advising ultra-afﬂ uent clients and family ofﬁ ces · advising ultra-affluent clients and...

Po

mpian

Advising Ultra-AffluentClients and Fam

ily Offices

$8500 USA$10200 CAN

D espite the downturn in fi nancial markets

there are still a large number of ultra-affl uent

individuals and families across the globe And

in light of recent events these clientsmdashdefi ned

here as those having $50 million or more in liquid

assetsmdashneed help on a variety of fronts Thatrsquos why

author Michael Pompian an experienced invest-

ment consultant in the private wealth arena has

created this timely guide

Advising todayrsquos ultra-affl uent clients (UACs)

and family offi ces requires solid investment

knowledge and the skills to deal with ldquosoftrdquo issues

such as family governance and philanthropy

Understanding this idea and integrating it into

your professional endeavors will put you in a

better position to serve your clients as well as

excel in one of the most-dynamic segments of the

fi nancial services industry Although targeted at

fi nancial practitioners this book is also a valuable

resource for families considering whether to

establish or join a family offi ce

Divided into four comprehensive parts this

thoughtful resource opens with an informative

introduction to advising UACs including a detailed

discussion of which clients are considered ldquoultra-

affl uentrdquo and an in-depth look at their attitudes

aspirations and investment behavior Part II

outlines various investment strategies for UACs

examining the best practices of top investment

organizations and reviewing many of the alterna-

tive investments available to UACs Part III takes

the time to outline the key aspects of advising

multigenerational familiesmdashincluding selecting

an adviser considerations for creating a family

offi ce selecting an investment vehicle structure

and wealth transfer Part IV rounds out this

extensive exploration of advising the ultra-affl uent

by covering special topics in advising UACs such

as family governance equity risk management

philanthropy asset protection and developing a

multigenerational asset allocation strategy

Working with the ultra-affl uent has great upside

potential especially given the generational

transition of wealth that is taking place globally

In order to take advantage of this opportunity

you need to gain a fundamental understanding

of both the investment and noninvestment

issues that affect ultra-affl uent clients Advising

Ultra-Affluent Clients and Family Offices contains

the practical insights and expert advice that

will allow readers to successfully navigate this

complex fi eld and effectively serve some of

todayrsquos most sophisticated investors

MICHAEL M POMPIAN CFA CFP is the director of the Private

Wealth Consulting Group for

Hammond Associatesmdashbased

in St Louis Missourimdashwhich

consults to over $55 billion He

works with some of the largest family offi ces in

the United States Prior to joining Hammond

Associates Pompian was a wealth manage-

ment adviser with Merrill Lynch a private banker

with PNC Private Bank and served on the

investment staff of a family offi ce He earned an

MBA from Tulane University and holds a BS in

management from the University of New Hamp-

shire 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 amp Sons) Pompian is

married with three sons and can be reached at

mpompianhaifccom

Jacket Design Loretta Leiva

Jacket Photograph copy Getty Images

( c o n t i n u e d o n b a c k f l a p )

( c o n t i n u e d f r o m f r o n t f l a p )

ldquoMichael Pompianrsquos book Advising Ultra-Affl uent Clients and Family Offi ces is noteworthy for its com-prehensiveness Michael combines lsquothe big picturersquo with detailed prescriptive and actionable strat-egies advisers to wealthy families will receive a detailed understanding of how a quickly evolving landscape impacts their business and its implications for their clientsrdquo

mdashJohn Benevides President Family Offi ce Exchange

ldquoThis book should be on the reading list of anyone who wants to be a full-fl edged professional in our industry Michael Pompian has wisely chosen to focus on practical descriptions and recommendations in my view this is a great plus as we need more educational resources in this fi eld Congratulations The book is well worth readingrdquo

mdashJean LP Brunel CFA Managing Principal Brunel Associates LLC

ldquoUltra-affl uent clients want information and advice integrated and in real time So planning investing and measuring become a continuous process This is very hard to do Michael Pompian articulates a clear and insightful road map which outlines the process components and human factors needed to create a sustainable world-class wealth management programmdashboth advisers and wealth owners would be wise to follow Michaelrsquos leadrdquo

mdashStephen Martiros founder Summitas (wwwsummitascom) Managing Partner CCC Alliance (wwwcccalliancecom)

