Integrating Tactical Wealth Management

Because strategic wealth management is so often relegated to second‐class status behind the tactics related to building and protecting a family's assets, this book has dealt largely with strategy.

This is not to say that tactical wealth management isn't a critical pursuit. A family cannot successfully manage wealth without a tactical plan because strategic wealth management, despite its importance, is not a stand‐alone proposition. The true formula for increasing wealth and sustaining it over generations is the integration of tactical wealth management and strategic processes. One is not nearly as effective as both.

The order in which these two disciplines are taken up is different for every family. Some, particularly those who experience a sudden wealth event, may need to deal with immediate tactical concerns—taxation and estate planning perhaps chief among them. However, if tactics can be hung on the overarching scaffolding of solid, values‐based strategy, so much the better, especially as the family grows and the generations replace one another.

The tactical issues that require placement in a strategic framework include:

  • Cash flow planning, budgeting, and financial forecasting
  • Banking, including credit management and money movement
  • Tax planning and compliance
  • Risk management and insurance planning
  • Asset management and investment management
  • Business management and direct investments
  • Family office creation and management
  • Information management and reporting

Cash Flow, Budgeting, and Financial Forecasting

If wealth has come quickly through the sale of a successful business, for example, the family may need a good deal of help to manage the cash that has been part of the sale. Although family members might have been successful at handling day‐to‐day or even strategic operations, those skills don't necessarily carry over to understanding the repercussions of handling huge amounts of cash.

This kind of immediate wealth, while it has upsides, also can be unsettling and cause varying degrees of anxiety. There's a name for these disconcerting feelings: sudden wealth syndrome (SWS), a term coined in an article by the Money, Meaning & Choice Institute to describe “the psychological issues… associated with new or sudden wealth.”1 In its description of the term, the institute names several possible signs of the syndrome:

  • Anxiety and panic
  • Irritability
  • Guilt
  • Depression
  • Sleep disorders
  • Paranoid thinking
  • Excessive worry about every uptick and downtick in the stock market

The article goes on to say, however, that the situation can be turned around. “People with SWS can … re‐balance themselves in the major domains of living: self, relationships, work, and community. This means making choices that align one's life with [one's] core values.” In short, these people can discover, as have many before them, that wealth is about much more than money. It's about making money work to accomplish important family and legacy goals.

Not every person who comes into wealth in a hurry falls apart, but for those who are having trouble dealing with the consequences of an influx of money, psychological counseling can be invaluable—and for nearly everyone in this situation, financial counseling is a must.

A qualified financial advisor or financial planner will be important in building a program that helps the family develop budgets, manage cash flow and cash requirements, and create financial forecasts. These professionals can work with the family to answer key questions such as:

  • What is the best thing to do with the cash now?
  • What are our immediate cash demands?
  • What are our short‐ and long‐term capital requirements?
  • How much cash does the family need in short‐term liquid instruments as an emergency or opportunity fund?
  • What other expenses will the family incur?
  • What levels of income will each family member receive? Are those levels high enough?
  • Does each family member have an income and expense budget?
  • What types of investments are worthy of our support?
  • Are there sectors we wish to avoid?
  • How do we diversify our holdings for safety and growth?
  • What do we see as the family dream? What matters to us individually and as a group?
  • How will we use our assets to achieve the family dream?

All of these tactical questions are complex but crucial to family success and wealth sustainability. However, having to deal with them as a family without the strategic underpinning provided by vision and mission statements, constitution, and bylaws is much harder.

For families who have had wealth and wealth managers for generations, the road may be clearer. Perhaps the family has developed a cogent rationale for decision making. They may have discussed the implications of great wealth with the next generations and prepared them well to take their places in the family enterprise, whatever that may be. The family council, family meetings, and family legacy may be deeply ingrained. This is not true of all multigenerational families of wealth, but is becoming truer in the era of the Giving Pledge, family foundations, impact investing, and a heightened interest in philanthropy.

Those for whom wealth is a new thing will need to start from scratch, dealing as rapidly as possible with the tactical issues that must be addressed and working hard with the rest of the family to generate the strategic structure that will guide future decisions. If you think your growing business may someday result in riches, the time to prepare is today.


