Wealth Management by Erik Lie

CHAPTER 1
Introduction
I initially wrote this book as a textbook for a wealth management class with
students who already had some basic knowledge of finance. But the vast
portion of the material is suitable for a broader audience with no finance
background. And while the book contains some finance theory and math, it is
intended to be very practical, and you can skip most of the math with limited
loss of the content.
The book is not a personal finance book for dummies. I am not going to
tell you to pay off your credit card balance every month or that you should
never borrow from a payday lender. I assume you already know that. But I will
not go to the other extreme either, by reviewing, say, short selling (which you
should stay away from) or the valuation of securities (which is a futile exercise
for individuals not working on Wall Street).
It has taken me a long time to discover and digest the material in this book.
I thought I was quite educated in financial matters when I got my PhD, but I
was very wrong. I wish I had known the content in this book at an earlier stage
of my career so that I could have made wiser financial decisions. In any event, I
want to pass on the content to others who are in their early stages because the
earlier you know the lessons in this book and adopt them, the better your
financial health will be later. But even if you are already well into your career or
close to retirement, you should benefit greatly.
Figure 1.1 provides a simplistic overview of some basic principles in this
book. The surest path to wealth in the long run (beyond the obvious of saving
as much as you can) is to (i) fully exploit retirement accounts and other tax-

advantaged accounts and (ii) place most of the money in the stock market
using low-fee exchange-traded funds and individual stocks. You should also
supplement with investments in regular brokerage accounts (though these
investments require some extra tax maneuvering) and basic insurance products,
including health insurance and term life insurance, while you have dependents.
In contrast, I argue that use of permanent life insurance products and annuities
should be limited. Oh—the sharks represent anyone who wants a bite of your
wealth, including insurance salespeople, financial advisers, and tax collectors,
though this, of course, is an overdramatization.

The book helps you navigate the pitfalls and opportunities in the world of
wealth management. I will also express my personal opinions in places. But I
am not a lawyer, and you should seek legal advice if you encounter complex
legal uncertainties and challenges.
You might also want to consult a financial adviser on occasion as a
supplement to this book. There is an abundance of individuals who call
themselves financial advisers and planners, so you should ensure that the
adviser is a fiduciary, meaning that (s)he is obligated to act in your best
interest. You might even request a written confirmation that (s)he is a
fiduciary before proceeding. A safe choice is a Registered Investment Adviser
(RIA) because RIAs must act as fiduciaries and are registered with the
Securities and Exchange Commission (SEC) or state regulatory agencies.
Furthermore, I recommend that you pay a flat or hourly rate for the services. I
believe that advisers who earn commissions or trading fees have perverse

Wealth Management by Erik Lie