ldquoAs wealthy families become more globalized their needs for wealth preservation and growth have be-come more complex and sophisticated in times of fi nancial uncertainty Michael Pompian has crafted an insightful and comprehensive guide for enhancing your own capabilities and awareness on how to advise the most demanding clients A must-read for all fi nancial advisersrdquo

mdashDr Kurt Moosmann MBA TEP CFP cofounder and Managing Partner of Dara Capital Ltd Zurich Switzerland

ldquoWithout incorporating the critical components of effective family governance and the awareness of generational and behavioral issues families of wealth and their advisers are operating blind in their wealth management pursuits Michael Pompianrsquos book gives both advisers and family members es-sential insights for discovering the risk factors they must consider in todayrsquos environment and in fi nding the resources required to provide consummate solutionsrdquo

mdashLisa Gray graymatter Strategies LLC author of The New Family Offi ce and Generational Wealth Management

ldquoAdvising Ultra-Affl uent Clients and Family Offi ces is a valuable lsquohandbookrsquo that covers all the major areas of wealth management While Mr Pompian has written the book primarily for wealth advisers Advising Ultra-Affl uent Clients and Family Offi ces will provide invaluable insights to ultra-affl uent indi-viduals and families particularly those who are thinking about setting up a family offi ce or becoming clients of a multifamily offi cerdquo

mdashPaul R Perez CFA Managing Director Family Advisory Services Northern Trust

ldquoI like the way Michael Pompian presents this material It covers the waterfront with a clear concise and compelling treatment This book will prove useful for family members and family offi ce executives I especially admire the multigenerational orientationrdquo

mdashBradley G Fisher CEO Springcreek Advisors LLC (Multi-Family Offi ce) Corte Madera California

Advising Ultra-Affluent Clients and Family OfficesPraise for

wileyfi nancecom

Advising Ultra-Affl uentClients and Family Offi ces

Michael M Pompian cfa cfp

P1 ab P2 cd QC ef T1 g

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396


FM JWBT069Pompian March 13 2009 130 Printer Yet to come

AdvisingUltra-Affluent Clients

and Family Offices

i



Founded in 1807 John Wiley amp Sons is the oldest independent publish-ing company in the United States With offices in North America EuropeAustralia and Asia Wiley is globally committed to developing and market-ing print and electronic products and services for our customersrsquo professionaland personal knowledge and understanding

The Wiley Finance series contains books written specifically for financeand investment professionals as well as sophisticated individual investorsand their financial advisers Book topics range from portfolio manage-ment to e-commerce risk management financial engineering valuation andfinancial instrument analysis as well as much more

For a list of available titles visit our web site at wwwWiley Financecom

ii




and Family Offices

MICHAEL M POMPIAN

John Wiley amp Sons Inc

iii



Copyright Ccopy 2009 by Michael M Pompian All rights reserved

Published by John Wiley amp Sons Inc Hoboken New JerseyPublished simultaneously in Canada

No part of this publication may be reproduced stored in a retrieval system or transmitted inany form or by any means electronic mechanical photocopying recording scanning orotherwise except as permitted under Section 107 or 108 of the 1976 United States CopyrightAct without either the prior written permission of the Publisher or authorization throughpayment of the appropriate per-copy fee to the Copyright Clearance Center Inc 222Rosewood Drive Danvers MA 01923 (978) 750-8400 fax (978) 648-8600 or on the webat wwwcopyrightcom Requests to the Publisher for permission should be addressed to thePermissions Department John Wiley amp Sons Inc 111 River Street Hoboken NJ 07030(201) 748-6011 fax (201) 748-6008 or online at httpwwwwileycomgopermissions

Limit of LiabilityDisclaimer of Warranty While the publisher and author have used theirbest efforts in preparing this book they make no representations or warranties with respect tothe accuracy or completeness of the contents of this book and specifically disclaim any impliedwarranties of merchantability or fitness for a particular purpose No warranty may be createdor extended by sales representatives or written sales materials The advice and strategiescontained herein may not be suitable for your situation You should consult with aprofessional where appropriate Neither the publisher nor author shall be liable for any loss ofprofit or any other commercial damages including but not limited to special incidentalconsequential or other damages

For general information on our other products and services or for technical support pleasecontact our Customer Care Department within the United States at (800) 762-2974 outsidethe United States at (317) 572-3993 or fax (317) 572-4002

Wiley also publishes its books in a variety of electronic formats Some content that appears inprint may not be available in electronic books For more information about Wiley productsvisit our web site at wwwwileycom

