Wealth Management

eNews is pleased to present the second installment in our Wealth Management section - “Combining Asset Class Diversification With Open Architecture” by Wallace L. Head (Wally), Chief Executive Officer of Wealth Management for PrivateBancorp, Inc., the Chicago based parent of The PrivateBanks.

Wally also serves as Chairman of the Trust Committee and is a Director of The PrivateBank and Trust Company. He brings more than 25 years of experience in studying, researching and counseling in the field of Wealth Management to the eNews.

And, we include another family business commentary from Sherman Titens, Co-Founder and Advisory Director of the PrivateBank – Kansas City, “Decision Making in the Family Business.” Currently Sherman’s book, 123 Secrets of Success in Your Family Owned Business, is being revised and updated and should be available in 2008.

The two additional offerings both contribute to our Library dealing with the growth, management and preservation of wealth.

Editor,
The PrivateBank eNews

Successful Wealth Management: Combining Asset Class Diversification With Open Architecture

By Wally Head
Managing Director and CEO of Wealth Management Services
The PrivateBank

Private investors whose portfolio is not at least 20 times the amount of dollars needed to support current or future spending, have a lot in common with trustees of endowments and foundations when it comes to managing investment portfolios.

These investors and trustees have investment goals that include both capital preservation and growth. As a result, they need to be very concerned about four key aspects of investment management:

Growing the portfolio to support current and/or future spending; Understanding and managing risks associated with portfolio investing; Protecting against major drops in the portfolio’s value; and, Paying reasonable fees for portfolio management.

Most trustees of sizable endowments and foundations hire independent investment consultants to help them address these concerns, and serious private investors are increasingly doing so also. Here are some lessons can we learn from them.

• Asset Class Diversification provides free risk reduction. Different types of investments perform differently, and diversifying a portfolio can lower its volatility without lowering its return, increase its return without increasing its volatility, or both. Achieving these results requires periodic rebalancing among the various investments, which is tantamount to “buying low and selling high.”
  
  This is about as close as most of us can get to a “free lunch.” Investment portfolios that need to support current and/or future spending, and therefore have capital preservation as a primary focus, miss this free lunch at their own peril. In fact, recognizing this investment fundamental, most states have statutes that direct trustees and other fiduciaries to diversify the portfolios they oversee.
• Asset Class Diversification today means investing in more than U.S. stocks, bonds and cash. It is easy and relatively inexpensive today to create and manage broadly diversified, global stock and bond portfolios using exchange-traded funds or mutual funds. For larger portfolios, managed accounts containing individual securities can be substituted for funds in certain portions of the portfolio, such as U.S. equities or high quality bonds. Today, it also is easy and only slightly more expensive to add real estate and commodities to a portfolio by investing in publicly-traded real estate investment trusts, exchange-traded funds or mutual funds
  
  Larger, fully diversified portfolios also include significant allocations to private investment partnerships that invest in a very broad range of strategies, most of which are intended to perform much differently than more traditional strategies. These non-traditional strategies have generic names, such as hedge funds, private equity funds, real estate funds and natural resources funds. These labels aren’t very helpful, and the actual risks and rewards are produced by the strategies that are used and the underlying investments that are made. For qualified investors who are able to adequately assess these risks and rewards, usually with the help of independent advisors, and who can identify and gain access to the better private investment partnerships, adding them to a portfolio can extend the free lunch of asset diversification.
• Open Architecture permits the selection of better investment funds or managers. In its most basic form, which might be labeled “totally open architecture,” open architecture allows investment funds or managers to be selected solely on their merits, and not as a result of any economic relationship they have with the person or entity responsible for their selection. In the marketplace today, however, the phrase “open architecture” is used to refer to a range of economic relationships, most of which include some conflicts of interest and are not totally open.
  
  How can you determine exactly how “open” an open architecture platform really is? Ask anyone recommending or selecting investment funds or managers to describe how he or she is compensated and whether he or she has any economic incentive to recommend or use any particular fund or manager. Written disclosures are frequently hard to interpret, so these questions are best asked face-to-face. If you are reluctant to ask them, then you should retain an advisor to do so on your behalf.
  
  We believe that totally open architecture generally results in better funds and managers being used to implement investment strategies. However, it is important to recognize that most investment offerings include some proprietary services or products. The starting point, therefore, is to learn whether the person recommending or selecting managers for your portfolio has any conflicts of interest, and if so, what they are. Armed with this information, you can make an informed decision whether to accept any conflicts that exist or reject them and look for someone who offers a more open approach.
• Open Architecture helps keep the costs of investment management reasonable. You might wonder how using several suppliers of investment management services, rather than only one or a few, can help reduce costs. The answer has two parts: First, open architecture allows low-cost alternatives, such as inexpensive mutual funds or exchange-traded funds, to be used for portions of the portfolio that aren’t likely to benefit from higher cost alternatives, such as U.S. large-cap core equities or high quality bonds. Second, open architecture allows the best alternatives to be selected, regardless of their source, and the important aspect of cost control is the relationship between amounts paid and results received. Said differently: The least expensive alternative isn’t always the lowest cost solution.
  
  The goal of prudent investment management isn’t to pay the least amount possible; the goal is to maximize the after-expense performance, taking both return and risk into account.

One conclusion you may reach is that combining asset class diversification with open architecture is more complicated than some other approaches, such as just hiring a good manager of U.S. large-cap stocks and high quality bonds to manage the entire portfolio. This is an accurate conclusion, but keep in mind simplicity wasn’t one of the four key concerns mentioned at the beginning of this article. As desirable as simplicity may be, its importance pales in comparison to other aspects of investment management.

