At BNY Mellon Wealth Management, we believe that many in our industry have underestimated the impact of two gradual but significant developments over the past two decades. The first is the shift in retirement benefits from company-provided pension plans to employee-funded savings plans, which has made individuals primarily responsible for their own financial futures. The second is the synchronized aging of the population in the world's largest economies (Europe, China, Japan and the United States), which we believe will lead to incrementally lower economic growth and market returns in the future. Taken together, these two developments have profound implications for successful wealth management.

Historically, investors have focused on the concept of "alpha" — the excess return above an investment benchmark that can be earned by the careful selection of securities. But as families expand their wealth and their financial affairs become more complex, beating the market becomes a much smaller factor in the success of their overall wealth management plan. The new “alpha” must be a broader measure of success related to a range of financial planning disciplines.

Drawing from our years of experience working with successful institutions and individuals, we have developed five practices to help our clients achieve long-term financial success: investing to maximize compounding; borrowing strategically; spending dynamically; managing taxes; and protecting legacy. This framework is designed to help clients sustain wealth over the next decade and beyond. We call it "Active Wealth."

The comprehensive support we provide around these practices and the proprietary technology we utilize can empower our clients to stay focused on what is important so they can confidently navigate what is to come.

Invest: Maximize Long-Term Compounding

According to the 2019 DALBAR Quantitative Analysis of Investor Behavior, poor decision-making has caused the average investor to underperform the S&P 500 by approximately 5.9% over the last 30 years.1 These poor decisions typically involve buying or selling at the wrong time and are largely the result of misunderstandings, misconceptions and overreactions.

Investors who do not fully understand the relationship between risk and return, or who fail to maintain a long-term perspective in the face of short-term challenges, are more likely to underperform their benchmarks.

Exhibit 1: The Average Investor Consistently Underperforms the Market

When faced with volatility or a steep decline in market value, many investors feel compelled to sell assets in the hope of stemming their losses. But in reality, being out of the market for even a short time can significantly reduce the long-term value of a portfolio. For example, an investor who missed out on the 10 best trading days of the S&P 500 between 1989 and 2018 would have lost about 2.5% in annualized returns and about 865% in cumulative returns.

Exhibit 2: Missing the 10 Best Trading Days Would Have Led to a Loss of More Than 2%, Annualized

Building generational wealth requires discipline. At BNY Mellon Wealth Management, we work with clients to develop customized investment plans that help them stay invested so they can maximize the long-term, compounding growth of their assets.

We begin by identifying a client's key objectives, then use this information to design an asset allocation aimed at supporting specific lifestyle needs and wealth-transfer goals. Once an allocation is established, we work to enhance after-tax returns by locating particular asset classes in the most appropriate, tax-efficient accounts. We also regularly rebalance assets, harvesting gains and losses while keeping the overall allocation aligned with client goals. The result is an allocation that is optimized to deliver substantial growth relative to what the average investor is likely to achieve.

At each point in this process, we seek to maximize the growth potential of the portfolio while mitigating risk and managing return expectations.

Borrow: Add Value Through Strategic Borrowing

Strategic borrowing can be a valuable tool for long-term investors seeking to take advantage of short-term opportunities without hindering their ability to achieve their long-term goals.

In a low interest rate environment, borrowing funds to pay for large purchases or to cover short-term spending or investment needs can be more advantageous than liquidating assets. For example, consider a scenario in which an individual with a $20 million investment portfolio needs $2 million to purchase a new home. By taking out a mortgage, this individual can avoid liquidating invested assets, defer taxes and further benefit from compounding growth by staying in the market.

Exhibit 3: Liquidating Assets Can Undermine Portfolio Principal

After 20 years, the portfolio of an investor who liquidated assets and paid for a new home in cash would be roughly $2.6 million smaller than the portfolio of an investor who opted to borrow those funds instead.