Library of Congress Cataloging-in-Publication Data

Pompian Michael M 1963ndashAdvising ultra-affluent clients and family offices Michael M Pompian

p cmIncludes bibliographical references and indexISBN 978-0-470-28231-1 (cloth)

1 Rich people 2 InvestmentsndashDecision making I TitleHT635P66 20093055prime234ndashdc22

2008051561

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

iv



To all professional adviserswho make a difference in the lives of their clients

v



vi



Contents

Foreword xiii

Preface xv

Acknowledgments xvii

PART ONEIntroduction to Advising Ultra-Affluent Clients and Family Offices 1

CHAPTER 1Who Are the Ultra-Affluent 3

Defining the Ultra-Affluent 5Quantifying Ultra-Affluence Among Total Global Wealth 10Looking to the Future 11A World of Opportunities for Advisers 17

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

Why Advising the Ultra-Affluent is Different 20What Ultra-Affluent Clients Value in an Adviser 23Building Relationships by Asking Questions and

Listening to the Answers 29Matching Client with Adviser 32Consultant Questionnaire 33Conclusion 37

CHAPTER 3Wealth Attitudes Aspirations and Investor Behavior ofUltra-Affluent Clients 39

Family Aspirations 40Wealth Attitudes of Ultra-Affluent Clients 42

vii



viii CONTENTS

Where Psychology Meets Finance 47Investor Biases 48Conclusion 60

CHAPTER 4Noninvestment Best Practices 61

The Challenges Associated with Wealth 61Guidelines for Sustaining Multigenerational Wealth 63Conclusion 71

PART TWOInvestment Strategies for Ultra-Affluent Clients and Family Offices 73

CHAPTER 5Practices of the Best Investment Organizations 75

Differences between Endowments and Private Investors 76Investment Committees 77Investment Policy Statements 82Key Considerations for Portfolio Oversight 88Conclusion 93

CHAPTER 6Asset Allocation Considerations for Ultra-Affluent Clientsand Family Offices 95

What Is Asset Allocation 96The Importance of Assumptions in the Asset Allocation

Selection Process 97The Importance of Asset Allocation 99Considerations in Asset Allocation for Individual Investors 100

CHAPTER 7Domestic and International Equity 111

Introduction to US and International Equity Securities 112The Five-Step Equity Strategy Process 115

CHAPTER 8Domestic and International Bonds 135

Introduction to Bonds 137Descriptions of Bond Asset Classes 141



Contents ix

CHAPTER 9Private Equity 159

What Is Private Equity and How Does It Work 162Three Primary Types of Private Equity Investments 166Creating a Customized Private Equity Program 172

CHAPTER 10Hedge Funds 179

What Is a Hedge Fund 180Hedge Fund Investing by UACs and Family Offices 185A History of Hedge Funds 187The Legal Environment of Hedge Funds 189Hedge Fund Strategies 191Manager Selection 202

CHAPTER 11Real Assets 203

The Portfolio Benefits of Real Assets 204Real Estate A Long-Term Inflation Hedge 205Natural Resources 210

PART THREEMultigenerational Considerations for Ultra-AffluentClients and Family Offices 223

CHAPTER 12Selecting an Adviser 225

Trust The Key Ingredient 226How UACs Select an Adviser 228Questions for Prospective Advisers 234Conclusion 237

CHAPTER 13Selecting a Custodian and Investment Vehicle Structure 239

Custodial Services 239Investment Vehicle Structure 250Conclusion 257



x CONTENTS

CHAPTER 14Considerations for Creating a Family Office 259

What is a Family Office 261Challenges of Wealth 262Practical Reasons to Create a Family Office 264Challenges of Running a Family Office 265Services Provided by a Family Office 267Administrative Considerations for Establishing a

Family Office 268Considerations for Establishing a Private Trust Company 274Conclusion 277

CHAPTER 15Wealth Transfer Planning 279

Estate Planning Basics 282Conclusion 295

PART FOURSpecial Topics for Ultra-Affluent Clients and Family Offices 297

CHAPTER 16Concentrated Equity Risk Management 299

What Constitutes a Concentrated Equity Position 300Concentrated Stock Risk Minimization Strategies 304Conclusion 315

CHAPTER 17Family Governance 317

Generational Division 318Family Governance An Essential Part of Successful

Wealth Transfer 319The Incredible Family 320Policies 326Stages of Development 327Conclusion 328

