A Strategy for Sustaining Wealth

In this month’s column, we’ll explore how to sustain personal wealth after a big liquidity event. Oftentimes, the new liquidity is unknown territory for the wealth creator, necessitating a thoughtful wealth sustainability strategy.

Why is formulating a wealth management strategy so important after a liquidity event, which could be the sale of a business, an IPO or recapitalization? Wealth creators generally are not passive individuals and may deploy the resulting liquidity into a new business venture. Unfortunately, this may not be a sound strategy for sustaining wealth because past business success does not predict future success.

Statistically, one-third of new ventures close within two years; half close within five years. A variation of this strategy is investing the business sale proceeds into a financial asset portfolio and utilizing the portfolio as loan collateral to fund a new venture. Some wealth owners experienced business failures during the recession when loan margin calls depleted their financial portfolios and left them without additional funding.

A different strategy is delegating the wealth management plan to private banks and brokerage firms. Given the product sales model of the wealth management industry, though, the result is typically an over-diversified, costly portfolio. Most entrepreneurs will not give discretion to business vendors, as higher costs and less profitability are a likely consequence of this business strategy. Similarly, portfolio management expenses rise with the number of investments due to sales charges, investment manager fees, trading costs, embedded structure costs, etc. This strategy will not necessarily promote the sustainability of one’s wealth but rather the profitability of the wealth management industry.

So, given this, what are some best practice components of a wealth management strategy? For starters, one needs to develop a thoughtful asset allocation plan that incorporates his or her wealth goals (Do I want to remain rich?), plus a corresponding risk allocation, part of which may include allocating a portion of capital to new business ventures.

Another best practice is using the family office to develop an asset management fee budget and knowingly allocating the fee budget across asset classes and strategies.

Finally, the family office can optimize the financial provider relationships and utilize products that benefit the family and not those that maximize revenue for the providers.

Various studies conclude that concentration of one’s capital creates wealth, while well-planned diversification ultimately sustains wealth. Interestingly, within one generation, less than 10 percent of the original Forbes 400 list, which started in 1982, are in the present-day ranking. It might be insightful to study those that have remained on the list. ?

Julie Neitzel is a partner and advisor with WE Family Offices in Miami and a board member of the Miami Finance Forum. Contact her at Julie.Neitzel@wefamilyoffices.com or 305.825.2225.

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