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  • Abby Schultz

Merrill Lynch’s Spending Advice for the Wealthy

For families with ample wealth, figuring out how much to spend can be tricky. That’s because for many families, the sky actually can be the limit. Anything is possible. But should it be?

Merrill Lynch’s Center for Family Wealth Dynamics and Governance team—a unit within Merrill Lynch Private Banking & Investment Group—counsels wealthy clients to go back to their core values and principles before forking out a lot of cash for a Ferrari or a splashy vacation in the Maldives.

It’s not that wealthy families shouldn’t buy a Ferrari. It’s that purchases of any size should be made in the context of core values and principles as well as what individuals see as the “desired outcome” of their wealth: to preserve it, grow it, or spend it down (which could include giving it away to charity).

Valerie Galinskaya, a director of the center, recalls a “very significant client” who contacted his financial advisor in the process of planning a vacation, and asked if he could afford to spend what he was planning to on a trip. This was an individual who had the means to spend whatever he wanted. His question really wasn’t “can I afford” the vacation? It was, “what should I spend on a vacation?”

“It was clearly not just about a vacation, but generally, how he was thinking about his wealth,” Galinskaya says.

The center is in the process of preparing a guide for clients confronted with questions like this, so wealthy individuals and families can better think through how to develop a spending plan that fits their values, principles, and the future goals for their wealth. It’s a surprisingly layered exercise that families don’t always know how to approach.

“You have to really step back from just the spending question to the overall allocation question and the question of balance,” says Stacy Allred, the center’s managing director.

Subconscious “money scripts” created in childhood can surface in behavior and create unexpected stumbling blocks for clients trying to answer the question of “how much should I spend?” Allred says.

For example, one “young wealth creator” with an MBA from Stanford with whom she had worked had grown up in a family with a negative view of “rich people.” “Now he was a rich person. It was a real struggle to own that and work through that dysfunctional be in a position to navigate wealth."

Often what’s required is a simple reframing of these kinds of dysfunctional beliefs so that clients can approach their wealth constructively. For instance, clients who think, “I am embarrassed when people ask me about my wealth,” can be more productive with it if they think, “I am grateful for what I have.”

Reframing often comes into play when Galinskaya and Allred work with families on their annual gifting to family members. Many families, for instance, take advantage of tax regulations that allow couples to gift $30,000 a year without paying gift or estate tax. Galinskaya says they guide clients to frame their gift in a way that makes their expectations for it clear. For example, a client can say, “the goal of this money is to help you save for your nest egg.”

“We've worked with families where there was no communication around the gift, which creates confusion and anxiety,” Galinskaya says.

Merrill also suggests using tools such as “personal financial statements” to make informed spending decisions, and to work with a financial advisor to think through the long-term implications of big purchases.

One family Merrill worked with was new to wealth and wanted to buy a private jet. Although the family could afford it, “we helped them slow down,” and to consider the full implications of owning a jet versus chartering or purchasing a jet share, Allred says. The cash-flow analysis the family did with their Merrill advisor showed that over the long-term, owning the jet would have a “big impact on other goals,” she says. The family decided to buy a jet share for flying to “hard to access” cities, and to fly commercial flights cross country.

“Our objective in working with their private wealth advisor, was to help the family make an informed, thoughtful decision that aligned with their overall philosophies and goals,” Allred says.

Courtesy : Barron's

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