CHAPTER 18Risk Management and Asset Protection 331

Family Office Risk Management 332



Contents xi

Individual Family Member Risk Management 337Legal Asset Protection 341Conclusion 344

CHAPTER 19Philanthropy 345

Philanthropic Strategy Development through AskingQuestions 347

Mission Statement 348Implementation of Philanthropic Strategy 349Philanthropic Investing 352Best Practices of Giving Large Gifts to Colleges and

Universities 355Appendix The Next Generation Redefining the

Philanthropic Landscape 358

CHAPTER 20Multigenerational Asset Allocation Strategies 367

Different Asset Allocations for Different Generations 369Single Allocation for an Entire Family 370Customized Asset Allocation by Generation or Family Unit 371Asset Allocation Targeting 374The Behavioral Finance Approach to Asset Allocation 374Conclusion 375

Notes 377

Index 387



xii



Foreword

The global financial system is suffering from historic stress and the cracksare showing This period of time will be marked as the tipping point

for the wealth management industry even though the actual trend has beenquietly forming for years

At the center of the trend is a reevaluation of trust and a desire on thepart of clients to understand the essential nature of their financial serviceprovidersmdashand to specifically understand the providerrsquos core competenciesand how they fit into the clientrsquos overall wealth management program Inaddition to this new awareness of the business models of financial serviceproviders is recognition of the interplay between trust incentives and eco-nomic behavior

I have worked with ultra-affluent clients and family offices for manyyears first as an adviser for the last seven years as the Managing Partnerof a private association of family offices and recently as the founder of atechnology platform for wealth management content Through these expe-riences I have had the great luxury of seeing a sort-of collective conscious-ness of ultra-affluent families and their advisors Family offices in particulardue to their unique makeupmdashessentially serving as private investment hold-ing companiesmdashare often leading indicators of future trends Due to theirfinancial resources access to top advisers and ability to take action quicklyfamily offices can lead the way towards activities that become more broadlyadopted by clients and financial service providers at all levels of the wealthspectrum

And one of the most powerful trends underway within the family officeand ultra-affluent market is the separation of advice from recordkeeping andinvestment products In the standard approach clients are offered a bundledsolution whereby their wealth manager (or private bank broker investmentadviser etc) offers consolidated recordkeeping and custody advice andproprietary investment productsmdashor in some cases investment productsfrom outside partners where revenue sharing is common

Now the wealthiest clients obtain advice from independent advisers andconsultants who help assemble best-in-class investment products from aglobal spectrum of providers and then aggregate and track results through

xiii



xiv FOREWORD

dedicated master custodians Thus successful advisors to ultra-affluent fam-ilies not only need demonstrated domain expertise but a transparent busi-ness model and a willingness and ability to cooperate with multiple externaladvisers and providers

Advising Ultra-Affluent Clients and Family Offices is the first com-prehensive guidebook that succinctly lays out the separate components orbuilding blocks for structuring a sophisticated wealth management solu-tion But just as important as assembling the right financial componentsis understanding the human side of the equation This is why MichaelPompian provides such a unique perspective in Advising Ultra-AffluentClients and Family Offices Michael is the rare financial writer who is atonce a wealth management practitioner at the top of the industry he writesabout as well as a researcher and writer on human economic behavior Thesubject of his first book Behavioral Finance and Wealth Management isevidence of Michaelrsquos deep understanding of the human factors that greatlyinfluence financial outcomes

Essentially all ultra-affluent clients are trying to ensure three things longterm growth of capital with limited volatility predictable cash flows frominterest dividends rents royalties and capital gains and minimal frictionfrom taxes fees and losses The wealth holder also wants to understandwhat they own how they are doing and what they should be doing in thefuturemdashessentially requiring a balance sheet income statements and strate-gic planmdashthey also want this information and advice integrated and in realtime So planning investing and measuring become a continuous processThis is very hard to do Michael Pompian articulates a clear and insight-ful roadmap which outlines the process components and human factorsneeded to create a sustainable world-class wealth management programmdashboth advisers and wealth owners would be wise follow Michaelrsquos lead