Unless an ultra‐wealthy family is also highly sophisticated about the ins and outs of banking and credit (and some are), they likely are not optimizing their results. The large majority of families of significant means qualify for enhanced banking services often referred to as private banking. These individuals and families can tap into a plethora of banking or concierge services, far in excess of those offered to clients of lesser means. Some of the banking opportunities that will be useful to these families include:

  • Money movement, cash processing, wire transfers, foreign exchange, and bill‐payment services
  • Short‐ and long‐term lines of credit and loans
  • Credit and debit cards for family members
  • Reporting on transaction processing and cash balances
  • E‐vault capabilities to store important family documents

To determine what banking requirements the family needs, they should consider the following questions:

  • Should we work with one or two banks as a group, or should we all select separate banks based on individual needs and preferences?
  • What banking services will we require as individuals and as a family group?
  • Should we use bank‐based advisory services exclusively, or are we better served by a corps of independent advisors—or both?
  • Are the fees charged by the bank's private banking service competitive with others that may offer similar products?
  • Are we being encouraged to purchase certain products the bank provides because those products generate additional fee income, or do we have latitude to select what we want from among a range of services and products?
  • Should we separate our various wealth management services, or is it more efficient to keep all the aspects of our wealth under one umbrella? What are the risks and benefits of each approach?
  • Should we allow a bank to serve as a corporate trustee for one or more family trusts? Why or why not?

It's essential to have these questions answered, because one bad banking or money management decision can cascade and have severe deleterious effects on the family's financial health and desired legacy.

Tax Planning and Compliance

Taxes—levied by local, state, federal, and overseas jurisdictions—are a morass of mind‐bending regulations, some of which seem to be at odds with one another. Tax laws can be complex, poorly worded, and confusing. They can also turn on a dime. What was a good tax strategy three years ago may have been legislated away last year. The upshot of all this incomprehensibility is that even an innocent mistake or misunderstanding of a rule can cost millions. Because of their complicated holdings, families with significant wealth have to navigate interconnected snares of tax policy, and it's something no family should try to do on its own.

Tax planning is, of course, an ongoing activity and involves searching for as many legal ways as possible to reduce the family's tax burden. It requires the advisor to have intimate knowledge of the intricacies of tax law and the family's financial status, both now and prospectively. Filings themselves can take place at various times of the year, but planning should never wait until tax time. For greatest tax savings, families must take advantage of tax‐reduction strategies far in advance of the filing date. “What you could have done in October or November to minimize your taxes may no longer be an option in March or April,” said Rob Yeend.2 “When [you file], you are reporting on what happened… the previous year. In the fall, you can still affect the facts of the current tax year.” Missing the opportunity for a particular tax break can cost hundreds of thousands of dollars—or perhaps even more.

Unless they are properly advised, wealthy individuals and families may face special tax burdens:

  • Deductions enjoyed by less‐affluent taxpayers (mortgage interest, a healthy percentage of charitable contributions, real estate, state income taxes, and itemized deductions) disappear if the family's adjusted gross income exceeds a specified amount. This threshold will be crossed easily by any high‐net‐to ultra‐high‐net‐worth family.
  • If estate planning is not carefully executed, precious assets might have to be sold to cover estate taxes. Remember the Robbie family mentioned in Chapter 1? It's a sad story of estate planning gone wrong.
  • Wealthy families also may pay higher Medicare taxes on both earned and investment income.
  • Off‐shore investments can result in special attention from the IRS and from the country in which the money was earned. In most cases, off‐shore investment is a legitimate activity, beneficial to both the investor and the other country, but because the practice sometimes has been abused, wealthy families must be assured that all paperwork is accurate and all transactions carefully documented.
  • Philanthropy, while encouraged, may have complicated reporting requirements, depending on the types of assets that are donated. Your tax advisor must be cognizant of the appraisals and forms required to make substantial charitable contributions, or the family can lose the tax benefit.

Given these considerations, it's appropriate for families to think about ways to reduce their tax obligations. The tax‐reduction tactics might include important legal entity choices such as trusts, family partnerships, corporations, or foundations. Whatever a family chooses to do should be done with forethought about the tax ramifications, both now and in the future.

With regard to taxes, the most important thing the family can do is to work with a qualified team of tax advisors and consultants. For families with significant resources, this team typically includes, at a minimum, a tax and estate planning attorney for complex planning and entity formation and a qualified CPA to manage ongoing tax compliance and reporting. In addition, a private bank or a multifamily office can be very helpful in vetting tax strategies based on a “what‐if” cost/benefit analysis.

As an aside, it's more common for those who report more than $1 million in income to be audited and even more likely for those who report more than $10 million. In 2014, less than 1 percent of all returns were audited. However, 6.21 percent of taxpayers who reported $1 million to $5 million were subject to audit, and 16 percent of those who reported more than $10 million said hello to the auditor. Overly large estate tax and international returns also may receive more attention.3

Risk Management

Although every aspect of life involves some degree of risk, many wealthy families and their advisors believe that risk management applies primarily to the family's investments. This is not the case; risk abounds throughout the entire wealth management process, but certainly investment risks must be managed. To do it well, the advisory group must have a thorough understanding of such investment factors as price volatility, variance drain, idiosyncratic decision making, venture capitalism, and the family's event horizons,4 to name a few. It's about more than the price of a particular stock or group of stocks on particular day. Excellent risk management is about consistently maximizing gain and minimizing loss, and it may take more than one advisor to identify and eliminate—or at least ameliorate—the sources and effects of risk.

