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 xiiiPreface xvAcknowledgments xviiPart One Introduction to Advising Ultra-Affluent Clients and Family Offices 1Chapter 1 Who Are the Ultra-Affluent? 3Defining the Ultra-Affluent 5Quantifying Ultra-Affluence Among Total Global Wealth 10Looking to the Future 11A World of Opportunities for Advisers 17Chapter 2 Understanding the Mindset of the Ultra-Affluent Client 19Why 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 37Chapter 3 Wealth Attitudes, Aspirations, and Investor Behavior of Ultra-Affluent Clients 39Family Aspirations 40Wealth Attitudes of Ultra-Affluent Clients 42Where Psychology Meets Finance 47Investor Biases 48Conclusion 60Chapter 4 Noninvestment Best Practices 61The Challenges Associated with Wealth 61Guidelines for Sustaining Multigenerational Wealth 63Conclusion 71Part Two Investment Strategies for Ultra-Affluent Clients and Family Offices 73Chapter 5 Practices of the Best Investment Organizations 75Differences between Endowments and Private Investors 76Investment Committees 77Investment Policy Statements 82Key Considerations for Portfolio Oversight 88Conclusion 93Chapter 6 Asset Allocation Considerations for Ultra-Affluent Clients and Family Offices 95What 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 100Chapter 7 Domestic and International Equity 111Introduction to U.S. and International Equity Securities 112The Five-Step Equity Strategy Process 115Chapter 8 Domestic and International Bonds 135Introduction to Bonds 137Descriptions of Bond Asset Classes 141Chapter 9 Private Equity 159What Is Private Equity and How Does It Work? 162Three Primary Types of Private Equity Investments 166Creating a Customized Private Equity Program 172Chapter 10 Hedge Funds 179What 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 202Chapter 11 Real Assets 203The Portfolio Benefits of Real Assets 204Real Estate: A Long-Term Inflation Hedge 205Natural Resources 210Part Three Multigenerational Considerations for Ultra-Affluent Clients and Family Offices 223Chapter 12 Selecting an Adviser 225Trust: The Key Ingredient 226How UACs Select an Adviser 228Questions for Prospective Advisers 234Conclusion 237Chapter 13 Selecting a Custodian and Investment Vehicle Structure 239Custodial Services 239Investment Vehicle Structure 250Conclusion 257Chapter 14 Considerations for Creating a Family Office 259What 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 277Chapter 15 Wealth Transfer Planning 279Estate Planning Basics 282Conclusion 295Part Four Special Topics for Ultra-Affluent Clients and Family Offices 297Chapter 16 Concentrated Equity Risk Management 299What Constitutes a Concentrated Equity Position? 300Concentrated Stock Risk Minimization Strategies 304Conclusion 315Chapter 17 Family Governance 317Generational Division 318Family Governance: An Essential Part of Successful Wealth Transfer 319The Incredible Family 320Policies 326Stages of Development 327Conclusion 328Chapter 18 Risk Management and Asset Protection 331Family Office Risk Management 332Individual Family Member Risk Management 337Legal Asset Protection 341Conclusion 344Chapter 19 Philanthropy 345Philanthropic Strategy Development through Asking Questions 347Mission 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 358Chapter 20 Multigenerational Asset Allocation Strategies 367Different 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 375Notes 377Index 387