STEPHEN MARTIROS

Managing Partner CCC AllianceFounder Summitas



Preface

Despite the downdraft in the markets that began in 2008 an explosion inwealth has occurred in the last 25 years Many ultra-affluent individuals

and family offices need significant help preserving and growing their wealthEntrepreneurs are often very good at creating wealth but they are often notas skillful or interested in managing their wealth Moreover much of thewealth in the world will change hands over the next 25 years from moreexperienced family members to newer generations that may not be as focusedon wealth management as those generations that created it Thus there isa significant opportunity to advise ultra-affluent clients (UACs) and familyoffices now and well into the future I have a personal stake in this I aman adviser to UACs and family offices myself having been in the financialadvisory business going on two decades

I review in this book key topics that are crucial to building the skillsnecessary to effectively advising UACs especially soft issues such as fam-ily dynamics philanthropy and family governance What advisers to thisclient segment need to realize is that these soft issues are taking an equaland sometimes greater place in some cases than investments in the workthat advisers do with their clients This is especially true with third- andfourth-generation family members at this stage investing in human capi-tal (ie investing in the development and wellbeing of family members) isoften more critical to the long-term health of the family than making greatfinancial investments Wealth preservation across multiple generations is aquestion therefore of productive human behavior If proper developmentof family members is not done wealthy families can succumb to the dreadedldquoshirtsleeves to shirtsleeves in three generationsrdquo curse At the same timeand especially in the current environment advisers to UACs also need tohave solid investment knowledge and there are a number of chapters dedi-cated to investments such as real assets hedge funds and private equity thatUACs are broadly investing in

There are four parts to the book Part One begins with an introduc-tion to advising UACs This includes a discussion of what is consideredultra-affluent and understanding the mindset of UACsmdashtheir attitudes as-pirations and investor behavior In Part Two I discuss investment strategies

xv



xvi PREFACE

for UAC which covers best practices of the top investment organizationsand a review of many of the alternative investments that UACs invest inPart Three delves in to key aspects of advising multigenerational familiesincluding selecting an adviser considerations for creating a family officeand selecting an investment vehicle structure Part Four covers special topicsin advising UACs that include wealth transfer family governance equityrisk management asset protection creating a philanthropic strategy anddeveloping a multigenerational asset allocation strategy A common themerunning throughout the book is the idea that UAC advisors need not beexpert in all areas of wealth management You simply cannot do it all your-self Bringing in experts to help you in critical areas as I have done in manyplaces in this book is critical for success once you have uncovered an issuethat goes beyond your level of knowledge or area of expertise

You will notice that there is little in the book about taxes Althoughtaxes are a critical subject when it comes to advising UACs there are entirebooks devoted to this subject that advisers should read and keep handyI recommend Doug Rogersrsquos book Tax-Aware Investment ManagementThe Essential Guide published by Bloomberg Another subject not coveredin the book is transitioning from a business-oriented family to a financialfamily On this subject I recommend a piece published by Family OfficeExchange in Chicago titled Managing Family Wealth Separately from theFamily Business Please feel free to email me with any comments or ques-tions mpompianhaifccom



Acknowledgments

Iwould like to acknowledge all the people who made this book possibleThe list is long so I hope to not leave anyone out First I thank my clients

whom I have the pleasure and responsibility to serve every day They havebeen the source of the thinking behind many parts of this volume andwithout the experience I have gained in serving them it would not have beenpossible to write the book Second I would like to thank all my colleaguesat Hammond Associates who help me to serve our private wealth clients andespecially those who helped review the book The firm contributed greatlywith investment research and keen topical insights there are simply toomany people to thank at the firm to single anyone out I also thank all of theinvestment managers with whom we work Special thanks to Hedge FundResearch Campden Research in London and Pertrac for their invaluablehelp in providing data and researching investment themes for the book

I would also like to thank all these great people John Benevides DavidLincoln and Angel Webb at Family Office Exchange (FOX) Charlotte Beyerat the Institute for Private Investors Stephen Martiros at CCC Alliance andSummitas Raffi Amit at the Wharton Global Family Alliance Lisa Grayat Graymatter Strategies who contributed to Chapters 3 and 18 DavidZell and Joel Shapiro at Timbervest who contributed to Chapter 11 JeanBrunel at Brunel Associates who provided key advice and guidance PaulPerez at Northern Trust for his review of the entire manuscript JoeGrunfeld at Merrill LynchBank of America for his key insights Brad Fisherat Springcreek Advisors who contributed to Chapter 19 Michael Lynchet al at Twenty-First Securities who contributed to Chapter 16 Marcy Hallat Hub International who contributed to Chapter 18 and Dan Rubin atMoses amp Singer who contributed to Chapter 18

