Advising Ultra-Affluent Clients and Family Offices

MICHAEL M. POMPIAN, CFA, CFP, is the director of the Private Wealth Consulting Group for Hammond Associates—based in St. Louis, Missouri—which consults to over $55 billion. He works with some of the largest family offices in the United States. Prior to joining Hammond Associates, Pompian was a wealth management adviser with Merrill Lynch, a private banker with PNC Private Bank, and served on the investment staff of a family office. He earned an MBA from Tulane University and holds a BS in management from the University of New Hampshire. Pompian is a member of CFA Institute and the New York Society of Securities Analysts. He is also the author of Behavioral Finance and Wealth Management (Wiley & Sons). Pompian is married with three sons and can be reached at mpompian@haifc.com.

Foreword xiii

Preface xv

Acknowledgments xvii

Part One Introduction to Advising Ultra-Affluent Clients and Family Offices 1

Chapter 1 Who Are the Ultra-Affluent? 3

Defining the Ultra-Affluent 5

Quantifying Ultra-Affluence Among Total Global Wealth 10

Looking to the Future 11

A World of Opportunities for Advisers 17

Chapter 2 Understanding the Mindset of the Ultra-Affluent Client 19

Why Advising the Ultra-Affluent is Different 20

What Ultra-Affluent Clients Value in an Adviser 23

Building Relationships by Asking Questions and Listening to the Answers 29

Matching Client with Adviser 32

Consultant Questionnaire 33

Conclusion 37

Chapter 3 Wealth Attitudes, Aspirations, and Investor Behavior of Ultra-Affluent Clients 39

Family Aspirations 40

Wealth Attitudes of Ultra-Affluent Clients 42

Where Psychology Meets Finance 47

Investor Biases 48

Conclusion 60

Chapter 4 Noninvestment Best Practices 61

The Challenges Associated with Wealth 61

Guidelines for Sustaining Multigenerational Wealth 63

Conclusion 71

Part Two Investment Strategies for Ultra-Affluent Clients and Family Offices 73

Chapter 5 Practices of the Best Investment Organizations 75

Differences between Endowments and Private Investors 76

Investment Committees 77

Investment Policy Statements 82

Key Considerations for Portfolio Oversight 88

Conclusion 93

Chapter 6 Asset Allocation Considerations for Ultra-Affluent Clients and Family Offices 95

What Is Asset Allocation? 96

The Importance of Assumptions in the Asset Allocation Selection Process 97

The Importance of Asset Allocation 99

Considerations in Asset Allocation for Individual Investors 100

Chapter 7 Domestic and International Equity 111

Introduction to U.S. and International Equity Securities 112

The Five-Step Equity Strategy Process 115

Chapter 8 Domestic and International Bonds 135

Introduction to Bonds 137

Descriptions of Bond Asset Classes 141

Chapter 9 Private Equity 159

What Is Private Equity and How Does It Work? 162

Three Primary Types of Private Equity Investments 166

Creating a Customized Private Equity Program 172

Chapter 10 Hedge Funds 179

What Is a Hedge Fund? 180

Hedge Fund Investing by UACs and Family Offices 185

A History of Hedge Funds 187

The Legal Environment of Hedge Funds 189

Hedge Fund Strategies 191

Manager Selection 202

Chapter 11 Real Assets 203

The Portfolio Benefits of Real Assets 204

Real Estate: A Long-Term Inflation Hedge 205

Natural Resources 210

Part Three Multigenerational Considerations for Ultra-Affluent Clients and Family Offices 223

Chapter 12 Selecting an Adviser 225

Trust: The Key Ingredient 226

How UACs Select an Adviser 228

Questions for Prospective Advisers 234

Conclusion 237

Chapter 13 Selecting a Custodian and Investment Vehicle Structure 239

Custodial Services 239

Investment Vehicle Structure 250

Conclusion 257

Chapter 14 Considerations for Creating a Family Office 259

What is a Family Office? 261

Challenges of Wealth 262

Practical Reasons to Create a Family Office 264

Challenges of Running a Family Office 265

Services Provided by a Family Office 267

Administrative Considerations for Establishing a Family Office 268

Considerations for Establishing a Private Trust Company 274

Conclusion 277

Chapter 15 Wealth Transfer Planning 279

Estate Planning Basics 282

Conclusion 295

Part Four Special Topics for Ultra-Affluent Clients and Family Offices 297

Chapter 16 Concentrated Equity Risk Management 299

What Constitutes a Concentrated Equity Position? 300

Concentrated Stock Risk Minimization Strategies 304

Conclusion 315

Chapter 17 Family Governance 317

Generational Division 318

Family Governance: An Essential Part of Successful Wealth Transfer 319

The Incredible Family 320

Policies 326

Stages of Development 327

Conclusion 328

Chapter 18 Risk Management and Asset Protection 331

Family Office Risk Management 332

Individual Family Member Risk Management 337

Legal Asset Protection 341

Conclusion 344

Chapter 19 Philanthropy 345

Philanthropic Strategy Development through Asking Questions 347

Mission Statement 348

Implementation of Philanthropic Strategy 349

Philanthropic Investing 352

Best Practices of Giving Large Gifts to Colleges and Universities 355

Appendix: The Next Generation: Redefining the Philanthropic Landscape 358

Chapter 20 Multigenerational Asset Allocation Strategies 367

Different Asset Allocations for Different Generations 369

Single Allocation for an Entire Family 370

Customized Asset Allocation by Generation or Family Unit 371

Asset Allocation Targeting 374

The Behavioral Finance Approach to Asset Allocation 374

Conclusion 375

Notes 377

Index 387