Since the Great Recession of 2008, many investors are rethinking these issues surrounding investment risk. David Craig, the CIO for a multifamily office, quoted in an article for Financial Times, said, “Wealthy families are not immune and their wealth faces some of the same threats as others.”5 Even very competent family members may find they need help in sorting out unforeseen areas of risk. The recession threw into high relief what those risks were all about. As Lauren Foster wrote, “While private clients generally understand the relationship between risk and return, many of the sophisticated financial instruments they invested in were so complex that the risks were not always obvious.”6 It was an expensive lesson for those who found that their wealth preservation and transfer plans had been upended or at least undercut.

As markets have revived since the recession, some may be investing more boldly again, but there is a greater appreciation for the risks involved—and a greater insistence that financial advisors fully inform their clients of these areas of risk. Ironically, the very wealthiest families saw some increase in the value of their holdings while the markets were diving. However, those gains certainly were not realized by every wealthy family.

Risk is not always related solely to equities. Other more tangible assets may also be at considerable risk. As Parker Beauchamp noted, “Risk factors and lifestyles increase in complexity proportionally with wealth and fame.”7 The risks might include the loss of reputation from even a frivolous lawsuit that follows the revelation of a family's net worth. A lack of appreciation for risk is evident in a feeling of invulnerability that results in unbridled spending. The continual outlay of money for houses on several continents, with their accompanying furnishings and staff; cars, planes and yachts and their crews; luxury apparel, priceless jewelry, and irreplaceable art collections can eventually drain the family fortune, even if it's immense. As the wealth creator's lifestyle gobbles up the family's financial rewards, the assets can disappear before they are passed down even to one succeeding generation.

Stephen R. Bitterman amplifies these concerns, citing three insurance deficiencies common to the affluent cohorts of society:

  • They have too many brokers and too many companies managing too many policies; no entity has a comprehensive view of all the layers of risk.
  • They are underinsured, sometimes to the tune of several million dollars. Because ultra‐high‐net‐worth clients have vast holdings, the loss of which results in huge claims, standard insurance policies usually will not suffice—and it can be hard to find the policies that might fully protect all their assets.
  • They don't pay enough attention to techniques and technology—especially those related “to home security, family safety, and natural disasters”—that might prevent or mitigate risks.8

In an earlier article, Beauchamp made the point that the more families have, the more they have to lose. He states that risk management is an integral part of the entire wealth management strategy because it “safeguards who can touch client assets, shields the wealth… and holds those who handle client assets accountable.”9

In spite of the concern for risks related to investments, risk is also part of virtually every family enterprise decision.

In its report, The State of the Art in Family Wealth Management, the Family Office Exchange takes a broad view of risk and makes the point that all risks are not investment related, saying that “the world has become a more interconnected place in which all families are impacted by systemic risks. Therefore, families must be prepared to face more external threats and unforeseen circumstances, and they must have the awareness and flexibility to identify and seize new opportunities.”10

For example, is all the family recordkeeping secure? What plans have been made to mitigate cyberattack, theft and publication of private information, or loss of records as a result of a natural disaster?

And speaking of natural disasters, does the family have a plan to keep the business going in a catastrophic event? How long would it take to get up and running again? How long can the family sustain the business if a return to full functioning is delayed for a protracted period of time?

Hiring can be fraught with risks. Are the family's human resources policies congruent with current law? What actions does the family take if an officer is hit with multiple sexual harassment claims? How does it handle the public relations fallout from the series of suits that follows and a negative social media campaign?

What about family malfeasance? How does the family cope with losses and uproar if one or more family members is found to be deceiving the rest about the uses of their funds?

Is the family following its own governance rules, or has governance become slapdash and casual? What effect is that having on the family enterprise, the wealth, and the legacy? How can the family remedy the situation, and what are the inherent risks if it doesn't?

A comprehensive risk management program that assesses the entire landscape of risk possibilities is a necessary part of the wealth strategy and the tactics that undergird it.

Asset and Investment Management

From the previous discussion, it's obvious that the wealthiest families need—and may have—a multitude of advisors. However, if the advisors are not part of a coordinated team with someone overseeing the group, asset management can become a quagmire. It's critical that family council members who are entrusted with understanding the asset picture work cooperatively and continually with those who are overseeing this part of the wealth.