In addition there are people at numerous firms across the country whohave helped elevate the investment consulting industry as a whole and chal-lenged me to be a better advisor These firms include Cambridge AssociatesGreycourt CTC Consulting and many more I thank members of the NewYork Society of Security Analysts (NYSSA) and the CFA Institute who have

xvii



xviii ACKNOWLEDGMENTS

been invaluable friends and colleagues in my career I also thank conferenceorganizers such as NMS Management Financial Research Associates (FRA)and Opal who have worked to provide venues for idea exchanges in theultra-affluent and family office space

Last but not least I thank my family for supporting me in my endeavorsmuch of what I do day in and day out is with them in mind




and Family Offices

xix



xx


c01 JWBT069Pompian March 6 2009 951 Printer Yet to come

PART

OneIntroduction to Advising

Ultra-Affluent Clientsand Family Offices

1



2



CHAPTER 1Who Are the Ultra-Affluent

I donrsquot believe in a law to prevent a man from getting richit would do more harm than good

mdashAbraham Lincoln

Despite the downdraft in the financial markets that began in 2008 whichhas dealt a blow to the portfolios of many ultra-affluent clients an

explosion in wealth has occurred in the world in the last 25 years Globalequity markets have performed exceptionally well since the recession ofthe early 1980s albeit with periods of volatility like the one we have seenrecently and that performance has created large numbers of ultra-affluentindividuals and families across the globe In addition a flood of money intoprivate equity over that time has created valuable new companies and helpedexisting companies grow to become even more valuable For advisers thisactivity has created a wide and vast pool of potential clients who need helpon a variety of fronts What an exciting time to be in the financial advisorybusiness

Seldom is opportunity without challenge The complexities of manag-ing wealth have never been greater Advisers to wealthy families have hadto improve their skills in order to serve their clients Family members whoare involved in managing their wealth have needed to educate themselveson topics that go well beyond investment management There are multi-ple layers of activities to manage simultaneously Ultra-affluent clients andfamily offices are now acting like institutions starting with governance poli-cies that guide the activities of the family Figure 11 shows the integratedcomplexities advisers and families alike face

If an adviser considers himself qualified to advise ultra-affluent clients(hereafter UACs) he needs to have a deep and broad skill set As youwill learn throughout this book managing wealth is about developing a

3



4 INTRODUCTION TO ADVISING ULTRA-AFFLUENT CLIENTS AND FAMILY OFFICES

Family Governance

Philanthropy Risk ManagementEducation

Wealth Transfer TaxCompliance Custodyand Accounting Cash

Management Trust andPartnership Structure

LifestyleGoals andInvestment

Policy

F IGURE 11 Multilayered Complexities ofManaging Wealth

process and only those advisers who understand both key investment andnoninvestment issuesmdashand know that they canrsquot do it all themselvesmdashwillsucceed Advisers with the skill sets to manage vast wealth properly andwithout conflicts will be the advisers of choice in the future But fret notThis chapter is intended to get you fired up If you are reading this bookyou are preparing yourself to serve clients in a dynamic segment of thefinancial services industry Serving ultra-affluent clients and family offices isa fantastic business opportunity with lots of upside potential

Many financial families particularly those not involved in running abusiness day-to-day are becoming more sophisticated in their understand-ing of investment and noninvestment issues and are fostering new attitudesand perspectives that challenge advisers to be at their best These clientsfrom around the world are in command of the language they need so theycan decipher complex wealth management concepts This is partly driven



Who Are the Ultra-Affluent 5

by the proliferation of financial and nonfinancial news data and analy-ses available This information is provided not only by public news agen-cies but also through UAC networking groups by fund managers and bysophisticated legal and tax professionals who target UACs directly In theprocess of selling services to potential clients they also provide educationabout sophisticated strategies The result is that ultra-affluent clients aresometimes better informed than the people who pretend to have the skills toadvise them Clearly this is not a good situation to be in if you are holdingyourself out as an adviser to UACs

