A NYC conference organized by Family Wealth Report delved into liability-asset management, healthcare on the go, aviation and wealth business models as part of a "full balance sheet" view of clients' lives.

Family offices' desire to invest directly in companies, and a search for the ideal ultra-high net worth wealth management model, joined themes such as entrepreneurship, private aviation and medicine as practitioners debated the "full balance sheet" around wealth at a recent New York conference.

The conference, held at the offices of Pepper Hamilton LLP at The New York Times Building, sought to capture not just the wealth accumulation and transfer issues that often dominate industry agendas, but also the liability management and client spending topics that all too often are put in separate mental silos.

Andrew Hulsh, partner at the host firm, introduced the conference and handed over to Michael Sonnenfeldt, founder and president of TIGER 21, a peer membership organization for high net worth wealth creators and preservers. Sonnenfeldt focused on the theme of the personality types that entrepreneurs typically represent, pointing to the differences from those in other career paths, and the issues that arise when business founders turn to the very different matter of overseeing liquid wealth. For example, he noted: "Entrepreneurs are the bankers of last resort, so many times they have to rely on their own resources." Entrepreneurs also tend to have different qualities than those that are often required in managing financial portfolios, he noted. 

Businessmen and women appreciate the role of luck, but those who prepare well and work hard are better placed to capture turns of good fortune, Sonnenfeldt, who is also the author of a recent book about his insights on wealth, told attendees. (See a review of his book here.)

A tough adjustment for an entrepreneur is changing expectations of what money can be made from a growing business and from an investment portfolio. There is a big gulf in percentage terms between these two standpoints, he said. "The hardest adjustment is accepting that change in expectations."

Sonnenfeldt talked about the asset allocations of TIGER 21 members, noting, for example, the "tectonic" shift in portfolios towards private equity holdings, the significant real estate exposure, and some reductions in listed equities.

The first panel, on “future-proofed investment plans”, addressed issues such as how family offices and ultra-high net worth individuals are increasingly keen on direct investing and private capital markets, even encroaching on the terrain traditionally the preserve of professional private equity houses. Also, speakers argued that there is great appetite to deploy capital that achieves a positive impact beyond narrow financial returns.

Carol Pepper, CEO and founder, Pepper International, said that investors have moved far away from the hard-charging era of the 80s when the focus was all about financial returns at the expense of anything else, including personal values. "Today, the big shift I see from people is asking `why are we doing this?'" Investors - and not just the Millennials - want to produce a positive impact. The millennial cohort is also maturing with people entering their 30s and climbing career ladders, she said. They are joining the family council as well as the investment committees of trusts and foundations, and are making their choices felt.

Arthur Bavelas, managing partner, Baveles Group, also spoke of generational differences in views about money and investment. "There's definitely a sentiment .....that they wake up every morning and think differently than we do," he said. Today's investors also have far more information at their fingertips than their predecessors.

Michael Felman, president and CEO of MSF Capital Partners, noted that, from his experience in working with families and entrepreneurs, they were still keen to make "lots of money", and noted that there can be issues with entrepreneurs trying to make money in areas they are not familiar with. If investors wanted to put money to work directly into companies rather than go via a professional firm or fund, they must remember that there are no "free lunches" in business.

"The most successful family offices I work with have encouraged a culture of change," Carol Pepper said, giving the case of an FO which started in the cement sector 100 years ago but which adapted and started investing in areas such as media and biotech. It is prudent, she said, for families to explore new areas gradually, rather than rush in. "Start small with a new investment focus, see if you like it and see if your kids are excited about it,” she said. 

"I see people turned off by private equity funds in general because they are seen as too expensive," she said, explaining why some FOs are in some cases investing directly.

After a break the conference looked at some of the big divergences in the global economy, with a presentation on this theme from Randy Parrish, head of credit at Voya Investment Management. 

Blue skies and turbulence
Delegates' attention turned aloft when a panel discussed issues such as management of private aviation assets, education and real estate and how these

must be integrated with a client’s understanding of cash flow, liquid vs. illiquid assets and personal balance sheet/net worth. The panel discussion included thoughts from Susan Sofronas, managing director of Geller Advisors and Frazer Rice, of Wealth Actually.

In particular, Ford von Weise, who is the global head of aircraft finance for Citi Private Bank, regaled the audience with some acute problems, such as a pilot shortage stemming from the aging of the generation of aviators who learned their trade in the military during the Cold War era. The skills shortage inflates salaries and costs to levels that even the larger family offices will struggle to justify, he said. 

von Weise went through the different models of using aviation resources, such as fractional ownership, card services, direct private ownership and charter. The fractional ownership model has seen heavy business consolidation - this sector was hit in the 2008 financial crash, he said. With chartering, the challenge can be availability of the aircraft when needed; with card services for aviation, they can be highly expensive for the level of service provided, he said.