According to a 2016 DarcMatter article reporting on a survey from the World Wealth Report 2015, American high‐net‐worth investors bought into the following investment instruments:

  • Equities—33.9%
  • Cash and cash equivalents—23.7%
  • Real estate—12.3%
  • Fixed income—18%
  • Alternative investments—12.2%11

Each of these instruments has risks and benefits, and the family's portfolio requires careful coordination, balance, and expert advice related to asset allocation. In fact, asset allocation is seen by many as the bedrock on which all wealth management decisions rest. An out‐of‐balance portfolio may result in unacceptable risk, and unacceptable—and perhaps unknown—risk may trigger large losses. For some extraordinarily wealthy families, a loss may be an inconvenience, but even for ultra‐high‐net‐worth families, a significant loss can have a major impact on the family's coherence and legacy. When it comes to assets and asset allocation—and even where the assets are located—families need to ask themselves some questions:

  • Do we have an overly concentrated position in the stock in our own company or the one who bought our business? What do we do about that?
  • Are we overly concentrated in any other sector, such as pharmaceuticals or energy? How should we rebalance our portfolio, when, and what will it cost?
  • How much liquidity does the family need? Are we tying up too much of what we have in assets that are hard to liquidate if we have to?
  • Have we aligned our asset allocation and asset location with the purpose behind each investment? Do we have a clear, shared understanding of the goals of each family member and the family overall? Does the overall investment plan support these objectives?
  • If we have invested offshore, how safe are those investments today? Has any governmental or system change made the investments more risky? Who's watching that situation carefully?
  • What is our investment style? Active or passive? Quick growth or longer‐term investment? How risk‐averse is the family? What kinds of equities are most attractive to us? Small up‐and‐comers or well‐established companies with recognizable brands? Do our advisors understand and act on our preferences and tolerance for risk when making investment decisions with us?
  • For each investment pool, have we developed a written investment policy that defines investment objectives, risk tolerances, asset allocation guidelines, decision‐making processes, return expectations, preferences, and restrictions? Have we shared that investment policy with all of our investment advisors and other members of our wealth management team?
  • What are the potential downsides of alternative investments such as commodities, hedge funds, venture capital, and precious metals? Are we comfortable in that space?
  • Are our advisors equally expert in every type of investment? If not, what other help do we need?
  • We are interested in learning more about investment generally so we can work with our advisory team more effectively. How much interest do our investment advisors have in educating us? Where else can we receive more information?

An emerging area of asset management is impact investing. Currently, wealthy families are becoming more interested in making these types of investments. “The growing impact investment market provides capital to address the world's most pressing challenges in sectors such as sustainable agriculture, clean technology, microfinance, and affordable and accessible basic services including housing, healthcare, and education,” says the Global Impact Investing Network.12 These investments are not philanthropy; in almost all cases, a return is expected. Investors do not own or manage the company, so impact investment might be termed a cousin of direct investment. It's an avenue a family can take to effect social and environmental change.

Business Management and Direct Investment

As several of the case studies in this book demonstrate, many wealthy people find that simply managing their wealth, traveling, or engaging in hobbies is insufficient for them to feel connected in their lives. They want something more. Some establish family foundations and immerse themselves in philanthropy or specific causes. Others, still fascinated by business, want to invest directly in either operating companies or real estate projects. They don't want to just plunk down cash, however. They want to be involved. Direct investment gives them the opportunity to invest in companies or projects in which they can be in control, make a difference, and find a sense of purpose.

In a direct investment scenario, the family buys operating companies or real property and manages those assets directly. Effectively, it means the individual family members or the family as a whole owns and manages the company they invest in. Perhaps it is a venture investment into a new or emerging business opportunity or a company that is struggling. Regardless of the type of entity, the family feels that with their intervention, business acumen, and cash infusion, they can have direct control and earn a higher rate of return on their assets than may be available in the public markets. However, often these types of investments are long‐term and hard to sell quickly, so it is important that families stay diversified and not be overly concentrated in direct investments or other illiquid assets.

Whether a family is a business‐owing family, has become a financial family after a liquidity event, or is buying into new ventures, management tasks go on, and they may become even more burdensome as the family increases in size and complexity. Business management experts can work with the family's advisors to analyze their current and projected financial status and carry out the tactical tasks that must be accomplished to help the family reach its highest goals.

