Wealth Management Business Notes

Wealth Management Business

  • The wealth management business involves trust and verification when dealing with financial advisors.
  • Financial advisors should be transparent with information to set the culture and ethos of the family enterprise.
  • Information sharing allows for continuous improvement and early problem identification.

Information Feedback

  • Good information feedback is crucial for successful businesses and financial lives.

Investment Managers

  • Investment managers like Brown Advisory or Call Capital do not typically hold the money directly.
  • The money is usually held by a third-party custodian.
  • Bernie Madoff situation is an exception to this where managers do have your money directly.

Investment Policy

  • Investment Policy: The strategic plan for managing financial assets over the long term.
  • Target Asset Allocation: Part of the investment policy, such as 70% stocks and 30% bonds, or allocations to private equity or real estate.
  • Manager Selection: Process of selecting third parties to manage different components of the money; many have at least four managers.
  • Manager Infrastructure: Overseeing investments, making decisions (discretionary or implemented based on client direction).

Trade Execution

  • Trades are typically executed through a third-party broker-dealer (excluding big banks).
  • The broker-dealer transfers shares from the custody account to the buyer and ensures money returns to the custody family.
  • Multiple parties (broker, buyer, investment manager) ensure proper execution, providing checks and balances.
  • Big banks often act as investment manager, broker, and custodian, potentially reducing checks and balances but are highly regulated.
  • Numerous measures are in place to ensure effective trade execution of millions of trades daily.

Performance Measurement

  • Performance measurement is a critical information feedback loop to ensure progress aligns with the plan.
  • Leadership and control are vital in designing the investment policy and performance measurement system.

Investment Committee

  • Larger families and institutions have a formal investment committee that meets regularly.
  • The investment committee considers the needs and interests of beneficiaries.
  • They consult with relevant parties, such as the president of a university or fundraising teams, to understand financial needs and goals.

Investment Policy Statement

  • A well-written investment policy statement provides guidelines for those responsible for executing the policy.
  • It helps set expectations and accountability between clients and managers.
  • A workbook about investment policy is available but does not include a draft investment policy statement to encourage original thought.

Components of an Investment Policy

  • Level Setting: Qualitative introduction to the purpose and beneficiaries of the capital.
  • Investment Objectives:
    • Absolute: Growing assets net of leakages at the rate of inflation over 20-30 years.
    • Relative: Benchmarking performance against indices like the S&P 500.
  • Assumptions: Explicit assumptions about the core family operating business and the overall market outlook.
  • Explicit assumptions should be made regarding the scenario where the economy declines.
  • Spending and Saving Targets: Defined targets for spending and saving.
  • Target Asset Allocation: Specific allocation targets for various asset classes.
  • Liquidity Parameters:
    • Access to a line of credit.
    • Limits on illiquid assets.
  • Restrictions: Restrictions on trading specific securities (e.g., Facebook) to avoid compliance issues with the SEC.
  • Manager Selection Process: Description of the investment process for selecting managers.
  • Rebalancing Criteria:
    • How to rebalance the portfolio back to the long-term target asset allocation.
    • The frequency of rebalancing.
    • Use cash flow to rebalance if possible.

Rebalancing Considerations

  • Academic studies are inconclusive about optimal rebalancing strategies for tax-exempt entities.
  • Rebalancing can be costly due to taxes; less frequent rebalancing may be preferable.
  • Use cash inflows or outflows to rebalance the portfolio.
  • For taxable portfolios, maintaining the actual asset allocation relative to targets can be more flexible.

Evaluating Performance

  • Summary information about how performance will be evaluated.
  • Shorter investment policy statements encourage more attention and compliance.

Asset Allocation

  • Some investors adopt a flexible approach to asset allocation, defining it as a range (e.g., 0-20%) rather than a fixed point.
  • This allows for opportunistic investing, such as in "funky debt."
  • Tight asset allocation ranges are preferred by some to limit discretion.
  • Example: Allowing a 5% deviation from a 70% equity allocation before rebalancing halfway back.
  • Having target allocations is important despite the desire to maintain flexibility.

Family Enterprise Structures

  • The structure of a family enterprise can be complex, with numerous trusts and tax returns.
  • Complexity can lead to adverse outcomes and administrative burdens.
  • Simplifying structures, especially trusts, can reduce federal costs and streamline operations.
  • Dynasty trusts can create administrative nightmares for future generations due to the multiplication of trusts.

