High-Net-Worth Family Office

For many families, memories of a humble past linger, stirring a persistent worry that those days may return if their wealth is not properly protected. The fear of encountering a personal financial crisis, which could rob them of the amenities and choices enabled by their prosperity, is their most pressing financial concern, especially for high-net-worth family offices.

A conversation with a prosperous man at a charity event brings this fear to life. The gentleman, in his eighties, had accumulated an impressive estate worth hundreds of millions, which included real estate, stocks, and a significant stake in municipal bonds. Raised in the era of the Great Depression, he comprehended the importance of every dollar he earned. His primary objective was to protect his wealth against losses to ensure its sustainability for generations to come.

After a series of discussions, he requested our expertise in managing his real estate, municipal bonds, and stock portfolio. The pressing question that arose as we delved into his situation was: who in his family could truly appreciate the effort that went into amassing this wealth? Who could be entrusted with such a considerable fortune after his departure? His niece, employed at a hedge fund, was relatively young, lacking the desired experience for handling such an enormous sum. His children showed limited interest in the family’s financial affairs. The dilemma remained: who would take over the business, real estate, and considerable stock/bond portfolios? Moreover, who would succeed him as the steward of family wealth, guaranteeing the lifestyle he envisioned for his family in the future?

The worries of this gentleman resonate with many ultra-wealthy families. With immense wealth comes great responsibility. The concern remains about the strategies for the preservation of the family fortune. How will the heirs be tutored and readied to manage such substantial wealth? Who will possess the knowledge and ability to prevent the wealth from dwindling? How can the wealth be equitably, not necessarily equally, disseminated?

These affluent families commonly have financial worries related to maintaining control over a privately-owned family business, overseeing real estate, or weathering potential financial storms. The media continually feeds this anxiety, citing issues such as the uncertain state of China, unrest in the Middle East, political machinations in Washington, DC, the recent peak of the VIX as a measure of market volatility, Carl Icahn’s 2015 prophecy of an impending disaster, and the impact of the Federal Reserve’s imminent actions on bonds. The key question is about how ultra-wealthy families will navigate these challenges. What financial and nonfinancial safeguards will they adopt, and what other measures will they take to bolster their defenses?

Table of Contents

• Navigating a Volatile World
• Setting a New Trajectory
• Understanding the Dynamics of High-Net-Worth Family Offices
• Introducing the Family Office
• Currency, Purpose, And Family
• Wealth, Family, and the High-Net-Worth Family Office

Navigating a Volatile World

More than three decades ago, Black Monday, October 19, 1987, dramatically altered the financial landscape as the Dow Jones Industrial Average plummeted by 23 percent. This event still holds the dubious distinction of the largest single-day loss in the history of the U.S. stock market. As portfolio managers during this turbulent period, we were significantly impacted by the crash, an impression that remains deeply ingrained. Numerous investors suffered substantial losses amounting to millions of dollars. Many pledged to learn from this calamity, yet we continue to witness the repetition of similar mistakes in our practice.

Predicting the next financial crisis is a feat no one has yet mastered. Reflecting on past disasters, it is likely you’ll recall financial experts exclaiming about the unprecedented nature of the situation, declaring it as uncharted territory, and suggesting that conditions were unlike anything ever experienced or anticipated. We, however, reject this narrative. One thing is certain: financial surprises will recur, albeit in varied forms.

Historical financial setbacks like the Great Depression, the 1973 oil crisis, and the rampant inflation of the late 1970s were all presented as unprecedented shocks. The 21st century carried on the trend with more financial upheavals. The dot-com bubble burst in 2000, the stock market and housing collapse occurred in 2008, and in 2013, the value of gold dropped 28 percent. Each of these unexpected crises blindsided many financial professionals, and we believe the next surprise will have a similar effect.

In the face of such unpredictable financial turbulence, your focus should be on protecting yourself from potential risks. By engaging with this text, you’ll learn strategies that can be put into practice—with the assistance of your advisors, within your portfolios, your estate, and your family—to mitigate the effects of the impending disaster. We will explore topics such as risk management and asset allocation, crucial tools that act as financial airbags during these recurrent yet unforeseeable events.

The objective is to minimize the damage as much as possible. Like many of you, we’ve reached a stage in our lives where we wish to free ourselves from the financial anxieties that consumed us decades ago. Our substantial earnings have provided us with a comfortable buffer, enabling us to put many financial worries aside.