Advising ultra-affluent clients is about much more than getting an extra20 basis points return on a portfolio or creating the most efficient estateplan Itrsquos equallymdashor potentially even moremdashabout soft issues such as familygovernance and philanthropy These issues are taking an equal footing withinvestment issues for todayrsquos UACs Advisers with the ability to bring theclient a wide array of resources that serve the wide variety of needs willbe successful This book can help not only advisers wishing to take theiradvisory practice to the next level but also UACs wishing to broaden theirknowledge of key issues they face when managing their own wealth anddealing with the advisers who serve them Before we jump into advisorytopics itrsquos important that we define what we mean by a UAC There are anumber of ways to potentially define this type of client and we need to havea common understanding of the types of clients that can benefit from thebroad range of topics I cover in this book

DEF IN ING THE ULTRA-AFFLUENT

If you ask 20 advisers of wealthy clients how they define ultra-affluent youwill likely get 20 different answers to the question For the purpose of thisbook however it is important that we put some parameters around whatwe are to consider ultra-affluent as distinguished from mass-affluent orwhat I call intermediate-affluent There are numerous factors that could beconsidered to define ultra-affluent which I discuss in the next section Butfirst letrsquos establish a baseline definition

In researching various definitions of ultra-affluent I found that Pricewa-terhouseCoopersrsquos (PWC) categorization of affluent investors is as good asany that Irsquove seen it will be modified somewhat however for our purposesFigure 12 shows five categories of affluent individuals along with threedefinitions that are used throughout the book The five PWC categories areAffluent ($100000 to $500000) Wealthy ($500000 to $1 million) HighNet Worth ($1 million to $5 million) Very High Net Worth ($5 million to$50 million) and Ultra High Net Worth ($50 million and more)1 Although I




Ultra high networth individuals

gt $50 million

Very high net worthindividuals $5 million ndash $50 million

High net worth individuals$1 million ndash $5 million

Wealthy $500000 ndash $1 million

Affluent $100000 ndash $500000

F IGURE 12 Categories of Affluent InvestorsSource PricewaterhouseCoopers

do think this is an excellent breakdown I prefer to further simplify these cat-egories into these three mass-affluent (MA) intermediate-affluent (IA) andultra-affluent (UA) MA describes individuals with $100000 to $5 millionIA $5 million to $50 million and UA $50 million and more As a generalrule for the purpose of this book I regard a client with $50 million andmore to be UA But that definition may dip below $50 million for some con-ceptual applications and rise above $50 million for others Regarding familyoffices and the levels of wealth associated with them please see Chapter 14

You may be asking ldquoWhy $50 millionrdquo There are numerous factorsthat could be considered to define ultra-affluent Three key factors are dis-cussed next complexity of needs investment access and service model

Complexi ty of Needs

Perhaps the most intuitive definition of ultra-affluent has to do with thecomplexity of the needs of the client rather than an absolute dollar amountUACs have complicated lives and advisers who work with these types ofclients must be aware of a vast array of issues many of which are servicedby specialists (internal or external to the advisersrsquo firms) such as CPAsattorneys philanthropy advisers and so on Figure 13 shows the complexneeds of the UAC




OperatingBusiness

FamilyGovernance

Philanthropy

InvestmentManagement

Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes

F IGURE 13 Needs of Ultra-Affluent Clients

Needs such as tax compliance philanthropy and investments amongothers are typically handled by a team of professionals These professionalsmust work together either across different firms or within the same firm toservice the client MA or IA clients may not need or be willing to pay forservices that are demanded by UACsmdashbut some IA clients may have thesecomplex needs while other UACs may not Table 11 shows the types ofservices demanded by UACs compared to those that may be demanded byMA and IA clients

Investment Access

In my daily work providing investment consulting services to UACs andfamily offices my definition of ultra-affluence is actually higher than $50million I consider UACs to be those who have $100 million or more Becausethe primary service my firm offers is investment advice this definition hasmore to do with the type of investment program the client can undertake thanan absolute wealth level or the complexity of the familyrsquos needs For examplewhen considering alternative investments generally and hedge funds privateequity and private real assets in particular I consider a client to be UA if shehas the ability to directly invest in these funds or through the highest qualityfund of funds Naturally this dollar amount is open to a significant amount




TABLE 11 Services Demanded across the Spectrum of Affluent Clients

Type of Service Mass-AffluentIntermediate-Affluent Ultra-Affluent

Investment AdviceProviders

Self-directedbrokeragebanks andfinancialplanners

Private banks andmultifamilyoffices (MFOs)

Investmentconsultants multi-and single-familyoffices (SFOs)