If you find asset class diversification and open architecture attractive, but you need some help using them with your investment portfolio, you should consider using The PrivateBank as a trustworthy advisor. The PrivateBank has a tradition of serving a full range of individuals and families who demand personal attention, direct access to experienced decision makers, and the timely delivery of high quality wealth management services. The PrivateBank’s wealth management services combine asset class diversification with a totally open architecture approach and fully disclosed fees that are not affected by decisions regarding how assets are allocated or which funds or managers are selected.

The PrivateBank’s Wealth Management & Trust Services Group serves as advisor or trustee for over $2 billion of private wealth. It serves clients located nationally through offices in Kansas City, St. Louis, Chicago, Milwaukee and Bloomfield Hills. For more information about these services, please contact Don Hubbs, Managing Director and Senior Investment Officer, at 816-286-1500 or dhubbs@theprivatebank.com, Wally Head, Managing Director and CEO of Wealth Management Services, at 312-683-7748 or whead@theprivatebank.com, or visit www.theprivatebank.com.

 

Decision Making in the Family Business - Which Way Do They Go?

By Sherman Titens,
Co-Founder and Advisory Director,
The PrivateBank – Kansas City

For a potentially unsettling, yet constructive experience, arrange a meeting with the family and key non-family members in your business. Do it away from the business. Gather at a breakfast or lunch. After the meal pass out a sheet of paper and a pencil to each person. On one side of the sheet have these words, "What is the purpose of our business today?" On the other side of the sheet have these words, "What should our business purpose be in 2013?"

Ask each person to write their responses to both questions on their papers. When that is done, have them read their responses aloud. First, everyone should respond to the "today" question, then later to the "2013" question.

And, then have each person list what they perceive to be the three most important core values of the busienss are now and what they should be in five years.

Expect some standard replies like: "Are you kidding? Why are we doing this?" "We all know what our purpose is... To make a profit, to serve our customers, to have jobs".

The Family Business Roadmap

Recognize that, to some extent, all of these spontaneous responses have validity and represent one level of truth. Just as any trip requires the answer to the two fundamental questions of where you are and where you are going, so too must these questions be answered in a business, especially in a family business. There are two objectives of the exercise: 1) to establish two points on your family business road map...where you are and where you are going and to have all of the key participants play a role in that process and 2) to reach concensus on what the core values of the business are and should be.

Why are the answers more critical in a family business? Consider that in a non-family business there usually is a consistent method of making decisions, of setting goals and a clear line of authority to the leader. If you are dealing with one true entrepreneur, then the decisions are made and the goals are often set by the decision of one person. If you have a formal management structure then the decisions may be made through a structured decision making process.

However, a family business must often struggle to harmonize the goal setting, decision making process and the family process. It is not unusual to make a decision in a family business and find that the next day the decision has changed. "Seems that there was a little discussion at home last night and then somehow things got all turned around.”

Situational Decisions Are Risky

This situational decision process can be difficult to deal with in the family business. It becomes almost impossible to deal with in a family business in the process of transition from one generation to another. The focus of the business can be put into jeopardy. This in turn can lead to anxiety, confusion and disagreements among the family which in turn can negatively impact the continued success of the business.

Having a clear focus on where you are. where you are going and what the main core values are and should be can be of great help in avoiding or minimizing the problems that may arise. This "fix" on reality gives all a condition which can serve as an anchor while the family issues can be reexamined.

Think of the answers to the two questions as the basic ingredients of a game plan. If the family members are focused on and can agree to the same reality, then it will be much more likely that you can get there. Just as in sports, the team with the plan which they follow is the team that will usually win.

The game plan, whether on a sports field or in a company office allows all of the participants to know where they are going and how they are going to get there. And the foundation of the game plan is where you are and where you are going.

Concensus Offers a Positive Dynamic

Involving both family and non-family members in developing the purpose statements of the business for today and five years from today creates several sets of positive dynamics:

1. A frame of reference will be constructed for the business which can serve as a guide for the day to day operation of the enterprise.

2. Everyone has the opportunity to participate, to contribute and become involved in and make a commitment to support the conclusions reached.

3. Family members have the opportunity to propose and explore their respective views in a setting that is open and conducive to individual expression.

4. Private discussions among family members are often attended by ghosts. This is generally undesirable. "Dad wouldn't want us to do that" (relatives); "Your wife never wants you to work late" (non-business relatives); "If you don't do as I say, I'll tell your mother". (family process)

5. Involvement in this process by non-family employees, who, sometimes, are caught between the ideas of two or more family members, can give them a forum in which they can express their views more comfortably. In turn, this can serve to heighten their commitment to the company, increase loyalty and yield stronger support from the non-family members.

Bring the Family Together With Input From Everyone

The meeting to create purpose statements can take one hour, one day or two or three half day sessions. Some times, these types of meetings are conducted in resort or business retreat settings. Often, qualified family business consultants are used to facilitate the session to ensure a neutral environment for the discussions. Meetings such as the one discussed here can take place from time to time and deal with other business issues. They can be used to forge a true management team for the family business.

When the purpose statements are complete, they can be displayed and communicated to all of the employees, the suppliers and even the customers. Imagine a business whose purpose statements clearly show where the business is and what its values are as well as where it wishes to head in the future. Usually everyone involved can clearly understand what is going on.

It is a short step for everyone to understand what is expected of them in order to move the business toward its purpose. The result is desirable in any business, but particularly so in a family business. Invariably the experience is constructive and the output is constructive. It will contribute to the success of both the business and the family in transition from one generation to the next.

Sherman Titens is Co-Founder and Advisory Director of The PrivateBank. He is a nationally recognized authority on Family Business. This article is posted in the online Resource Library of the Kansas City Chamber of Commerce and is excerpted from his book, 123 Secrets for Success in Your Family Business...and More. He may be reached at 816-286-1500 or stitens@theprivatebank.com.