"We are in the middle of a huge pilot shortage," he warned. This appears to be particularly more acute in the US market, he said.

Fellow panelist Susan Sofronas, noted her firm tailors its advice for clients based on three key financial reports: statement of net worth, balance sheet and a comprehensive financial plan. These financial reports are developed in collaboration with our clients and provide a window into cash flow projections and create an understanding of which part of the balance sheet is illiquid vs. liquid, Sofranos said: “Many families look at their net worth and think that’s how much they have on hand and can spend. The reality is, however, that a sizeable portion of one’s net worth is typically in illiquid assets such as personal real estate and personal items, such as art, antiques, jewelry, etc.”  

Frazer Rice, president, of Wealth Actually, said that "amongst the severely wealthy....they don't want kids to be trust-fund kids". It is essential to get families to understand their goals and values and link that back to their current spending. Turning to the liability-matching ideas, he stressed that a family doesn't want to be in a position where its spending forces it to be a forced seller of assets. Sofronas gave an example of a client who wanted to buy another home before selling the first home. Based on the client’s assets and current income, it would not have been prudent to carry two homes. Fast forward, the price of the home dropped by more than 50 per cent. The client really wanted to buy another home before the first one was sold. Fortunately the client didn’t.

Panelists noted that in areas such as real estate, families can own a large portfolio of buildings, requiring good management and consolidation of certain costs, such as insurance and staff management bills, for example. 

Back on the subject of aviation, when healthcare issues also came up, von Weise noted the case of one client who kept an aircraft on standby to help his mother in case she needed urgent medical treatment. In another case, an ultra-high net worth client had a mini-operating theater in a private jet.

There was a presentation from David Norton, partner and head of aviation practice at Shackelford, Bowen, McKinley & Norton, on aviation matters, going through the morass of tax, regulation and compliance issues arising from owning and using such assets in the US, and further afield.

Freedom from wealth
Inherited wealth as a potential burden was the theme of a talk by industry luminary and regular commentator Charles Lowenhaupt. Referring to his recently published book - reviewed by this news service - Lowenhaupt explored the theme of how inheritors should not allow money to overwhelm them. The problems of attracting false "friends", or having to live up to certain expectations of parents and friends, were key themes of his talk.

Third panel
A panel examined the changing nature of philanthropy. One term that emerged was how philanthropy, and drawing a family around a cause and mission, played to the idea of "family sustainability". 

Kim Laughton, president of Schwab Charitable, told attendees that charitable giving is an important component of clients’ financial planning, and how family offices that embrace philanthropy differentiate their practice.

With about $30 trillion of wealth due to change hands as the next generation comes through, a significant chunk of that is in play for philanthropy, Rebecca Meyer, Consultant at Relative Solutions, said. Another cause, which a number of stakeholders must address, is the low level of financial literacy in the US, she said. "Financial [low] literacy in the US is endemic," she said. There is a lack of teachers to instill knowledge in others about it, she added.

Walter Sweet, senior vice president of Rockefeller Philanthropy Advisors, spoke about how some families "see philanthropy about how the next gen. gets comfortable with money". Asked how philanthropic success can be achieved, he said much depends on the specific goals at stake. There is a balance between requiring accountability of a charity, for example, and not overloading it with constant demands for information, since providing data carries a cost, he said.

Maura Cunningham, founder of Rock The Street, Wall Street, spoke about another form of philanthropy going far beyond financial transfers - "skills-based volunteerism", relating to how people in certain walks of life use their skills to directly help others. She also spoke about the "feminization" of finance and associated fields. "We need to get the other half of the population in philanthropy," Cunningham said.

Fourth panel
The focus of the conference shifted to a presentation on “optimizing the family office formula”, given by Gemma Leddy, partner-in-charge, PKF O’Connor Davies Family Office, and Marc Rinaldi, partner-in-charge, PKF O’Connor Davies. The panelists talked about some of the changes to the family offices landscape, drawing on their own insights in serving these clients in the US, and abroad. 

The final panel involved a lively discussion about what is the right model for serving ultra-high net worth individuals and families. Panelists included Mel Lagomasino, CEO of WE Family Offices; Bill Woodson, MD at Citi Private Bank; Joe Calabrese, national head of investments at Key Private Bank, Steve Prostano, founder and managing partner, SPI Partners, and acting as chair was Jamie McLaughlin, founder and CEO, JH McLaughlin & Co. 

Despite the number of options available to clients today, the panel’s conclusion was that there is no single business model that can fully satisfy the needs of UHNW families and family offices, but there is a dire need for education and transparency, the audience heard.

The panelists said there has been a trend among a subset of the UHNW and family offices area – those who have educated themselves and are more enlightened about the industry.  These families are migrating towards independent, well-capitalized firms, focused on providing objective advice, which they believe are transparent and not conflicted by the financial products they sell. (To see a separate article by Steve Prostano about the conclusions of this panel, and future ambitions, click here.)