The commander stands on the hill a little away from the action, just on the commander’s hill, where the fighting is overlooked and there is no immediate danger.
Next to him are typically his advisors, who know exactly in which matters they have to be able to support the commander. At any time and accurately. They prepare the information in a way that allows informed and hopefully correct decisions to be made. They do the synthesis, they consolidate. They create the overview by hiding irrelevant details and providing relevant concentrate. They also provide support in implementation and execution.
Anyone who has read this wonderful book by Kanemann knows how amazingly badly our brain analyses and what gross errors happen when we leave the analysis to the so-called System 1 of our brain alone. System 1 is active when confusion and disorder prevail, when details distract and chaos and stress dominate. System 1 can analyse very quickly, but also very inaccurately. It is based on reflex, instinct and experience. System 2, on the other hand, distinguishes humans from animals. It puts complex information into context and processes it with precision. To “use” system 2 is exhausting, but it is an essential prerequisite for an “informed decision”.
The best decisions are usually made when both systems play their part in the analysis.
The same is true for decisions in asset matters. As advisors, we have developed a synthesis and analysis process that provides targeted support for us and our clients in the decision-making process. This includes consolidation.
The simplest way to imagine a consolidated view of the asset situation is as an overall balance sheet with an income statement. The central difference to the conventional balance sheet (e.g. of a company or the tax return) is that the majority of the income is passive income and depends directly on a part of the assets. While income normally comes from the sale of services or products or from wage payments, in asset consolidation the allocation to the individual asset parts (so-called assets) must always be carried out. A change in the value of an asset is – in contrast to traditional accounting – always an essential part of the analysis.
The asset parts of an asset typically include real estate (including owner-occupied), equity interests, art, collections of all kinds, but also so-called bankable asset parts, which are usually held in trust at a bank or cash that is lent to banks as deposits. The liabilities side includes obligations such as mortgages. Special attention is paid to expenses in the consolidated presentation. Costs and expenses, like income, are mostly related to asset items on the liabilities side (e.g. interest on liabilities) but also on the assets side (e.g. bank, transaction or administration fees).
In order for apples to be added to apples, it is necessary to convert all values and transactions into a uniform unit. The prerequisite for this are accurate conversion prices into this unit at the time of the transactions in the monitored period. As a rule, one speaks of the reference currency, because people can better imagine assets in monetary quantities. Reference is difficult in the case of very weak currencies, as series of figures are difficult to compare due to inflation. But we can also implement specific client wishes: A customer of mine wanted to see all evaluations expressed in number of cattle; this was a better reference for him. Another customer did not want to get used to the euro and we calculated everything for him in pesetas.
If now all transactions and prices are correctly recorded over the entire assets, the “right” decisions can be made. This is the only way to accurately assess the composition of the development (so-called performance attribution) over a period of time, to identify risks and to evaluate managers’ performance or profitability according to the cost of an investment.
Every asset situation is different. And so the reporting logic must also be adapted according to the issue at hand. Just as the arrangement of the instruments in a cockpit follows a logic that allows the timely recording of the relevant information, we make sure that we prepare the relevant information for the client.
The consolidated presentation of a financial situation and the detailed information over a period of time is relevant for each asset. Our experience has shown that a mere momentary view (usually prepared manually
