as our own creation of wealth.
This feels as though we are the beneficiaries of an unfair system that gives benefits to people who already have wealth at the expense of those who do not have it.
And that’s because we are.
This Substack operates under the auspices of educating people about how to use life insurance and annuity vehicles as financial planning tools.
But if you look deeper at this Substack, you’ll see that it’s really a discussion about human behavior and how whole industries are centered around humans making suboptimal decisions based on our emotions rather than rationale.
Middle class Americans purchase complicated life insurance and annuity products that they don’t understand from well compensated life insurance agents who sell it to them. They eventually cancel these products and walk away with very little because they didn’t fully understand what they bought.
But because these individuals get the poor end of the deal, wealthy and sophisticated individuals get underpriced policies in which the full price of the policy has been subsidized by those who got the worst end of the deal.
And these more sophisticated individuals are implementing this as part of a holistic wealth and estate plan to take full advantage of the tax benefits that the insurance industry has long lobbied to protect.
So the middle class is quite literally subsidizing the cost of the life insurance, wealth management, and tax benefits that their wealthier counterparts benefit from.
And the only reason any of this is possible is because we feel comforted by our own identity and bias more than we do by numbers.
So people who appeal to our sense of identity and biases sell more products and services than those who try to appeal to our sense of logic.
It’s only once we start to peel back the curtain on the back-end (if we ever do) that we have a problem with how things were sold to us on the front-end.
But up until that point-in-time we don’t have an issue with the sales process—or our lack of due diligence before agreeing to the sale.
Everyone—myself included—likes to point out the less savory parts of the life insurance agency or financial advisory business model.
It’s easy here to scapegoat the individual salespeople or the industry for being at fault here.
But the truth of the matter is that they aren’t doing anything illegal.
They are simply selling products and services in the way that people want to be sold them in mass quantities.
All they are doing is creating their own wealth using the systems at their disposal in the same way we used our skillsets to create our own wealth using the systems at ours.
They are just doing so at the expense of ourselves.
So at what point do we stop putting the blame on other participants for creating their own wealth by operating within the confines of the system at play and not on ourselves for our own beliefs and ideologies that prevent us from understanding how that system works and using it to manage our own wealth in the most efficient way possible?
We can lead a horse to water, but we can’t make it drink if it’s not ready to.
The issue isn’t always the quality of the water; it’s the willingness of the horse.
Do we want a retirement plan that provides us with the highest chance of meeting our retirement goals and maximizes the wealth we leave to our children?
Or do we want a plan sold by someone who makes us feel better about who we are as people that comes at a large cost to the goals and wealth we profess to want for ourselves and our children?
The first option requires a lot of work on our part in terms of educating ourselves about the systems at play, our role in it, and the beliefs and identities we bring to the table that prevent us from becoming the people we need to be in order to fully make use of the opportunities we have created for ourselves.
The second option requires no education, no growth on our part, no tough conversations, and allows us to feel better about ourselves and how we’ve lived our lives to this point.
It just comes at the cost of a large portion of the wealth we’ve created for ourselves which we are now essentially gifting to someone who has learned the skill of selling bad solutions to people who want to be sold.
The second option is just a redistribution of wealth from people who’ve created it (ourselves) and towards people who’ve learned how to sell us what we really want (which is to feel better about our identity and beliefs) in place of what we are actually coming to them in the first place for—which is comprehensive wealth and retirement planning that is in our best interests and not theirs.
This is what Separating Value From Bias is really about.
It’s about questioning who we are as people, the systems we’re a part of, and whether our own beliefs and ideologies that we’ve acquired over the course of our lives are getting in the way of the values we profess to have for ourselves going forward.
The world and its nuance is often a lot bigger and more complex than our own limited personal experiences may make it out to be.
Our willingness to look past our own experiences and beliefs and understand the larger systems at play help determine how much objective value we are able to extract from the realities of the world we live in.
And hopefully that allow us an insight into our thoughts on how we can contribute the most back to it.
About the Author
Rajiv Rebello is the Principal and Chief Actuary of Colva Insurance Services and Guaranteed Annuity Experts. He helps HNW clients implement better after-tax, risk-adjusted wealth and estate solutions through the use of life insurance and annuity vehicles. He can be reached at rajiv.rebello@colvaservices.com.
You can also book a call directly with him here: