Noted family wealth expert Greg Curtis sits down with Joe Reilly to chat about his recently-issued book and the issues confronting high net worth families in the current environment.

Family office consultant Joe Reilly interviews Greg Curtis, founder and chairman of Greycourt ?& Co, about his new book: Family Capital: Working with Families to Manage Their Money Across Generations. Curtis talks about the importance of private capital in the US economy, dealing with overspending families and his ambivalence about trusts.  (The opinions expressed here are solely those of Curtis, and not those of Greycourt & Co.)

(This publication has also reviewed books by Curtis, and to see an example, click here.)

Joe Reilly:  Your new book, Family Capital, has a very different format from your previous two investment books. What prompted you to write it?
Greg Curtis: My first two investment books were, in effect, textbooks and were hard slogging for anyone not deeply interested in investing. Readers complained that they couldn’t get other family members to read them: spouses, adult children, even family attorneys and bankers.  I thought it might be better not to tell my readers how investing is done properly and improperly, but to show them families in the process of making good and bad decisions. I decided, in other words, to write an investment book that read more like a novel, full of stories about family members. I hoped the book would be more accessible to people who wouldn’t otherwise read an investment book.
 
There is a chilling story that sets the frame of the book about a family overreacting to the ’74 bear market in the US.  Why did you choose this story to lead off the book?
The first, and least important, reason I began with the 1974 overreaction was because the 1973-74 Bear Market was the first serious market incident in the careers of investors who are still active. If those investors were just starting their careers, they would now be in their 60s and 70s. The more important reason was to emphasize that the failure to make an effort to understand capital markets can result in decisions that are permanently catastrophic, i.e., that destroy a family’s wealth. George Titan was a hero when he pulled his family’s capital out of the stock markets in 1974, but today that branch of the Titan family is no longer wealthy. George erred because he’d made no effort to understand investing himself, but relied entirely on professional advisors. As a result, he panicked at the exact moment he should have been patient.
 
How do you talk to a recalcitrant family about their spending?
Prolonged family-wide high spending is essentially un-fixable, because it requires too many lifestyle changes among people who aren’t constitutionally able to make them. Just as it’s easy to go from being poor to being rich, but not the other way around, it’s easy to go from prudent spending to imprudent spending, but not the reverse. On the other hand, some families are perfectly happy spending away like drunken sailors. I’m reminded of the guy [British soccer player George Best] who said, “I spent most of my money on horses, booze and women. The rest I wasted.” Notice that overspending isn’t just a problem for families. I see it more often with endowments and foundations. Probably 90 per cent of America’s private foundations are spending too much, essentially liquidating themselves in real terms.  This is partly because the required minimum distribution is already too high at 5 per cent, and partly because so many foundations, focused on their philanthropic missions, spend even more than that.
 
The family in the book has a somewhat ambivalent attitude about trusts.  What is your thinking about the value of trusts for beneficiaries?
I’m definitely ambivalent about trusts.  Far too often the tax and creditor-protection features of trusts are overwhelmed by their infantilizing effect on the beneficiaries.  If a person has no responsibility for the management of their own capital - because it’s in a trust and some trustee is managing it - there is an important sense in which it’s no longer that person’s capital at all.  Having an allowance when you’re a child is a sensible thing.  Having an allowance when you’re an adult is degrading and corruptive.
 
You have written a great deal elsewhere about conflicts of interest in asset management.  How do you educate families about the industry, and how much do you think they really understand?
I think families have come a long way in their understanding of conflicts and how they harm portfolios.  But often a newly wealthy family has to experience the conflicts before they learn to appreciate them. Frequently, for example, a family business is sold and the banker who advised on the transaction gets the assignment to manage the cash generated by the sale.  By the time the family realizes how dangerous the conflicts are, it can be too late.  Often, for example, the danger surrounding the conflicts doesn’t surface until a market crisis (the Tech Bust, the Financial Crisis), and when the dust has settled half the family’s capital has been dissipated.
 
You have stressed that private capital is essential to the economic success of the US.  What is your concept of how private capital works, and do you think families have an obligation to play an active role in the economy?
Private capital is the most important kind of capital there is because it’s the progenitor of every other kind of capital, and because it’s the most flexible capital available to human economies. Corporate capital, government capital, endowment capital, foundation capital, it all came originally from private capital via taxes, entrepreneurship, or generosity.  Thus, a failure to properly steward private capital is a very large failure - it affects not just the family, but also the society at large.
 

In a recent post on your blog, you noted the challenges facing hedge fund managers.  Has the role of hedge funds changed in the portfolios of your clients? 
Yes, most clients have seen hedge fund exposure reduced since the Financial Crisis in favor of long, typically index-like equity exposure. Unfortunately, that game is ending and it will be difficult for many families to get used to expanding hedge exposure again - which they will need to do.  In fundamentally-driven markets, as opposed to central banker-rigged markets, hedge funds will do well and long index exposure won’t. But the combination of high fees, poorly structured profit shares, and poor performance (relative to the S&P 500) has soured many investors on hedge.
 
Great advisors - bred or bought?
There are outstanding advisors in every kind of firm, but they are much rarer in firms that have built-in conflicts of interest.  Conflicts corrupt a family’s capital, but they also corrupt the family’s advisor.  A good advisor with conflicts will do a worse job for a family than an average advisor without conflicts.
 
How do you recommend families find an advisor?
I suggest checking with at least half a dozen people whose opinions you trust: other families, attorneys, accountants, and money managers.  This will give you a wide variety of options to choose from. In the first round of interviews, look at different kinds of firms.  In the second round, look only at firms whose structure you are most comfortable with.  It’s extremely difficult to compare, say, an investment banking firm with an open architecture wealth advisor – they are apples and oranges.  If you like the bank trust department model, don’t just interview one bank.  If you like open architecture firms, don’t just interview one.
 
Do you think the role of the family office has changed since you entered the business?
Yes.  When I began running a family office many years ago it was a strange and unusual and very isolating job. That’s one of the reasons I founded Greycourt. Today family offices are much more mainstream and families are more in touch with each other and more aware of what other families are doing. We have the family affinity groups to thank for much of this: FOX, IPI, the regional family office associations, and so on.  As the visionary founders of those kinds of groups retire, it will be interesting to see what happens with the space.
 
We seem to be in an interesting moment right now.  Are you optimistic about the global economy? 
Yes, I’m optimistic.  Whatever one’s political views of phenomena like Brexit and Trump (and there will be many more to come), voters and politicians are at least beginning to rethink the big issues: globalization, international trade, strategic relationships, the role of experts in deciding how things get done, issues surrounding economic equality, and so on.  We are having our bubbles punctured and are being forced to think outside the box for the first time since the end of World War II.  It can be painful, but I suspect the future will be brighter for it.