Interest rates are cyclical, and we encourage clients to take advantage of cyclical lows through the strategic use of leverage. We take a comprehensive approach when determining whether strategic borrowing is right for our clients. In addition to examining their assets and short- and long-term liabilities, we strive to understand who they are: What are their personal and family circumstances? How do their values, obligations and aspirations influence their long-term financial goals? What is their sensitivity to risk and what are their liquidity needs? Answering these questions allows us to devise a customized financing strategy that is aligned to their objectives and helps maintain growth in their portfolio.

Spend: Create a Dynamic Spending Strategy

Small changes in spending can have a significant impact on wealth. Consider the effect of a 1% reduction in spending for a family with a $20 million portfolio. Assuming annual portfolio growth of 5.25%, on average, and a 4% annual spending rate, the portfolio's value will grow to $24.6 million after two decades. Reducing the spending rate to 3% over that same period would significantly increase the family's wealth, resulting in a $31.3 million portfolio.

Exhibit 4 : Increasing Spending by 1% Can Reduce Wealth by 21% Over 20 Years

Institutions, such as defined benefit plans and non-profit endowments, preserve their assets by setting a clear spending target that is flexible enough to respond to changing circumstances. We believe that this institutional approach can be useful for individuals and encourage our clients to adopt these proven practices in their own spending plans.

We will work with our clients to assess the sustainability of their current spending and the impact of potential changes. Our powerful proprietary forecasting tools provide a clear picture of how spending decisions can affect wealth over time. These tools also allow us to demonstrate what a client’s future wealth might look like in different scenarios, facilitating informed decision-making.

These insights help us develop dynamic spending plans that address lifestyle needs, respond to market conditions and sustain wealth across multiple generations. In contrast to a static spending strategy in which the spending rate grows with inflation each year, the spending rate of a dynamic spending strategy is adjusted as circumstances change, protecting portfolio principal during market downturns.

This allows for greater compounding and makes the portfolio less reliant on market returns.

Manage: Maximize Wealth through Tax-Efficient Investing

An important part of maximizing wealth in the coming decade will be managing and mitigating the cost of taxes. Paying attention to after-tax returns and implementing tax-efficient investment strategies will be essential to ensuring that clients are able to keep more of their wealth.

We also make an effort to utilize fee-based investments only where they are most productive, in markets where active management and manager selection are proven to make a difference. This allows us to manage the overall fee of a client's portfolio and ensure that our allocations are optimized in the manner that best suits the client's long-term investment objectives.

Protect: Safeguarding What is Most Important

The goal of creating sustainable, multigenerational wealth is to leave behind a legacy that supports the things an individual cares most about, such as family, values and favorite charitable causes. This requires a significant amount of planning, both financial and non-financial, to protect assets against any unintended consequences — including taxes, lawsuits, divorce, creditors, identity theft and fraud — that might threaten long-term goals.

We take the safety and security of your assets seriously. We’ve invested in cutting-edge cybersecurity protections, using the strongest and most up-to-date encryption technology to safeguard your data against fraud. Our dedicated cybersecurity team actively monitors your accounts to block any unauthorized access.

On the financial side, we combine sound investment management with strategic estate and tax planning to substantially increase after-tax wealth for our clients.


Our team of wealth management experts has the knowledge and experience necessary to guide our clients through all of it. Our ability to protect and grow wealth through customized advice has brought us the success we care about most: highly satisfied, loyal clients whose relationships with us span generations. Our investment counsellors will work closely with clients to ensure that the strategies we recommend are in tune with their lives and provide for the future they want for their family.

  • 1.  "Quantitative Analysis of Investor Behavior, 2019," DALBAR, Inc.

  • This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.

    BNY Mellon Wealth Management, Advisory Services, Inc. is registered as a portfolio manager and exempt market dealer in each province of Canada, and is registered as an investment fund manager in Ontario, Quebec, and Newfoundland & Labrador. Its principal regulator is the Ontario Securities Commission and is subject to Canadian and provincial laws. Trademarks and logos belong to their respective owners. ©2020 The Bank of New York Mellon Corporation. All rights reserved.