Consolidating Trusts

  • Effective estate planning often involves breaking up assets into smaller pieces but adds complexity.
  • Consolidating trusts can be challenging but beneficial for strategic management.
  • Legal expertise is necessary to consolidate trusts.
  • Unintended consequences of trust design can emerge decades later when trying to consolidate.

Finding Expert Advice

  • Finding advisors who can address both the soft issues (family dynamics) and the hard issues (financial complexities) is challenging.
  • Multifamily offices can provide comprehensive wealth advisory services but are not always easy to find.
  • Headhunters and large consulting firms (e.g., Russell Reynolds, Spencer Stuart) may have family office specialists.
  • Finding independent contractors for a few hours of work per week is difficult; financial advisory firms may be a better option.

Recommended Firms

  • Brown Advisory: National firm suitable for clients with $100 million to $500 million in assets.
  • Plante Moran Financial Advisors (PMFA): Midwest accounting firm that also provides wealth management services.
  • Hall Capital (now Pathstone): Firm in San Francisco for higher-end clients.
  • Santa Barbara Management: New firm in Chicago focused on everything other than investment management.
  • Fiduciary Trust Company of Boston: Specializes in simple asset management and has its own New Hampshire trust company.

Software for Managing Family Offices

  • Finding the optimal software for managing family offices is challenging.
  • Performance measurement systems differ from general ledger accounting systems.
  • Combining the two effectively has not been perfected.
  • Examples: Archway (general ledger), Addepar (performance measurement); both are complex to manage.

Performance Measurement Software

  • Excel can be used for performance measurement, but it can be painful.
  • Financial advisors should be able to measure complex portfolios.
  • Combined time-weighted rates of return and IRRs are necessary.
  • Historical accuracy is the biggest challenge, especially for performance since inception.
  • Data migration is a challenge; consider how you will change your system in the future.
  • Protecting and keeping your data is important.
  • Contracts should specify that data belongs to you and that the service provider will help you move data if needed.

Software Solutions

  • Other factors you are managing also include legal entities, legal documents, etc.
  • Another popular software is EmoneyAdvisor.com
  • LeafPlanner helps with document management.
  • Levels software can model trust performance and growth rates.
  • There is another software called Diligent for legal entity documents.

Performance Reporting Software Discussion

*Different Levels of Software exist with different stacks and for different functions.

  • The price point is in the realm of $65-$250 a month
    EmoneyAdvisor.com. is a popular software used by some.
    Need staff to manage systems.
    Advent is also considered a great system (may be out of date)
    Portfolio Center may be useful - biggest challenge is typically moving historical data
  • No one source of data - will need several and figure out how to work together.

Accountability

  • Follow up performance measurement with a well-defined system of accountability.

Custody

  • Outside the US it is incredibly rare to have a single gloabl custodian.

Multiple Custodian Model and banks outside the US

  • Common for the wealthiest to divide different banks manage money and collect that information centrally.
  • Banks compete to provide the best return and then the worst performing are fired.
  • However
  • People often fail to collect the best data, so they don't understand whats going on.
  • The guys who were terrible before will likely outperform the new managers that you replace them with and vice versa. It's called Mean Reversion.

Modular Family Office with coordination functions

  • Having a coordiation function or outsourcing the coordination function may be an appropriate solution.

Balance Sheet

  • Must manage appropriately.
  • The types of debt, amount of debt and structures involved are important.

Cashflow

  • The time frames that one is considering, .5 - 1 pecent cashflow over 20 years adds up

Performance Measurement

  • Very difficult to find a good performance measurement tool that tracks after tax performance.
  • One can track tax efficiencies and accountants may be able to help with this

Family Communication

  • Must be implemented well.

Communication of Family Results

  • Electronic version of a wealth management policy is avaialble on Canvas.

Detailed Reporting

  • Use consistent reporting with all adult family members.
  • Invite younger members. and be productive, get careers etc, etc

Simple Charts for reporting

  • Performance versus Inflation over 10 years.
    *Performance versus bench marks in DOLLARS - rather than numbers people don't appreciate percetns, but they do appreciate dollars.

Global Family Offices reporting

  • Northern trust largest client operates a global family
  • The chart is perfromance and the bars represent quartile.
  • Performance after tax may be difficult to measure. must consult accountants.

Analysis

  • Must perform one.

Accountability

  • Hold self accountable.