A family may own and operate an extremely well-run, highly successful business yet be surprisingly disorganized in its approach to managing the wealth generated by that business. The continuous demands of the company are so consuming, that in many cases, the family simply has not had the time or felt the urgency to focus on family finances. In some cases, business-owning families may not feel they have adequate liquidity to warrant an external portfolio or, on the other extreme, they may have pools of excess cash that if not immediately reinvested in the business, sit idle for long periods of time losing value.
In the following interview, Steve Weinstein, president and founder of Altair Advisers LLC, discusses how some business-owning families work with an outsourced chief investment officer (CIO) to create a greater level of wealth diversification and avoid some of these typical scenarios. These families recognize the multi-generational benefits that come from having a dedicated focus on the financial assets generated by the business and look to apply the same level of discipline and planning to their family portfolio as their family business.
AN: The term “outsourced CIO” has become popular over the last 5-10 years. How would you define that term and who tends to work with an outside CIO?
SW: The term sprang up from the growing desire by family businesses and family offices to hire an external resource to manage the family’s portfolio of liquid wealth. To use an analogy, the large endowments of major universities and charities have a point person to set investment policy, develop asset allocation, select managers and monitor and review performance which includes modeling cash flows, understanding risk and determine return requirements and liquidity needs. Many families see the applicability of this same institutional model to their own situation, particularly multi-generational families who have a similar long-term time horizon for their wealth as an endowment does. There are some differences, the biggest example being that families have tax considerations that an endowment would not, but the outsourced CIO concept applies that same model, taking a customized approach to investing for the long-term benefit of the family.
AN: In your work with business-owning families, what are some of the common financial challenges that these clients face?
SW: In many instances these clients have a lack of liquidity because the family assets are tied up in the business. That said, unless there are extenuating circumstances, families with low liquidity do not have to make a sudden, dramatic change. Their adviser should be able to help them create a long-term plan for greater wealth diversification on a timeline that makes sense for the family and the business. Sometimes the bigger challenge can be with families where there has been a monetizing event. The family now has liquidity, but it struggles with the fears that come from no longer having regular cash flows from the business. When family members are used to receiving a regular income stream from the business, even if they come into substantial wealth, it may be psychologically harder to live off a defined lump sum. In part, a lot of the hesitation to diversify wealth beyond the business or the anxiety of living off a portfolio comes from not having a good understanding of the investment world. If the family members do not have a background in finance or investing, they may not know the instruments, strategies, or procedures to evaluate advisers. So they are now charged with making decisions but may not feel they have the expertise to navigate that world.
AN: What would you note as the key benefits for business-owning families in working with an outsourced CIO?
SW: Having an outsourced CIO who serves as a point person in charge of a family’s investments is consistent with how the family runs the business. In a business, someone is in charge of marketing, of operations, of human resources. This structure provides accountability and enables specialization. An outsourced CIO provides that same level of accountability and specialization on the investment front while being part of the larger wealth management team.
The outsourced CIO can also play the role of quarterbacking all the various parts of a family’s wealth management team to ensure everyone is working off the same playbook. An investment portfolio does not exist in a vacuum. It is structured in conjunction with the family’s estate, tax, insurance and charitable planning among other considerations unique to each family. The outsourced CIO is in a position to reach out to the other professionals on a client’s financial team and coordinate across disciplines to provide an integrated approach to wealth planning.
AN: It is very common for business-owning families to manage their personal assets inside the business. How critical is it for the family to gain an outside perspective on what they own and the risks across their current holdings?
SW: Again, it comes down to expertise and specialization. The CFO of a family business may be extremely talented at all aspects of corporate finance but have little to no wealth management expertise and no basis on which to evaluate the breadth and depth of investment alternatives. You want that specialized expertise.
You also want someone who is able to stand back from the family business a bit. It’s important to recognize the significance of the operating company in a family’s overall portfolio but it should still be viewed in the context of other variables. Someone who is working for the family business will not be able to provide that same level of impartiality.
AN: What are the qualifications a family should consider when searching for an external CIO and how should they go about the search process?
SW: Independence, objectivity, and, critically, someone who can serve the family as a fiduciary. Take the time to learn how an adviser is compensated. A true independent adviser should be motivated solely to serve the family’s best interests and have no other sales objectives or competing sources of revenues beyond client fees. If you are unsure of their fiduciary status or forms of compensation, ask, “Which standard of care are you legally held to and whom are you serving as a fiduciary? What other sources and forms of compensation do you and the firm receive beyond direct client fees? (manager commissions, fee shares, soft-dollar arrangements)”
Working with an outsourced CIO can pay tremendous dividends in the short and long-term but only if the adviser’s interests align with the family’s.
About the contributors:
Anna Nichols is director of communications at Chicago-based Altair Advisers LLC and is responsible for creating and leading the marketing and business development strategies for the firm. Anna can be reached at firstname.lastname@example.org.
Steven B. Weinstein, president & chief investment officer, founded the independent investment advisory firm of Altair Advisers in June of 2002. He has been counseling wealthy families, business owners, and senior executives on their investment, tax, retirement and estate planning matters for over 30 years. Steve can be reached at email@example.com.