Reflect on the financial crises of 1987 and the Great Recession of 2008, when trillions of dollars vanished from portfolios and real estate values plummeted. How were you affected? What was the impact on your family and friends? And most importantly, are you financially equipped to weather the next storm?

Even those with impressive wealth are not immune to personal financial crises. Let’s take the instance of Adolf Merckle, a 74-year-old German businessman once listed among the world’s top 100 wealthiest individuals by Forbes, with an estimated net worth exceeding $9 billion. Merckle, renowned for his investment acumen, made a sizeable wager on the stock market in 2008. He bet against Volkswagen, expecting its stock value to plummet. This decision, however, ended up costing him hundreds of millions of dollars.

Merckle’s fortune wasn’t entirely decimated, as his acquaintances have suggested. Nonetheless, he was confronted with a liquidity crisis. He attempted to secure a loan of 400 million euros, but the financial chaos of 2008 made borrowing challenging, even for a billionaire. With the money flow constricted and feeling he had let his family down, Merckle tragically took his own life.

While this is an extreme example and one we hope you’ll never have to confront, it emphasizes the harsh reality that no amount of wealth offers complete protection from financial turmoil. Whether your net worth is in the tens or hundreds of millions, or even billions, everyone is susceptible to financial pitfalls. Merckle’s case was not an isolated incident; numerous ultra-wealthy families and individuals have similarly encountered financial ruin.

Curt Schilling, a successful baseball pitcher and two-time World Series champion, amassed over $100 million during his career. However, he later confessed to ESPN that he had lost significant money through investments and was actually $60 million in debt.

Mike Tyson, who earned close to half a billion dollars during his boxing career, filed for bankruptcy. Acclaimed actress Kim Basinger, who at the peak of her career commanded over $10 million per movie, also declared bankruptcy.

Musicians Marvin Gaye, Willie Nelson, MC Hammer, Meat Loaf, and 50 Cent all either filed for bankruptcy or came close to it.

Michael Jackson, the iconic King of Pop, signed a contract worth a staggering $1 billion and sold over 760 million records. However, in 2007, he was teetering on the brink of bankruptcy when he couldn’t repay a $25 million loan on his Neverland Ranch. At the time of his death in 2009, he was reportedly in debt by more than $300 million.

This article is designed to guide you and other ultra-wealthy families to sidestep such disasters. The key to safeguarding your family’s future is to maintain a portfolio that can weather surprises, irrespective of the investment environment. We believe that many of these catastrophes could have been averted with an emphasis on protection and preventative measures prior to any crisis. Small adjustments in strategy can often yield significant results without causing significant upheaval.

Setting a New Trajectory

Consider this article as the commencement of a new journey designed to secure your family’s wealth and legacy. As you delve deeper, make note of any thoughts, insights, or tactics that could be beneficial to your specific circumstances. By the time you’ve reached the end of the article, you should be in a position to contemplate the most suitable adjustments that align with your circumstances.

This signals the start of crucial discussions with your top advisors. We’ve witnessed the remarkable outcomes achieved when families seamlessly unify their investment, legal, tax, M&A, familial, and other resources. The synergy produced by working across different fields empowers you to devise a robust, enduring family wealth strategy that seamlessly blends financial objectives with lifestyle aspirations. This comprehensive plan is designed to safeguard and enhance your family’s wealth and legacy.

Investing is akin to a battlefield, and entering this battlefield without a well-crafted strategy is ill-advised. When you purchase a stock or bond, the seller believes its value will decrease, while when you sell a stock or bond, the buyer anticipates its value will increase. Regardless of which side you’re on, the need for a strategic approach is imperative. Without it, you’re akin to a rudderless ship in the middle of the ocean, vulnerable to the whims of the waves, currents, and winds, drifting aimlessly and devoid of control

Understanding the Dynamics of High-Net-Worth Family Offices

Achieving high-net-worth status marks a shift in perspective. Initially, there’s a feeling of triumph: “I’ve made it. I have more than enough to sustain the lifestyle I want for the rest of my life—I’ll spend as I please and invest the rest safely.” However, the weight of responsibility soon becomes apparent: “How will our family office maintain this wealth? Will it endure if I invest it safely?” Regardless of your financial sophistication, you realize it’s impossible to know everything. Besides, there are other aspects of life that demand your time and attention. You grasp the importance of surrounding yourself with top-tier minds and advisors, professionals who can guide you in areas where you need expertise.

In our experience, the expansion of wealth is often less critical to ultra-affluent family offices than maintaining family harmony, adhering to core values, and engaging in philanthropy. The fundamental question is: What are you accomplishing with the single life you have? Every individual seeks a sense of purpose. How can you attain joy and fulfilment? And how can you contribute to making the world a better place? Affluent family offices aspire to put their wealth to meaningful use.

As their wealth accumulates, high-net-worth family offices naturally gravitate towards philanthropy. You feel a genuine duty to maximize your wealth for the greater good. Numerous high-net-worth family offices strive to make a difference, offering generous donations and volunteering their time. When your wealth reaches the hundreds of millions or even billions, virtually everything becomes optional, but there’s a limit to personal spending. Figures like Bill Gates and Warren Buffett, alongside other families in similar financial rank, pledge significant parts of their wealth to foundations, funding causes close to their hearts.

High-net-worth family offices often reminisce about times filled with uncertainty. They unequivocally do not wish to return to such periods. One billionaire still remembers his days struggling on a farm, a lifestyle he would never choose to revisit. Many families recall more modest beginnings and harbor fears that without adequate protection, their wealth could evaporate, potentially plunging them back into those less affluent days. Undoubtedly, their most profound financial fear is experiencing a personal financial crisis, consequently losing the lifestyle choices and opportunities their wealth has provided.

A high-net-worth family office can be an effective solution to the intricate financial and emotional-quotient challenges that ultra-affluent families encounter. In such an office, professionals from various disciplines congregate to pool their expertise in the family office’s best interest. The services offered can span a wide array, including financial and investment management, tax planning, and estate planning.

Family offices serving ultra-high-net-worth families must offer dynamic and intricate services specifically tailored to their unique circumstances. Their financial advisors must provide clarity and transparency, minimizing conflicts of interest, thereby curating a network meticulously designed for their distinct financial landscapes. This extensive expertise plays a pivotal role in safeguarding their wealth, potentially benefiting numerous future generations.

Possessing ultra-high net worth opens a plethora of opportunities. It equips you not only with the means to afford the lifestyle you and your family desire but also empowers you to contribute to the broader community—provided you manage to preserve it! It’s prudent not to wait until a financial tsunami is threatening to capsize your boat before you trim your sails and batten your hatches. Continue reading to learn more about taking pre-emptive action to safeguard your future. Rest assured, you’ll sleep more soundly knowing you’ve taken such steps.

Introducing the Family Office

For high-net-worth families, the integration of advisors into a family office can offer a comprehensive solution. This decision, however, presents the challenge of assembling a team of top experts across various fields to work exclusively for the family. These professionals boast extensive experience and proven success in their respective domains, making them highly sought-after and often occupied with commitments. Consequently, the cost associated with establishing a family office may initially appear daunting. With expenses ranging from $500,000 to over $10,000,000 per year, it typically requires a substantial wealth base, often in the hundreds of millions, to justify the cost.

Nevertheless, the advantages of a family office are manifold. Serving as a private management firm, the family office addresses a wide spectrum of financial and personal affairs. From providing investment advice and managing charitable contributions to handling insurance, tax services, estate planning, wealth transfer, and more, the family office acts as a one-stop solution. It goes beyond financial matters, facilitating travel arrangements, coordinating private education, and managing various household tasks. In addition to offering comprehensive services, the family office fosters leadership development and upholds strong family values. Its adaptability ensures customization to meet the diverse needs of the family, whether it involves bill payment, legal matters, pet care, travel arrangements, property maintenance, hiring staff, or overseeing assets like jets and yachts. For high-net-worth families with extensive requirements, a dedicated team well-versed in the family’s dynamics is vital to ensuring smooth operations.

Essentially, the family office empowers you to take control of your financial and administrative affairs while alleviating the burden on your family. A specialized staff is devoted solely to your family’s needs. Alternatively, a shared office model can serve multiple families, reducing costs by distributing staff expenses among participants. Regardless of the approach, the family office operates based on your family’s directives, offering a high level of service customization.

Beyond financial management, the family office safeguards your family’s legacy and values, nurturing future stewards of wealth and cultivating leadership skills. As mentioned, the office’s scope extends far beyond financial matters, making it a comprehensive solution for all aspects of your family’s affairs.

Currency, Purpose, And Family

One of the initial questions we pose to our clients in a high-net-worth family office setting is: “What does money mean to you?” Their initial responses tend to be superficial, but as we persist with the question, their deeper responses expose their true selves and what they desire from life. Discussions often revolve around the necessity of financial security, the liberty to pursue life’s choices, and the ambition to establish a legacy.

A 2008 Psychology Today article highlighted our human reliance on the social system to meet all our needs, ranging from the most fundamental, such as food and shelter, to intangible aspects like self-worth and personal power. Money serves as the mechanism that operates within this system. As the article suggests, “Money is thus … an all-purpose social tool,” recognized and valued by the social system.

When you reflect on money from this viewpoint, it becomes apparent that your wealth transcends mere digits. Regardless of whether your net worth is $25 million or $425 million, the importance of the number dwindles in comparison to the opportunities your wealth presents. Therefore, introspect: Are you commanding your money, or is it ruling you? Does it provide you with more freedom, or do you find your wealth burdensome? Does it foster family unity, or instigate friction or dysfunction? Has financial concern overtaken family affairs, health, spirituality, or community engagements? Does it incite peace or anxiety? Pause and take a broader view. What role does wealth play in your life? Is it enhancing your life quality? Are you utilizing it as the beneficial and potent tool it’s meant to be?

In the not-so-distant past, we were conversing with a client about potential changes she might consider in her life. Her revelation that she desired to relocate away from Atherton caught us by surprise. Being a rather reserved individual, she had never shared this aspiration previously. Eagerly, we began working on her case, and two years down the line, she was joyfully settled in Carmel, surrounded by its enchanting ocean views. She now indulges in daily beach strolls and admires the sea otters frolicking amidst the kelp. For years, she lived a comfortable life, yet was reluctant to initiate change, despite her longing to move due to various life circumstances. As advisors, witnessing such transformations in our clients’ lives are moments of immense satisfaction and warmth.

Wealth, Family, and the High-Net-Worth Family Office

Nonetheless, what constitutes “enough”? It’s a question you might find yourself grappling with. How much wealth is necessary to safeguard a family’s wellbeing so that any surplus can be allocated to philanthropy? Is there a threshold where family members amass so much wealth that it becomes detrimental, leaving them better off with less? Decoupling your perception of wealth from the aspirations and dreams of your family is an impossible task. The significance of money is intrinsically woven into the fabric of family meaning. While wealth can fortify the family structure, it may also pose challenges. A common worry among ultra-high-net-worth parents is that immense wealth might stifle their offspring’s personal ambitions, thereby not only engendering undesirable personality traits but also jeopardizing the family’s wealth.

However, wealth does not have to condemn children to a life devoid of aspiration and motivation. Prudent parents devise methods to inculcate the incentives, knowledge, and practical experience necessary for sustained success. Astute custodians of substantial wealth adopt a generational outlook. They progressively involve their children and grandchildren in financial and business management, step by step. This process entails not only a robust education but also comprehensive, practical training, all while ensuring that the younger generations are well-versed in the family’s values and principles. Families that successfully transfer wealth to the younger generation furnish their children with ample opportunities to learn wealth management before they are entrusted with responsibility.

The nature of these opportunities will differ among families. Some families might evaluate their children’s financial acumen by endowing them with a substantial sum, say, half a million dollars, and encouraging them to utilize it as they deem fit. While this may seem insignificant for a family office managing hundreds of millions, it is ample for the children to demonstrate their ability to seize an opportunity. They will either glean a path to success or a valuable lesson. As we all know, children raised under similar circumstances can chart vastly different life paths. Some may adopt a solid and responsible life trajectory, while others may divert onto perilous detours. As parents, we can only strive to do our best.

Many families grapple with internal discord due to poorly communicated expectations. What is often needed, and occasionally absent, is a strong guiding hand. Your family requires a firm and unambiguous policy delineating its core values and direction. What are its principles? What does your family collectively deem important? What significance does wealth hold for your family?

The generation that initially attains ultra-high-net-worth status will have a divergent emotional perspective towards wealth than the generation inheriting it. The inevitable parent-child friction will invariably manifest itself in financial matters. The wealth creators expect subsequent generations to appreciate the effort required to accumulate such a fortune. Their offspring, raised amid affluence, may harbor respect for their parent’s efforts but might lack a complete understanding of the hard work and financial acumen required to secure such prosperity. If they do not embody these traits, they cannot pass them on to their progeny, who might develop a sense of entitlement, hindering their path to success.

The initial generation may have amassed the wealth, but the responsibility of sustaining it lies with the succeeding generations. Keeping a family aligned with its original vision requires a sustained, concerted effort. Regrettably, most ultra-high-net-worth families falter. About 80 percent of the time, the wealth fails to persist until the third generation. Unless family affairs are taken seriously, the dreams may not endure. Even with competent wealth management and an efficient transition, if the recipients fail to understand the family’s ethos, the wealth may eventually evaporate.