Philanthropy None orcommingledvehicle

Commingled orfamilyfoundation

Professionalphilanthropy

Tax Preparation Self or CPA CPA or integratedwith investmentprovider

MFO SFO orsophisticated CPAfirm

Investment Access Modest Good GreatLife Insurance Local agent or

brokerHigher-end

providerintegrated withestate plan

Intergenerationalinsurance planningby many specialists

Estate Planning Local attorney Regional ornational firm

Integrated insuranceinvestments and taxplan by manyspecialists

LifestyleConciergeServices

None Modest Extensive

of debate Yes there are some investors who have $50 million or $75 millionand are well-connected enough in the investment world that accessing thebest managers at lower minimums is not an issue And yes there are somewho might argue that $100 million is too low because the best managersin the world require a minimum of $5 millionmdashand how could a properportfolio be created with one or more managers taking up five percent ofthe total portfolio In my experience creating an outstanding portfolio ofalternative and traditional managers is certainly doable with $100 millionlowast

Nonetheless investors with $25 million to $50 million have substantialbuying power and could in some circles be considered UA

lowastIt should also be noted that clients of my firm have the ability to invest in volumeas we gain access to top managers at reduced minimums by placing large sums withthe managers we work with Any client with $100 million has the ability to hire aconsulting firm like mine


ind JWBT069Pompian March 12 2009 1315 Printer Yet to come

396




and Family Offices

i






ii




and Family Offices

MICHAEL M POMPIAN


iii













2008051561


10 9 8 7 6 5 4 3 2 1

iv




v



vi



Contents

Foreword xiii

Preface xv










vii



viii CONTENTS
















Contents ix














x CONTENTS
















Contents xi









Notes 377

Index 387



xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end













and Family Offices

i






ii




and Family Offices

MICHAEL M POMPIAN


iii













2008051561


10 9 8 7 6 5 4 3 2 1

iv




v



vi



Contents

Foreword xiii

Preface xv










vii



viii CONTENTS
















Contents ix














x CONTENTS
















Contents xi









Notes 377

Index 387



xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end















ii




and Family Offices

MICHAEL M POMPIAN


iii













2008051561


10 9 8 7 6 5 4 3 2 1

iv




v



vi



Contents

Foreword xiii

Preface xv










vii



viii CONTENTS
















Contents ix














x CONTENTS
















Contents xi









Notes 377

Index 387



xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end













and Family Offices

MICHAEL M POMPIAN


iii













2008051561


10 9 8 7 6 5 4 3 2 1

iv




v



vi



Contents

Foreword xiii

Preface xv










vii



viii CONTENTS
















Contents ix














x CONTENTS
















Contents xi









Notes 377

Index 387



xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end






















2008051561


10 9 8 7 6 5 4 3 2 1

iv




v



vi



Contents

Foreword xiii

Preface xv










vii



viii CONTENTS
















Contents ix














x CONTENTS
















Contents xi









Notes 377

Index 387



xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end













v



vi



Contents

Foreword xiii

Preface xv










vii



viii CONTENTS
















Contents ix














x CONTENTS
















Contents xi









Notes 377

Index 387



xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












vi



Contents

Foreword xiii

Preface xv










vii



viii CONTENTS
















Contents ix














x CONTENTS
















Contents xi









Notes 377

Index 387



xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












Contents

Foreword xiii

Preface xv










vii



viii CONTENTS
















Contents ix














x CONTENTS
















Contents xi









Notes 377

Index 387



xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












viii CONTENTS
















Contents ix














x CONTENTS
















Contents xi









Notes 377

Index 387



xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












Contents ix














x CONTENTS
















Contents xi









Notes 377

Index 387



xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












x CONTENTS
















Contents xi









Notes 377

Index 387



xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












Contents xi









Notes 377

Index 387



xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












xii



Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












Foreword







xiii



xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












xiv FOREWORD




STEPHEN MARTIROS




Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












Preface





xv



xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












xvi PREFACE





Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












Acknowledgments





xvii









and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end


















and Family Offices

xix



xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












xx



PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












PART



1



2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end












2










3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end



















3




Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end













Family Governance





Policy
















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end






















gt $50 million













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end













OperatingBusiness

FamilyGovernance

Philanthropy


Technology

WealthTransferRisk

Management

LifestyleServices

BankingUA

Client

PersonalBudgeting

Taxes



Investment Access

















brokerHigher-end

























brokerHigher-end










advising ultra-afﬂ uent clients and family ofﬁ ces · advising ultra-affluent clients and...

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