Scott Fitzpatrick:
Hi, everyone. I want to walk you through two concepts now, which I think adds value to the conversation with your successful family, successful business owner. One of them is around this concept of Total Household Income, and the other one is around readily realizable assets or liquidity. There’s a couple of things that are quite often overlooked. But in essence, with total household income, my role is to be across your entire balance sheet, all your assets, all your entities, and all the income streams that come from them, and for me to understand what is the total cost to run your household.
Now, when I say household, for a successful client, a household could be, I’ve got the property in Sydney, I’ve got the property at Hamilton Island, I’ve got the boat, I’ve got the farm, I’ve got the business. It could be a range of income streams and a range of entities, as well as funding kids’ education, university fees, this may be running cars for everybody. So, it’s just getting an understanding across the total household income. Let’s just play around with that. Let’s say, for example, the total household income is a million dollars. Then what we can do is that we can make an allowance for tax. We can make an allowance for lifestyle.
Tax, lifestyle, what does it cost for us to live and to run these assets? Then what have we got left over? That’s our surplus cash, surplus capital. Then what we can do is some scenario playing to go, great, in a simplified form, how do we allocate that capital? Is it the property to make sure that we’ve got this debt free over 10 years? How do we build up trust assets? What contributions can be made to super? So, the role here is being across the asset pool, understanding the income streams, and then scenario planning on what’s the right allocation of capital here.
The right allocation of capital is, how do we do this? What’s the mix? Whether it’s simply our residential property, commercial properties, our trusts, our super funds. It’s capital management. It’s being able to put that into a position paper so that we can work through that with the client. Once again, you don’t need to be able to solve the problem today. You do need to be able to demonstrate the capability to solve the problem. The second part of this from a risk management point of view, and remember, I’m always harping on about this, is that your role is to be the risk manager for the family, to oversee the risks that they’re going to face.
One of the risks that we’re all very well aware of after the GFC is liquidity. So, it’s really important to be able to run over this asset pool with a liquidity lens, or what I would call readily realizable assets, to be able to go, “Great in this portfolio here, how much is cash? How much is equities? What can we redeem in one day? What can we redeem in three days? Where is our gunpowder? How long would it take me to sell this commercial property or residential properties?” “If I have a business down here, what funding could it need over the next one, three, six, 12 months?” Somebody needs to keep an eye on liquidity or readily realizable assets. It’s really great to measure this each year. It’s a really great checking point with the client for them to acknowledge that you’re looking at these risks that they haven’t even thought about. Total household income, being across their entire balance sheet, readily realizable assets, a liquidity measure. Great value to add into these conversations.