Family Office Creation and Management

As discussed in Chapter 5, single‐family offices (SFOs) are for the top‐of‐the‐pole wealthy. A single‐family office is run and managed for the benefit of one family. They own it, they control it, and they don't share services with anyone else. It's easier for the family to maintain confidentiality and privacy about sensitive matters because the office is run by trusted advisors and family members who work only for the family. The costs, however, are usually in the neighborhood of $1 million per year, and most clients have at least $500 million to $1 billion in investable assets.

If a family cannot afford a single‐family office, the multifamily office (MFO) provides a way for several families to receive a full gamut of services at a lesser price. MFOs are one of the fastest‐growing sectors in financial services. “The genesis of the new multifamily offices is coming from…accounting firms, financial planning firms, registered investment advisors, spin‐off teams from private bank and broker‐dealer wealth management platforms [and] spin‐off teams from investment management firms,” said Linda Mack.13 To be a true family office, the firm must offer:

  • Integrated tax and estate planning
  • Investment strategy
  • Trusteeship
  • Risk management
  • Lifestyle management
  • Recordkeeping and reporting
  • Family continuity
  • Family philanthropy14

It's important, then, when seeking to become part of such a group to question the advisors carefully and to unearth all the services they provide. Questions might include:

  • How experienced is each advisor, and what is the depth of experience of the entire office?
  • Are there recognized specialists who can deal with any of our family's unique situations?
  • What are your affiliations with other firms that provide products and services for families like ours? Are your recommendations for our family affected by any financial considerations related to these relationships?
  • Will there be a specific person who will serve as the nerve center and point of contact for our family?
  • Who will handle the day‐to‐day tasks such as recordkeeping and tax compliance?
  • Prior to our making a decision, may we interview each member of the firm who would be dealing with our family?
  • Are there additional services, such as travel planning and purchase advice on large‐ticket items, such as new aircraft, that we can tap into as members of this office?
  • How are costs assessed? Are there any hidden expenses we should know about now?
  • What checks and balances does the firm have in place to ensure that there are no mistakes based on dishonesty, incompetence, or preventable errors? Can we feel safe that all your advisors meet the highest personal and professional standards?

Information Management and Reporting

Financial performance is dependent on reliable information, but families of significant wealth may have a large pool of diverse assets held in different locations and managed by a variety of advisors. These families need a timely, unified view of their assets. Without such a 360‐degree outlook, the family has a more difficult time administering its own wealth and the legacy it wishes to establish for current and future generations.

Measuring and reporting critical goal‐driven data are important keys to successful decision making and long‐term wealth management. After all, if you don't know where you are, how will you get to where you want to be? Below are some important questions to ask your wealth advisors:

  • How often will I receive performance reports?
  • In what form will my reports arrive?
  • Will my reports aggregate and consolidate data from my entire wealth picture or just from my equity investments?
  • Can you generate customized reports such as net worth statements for the family and its branches?
  • How often do you create comprehensive financial reports? Yearly? Monthly? As we request?
  • If there is a sudden national or international event that has an impact on our family wealth picture, how quickly can you report the effects of that event on our plans? How will that information come to us? Will you simply report it, or will you make immediate recommendations?
  • How reliable and secure is your current information management and reporting technology?
  • How rapidly do you take advantage of new and better technology?
  • What kinds of specialists do you have managing that technology?
  • Do we have 24/7 digital access to important data?
  • While we like digital access for certain tasks, we like to discuss certain things, such as long‐term planning and investment strategies, face‐to‐face. Are both ways of doing business equally important to you or do you rely primarily on online interactions?

Winding Up

As is evident from the lists of questions above, tactical wealth management is a complicated, interlocking web of decisions. With the help of advisors, the family may make highly successful tactical decisions. It may prosper, but prosperity today doesn't guarantee prosperity tomorrow. Wealth is more than piling up assets for today. The power of wealth resides in how a family uses it and passes it on over a long period of time. Having a strategic plan in place makes all tactical decisions clearer and more defensible. The family is more likely to sustain its wealth, rather than squandering it by the third generation, by maintaining a unified, strategic posture regarding the growth and use of the family fortune.

Obviously, a critical component in integrating the tactical and strategic aspects of effective long‐term wealth management is selecting, coordinating, and overseeing the nonfamily service providers and the professional advisory teams that should be an important part of the process. These teams will include attorneys, accountants and other tax experts, bankers, investment managers and consultants, insurance specialists versed in complex risks, family succession planning advisors, estate planners, and unaffiliated family employees and board members. This coordination effort is enhanced when families have developed and continue to refine their strategic plans as a tool to improve the performance and effectiveness of their tactical procedures.

In the following—and last—chapter of this book is a case study of the Singleton family, whose strategic and tactical plans have meshed, providing the families with financial growth, unity, exceptional wealth management, and a legacy that will live for generations to come.


..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.