Archive for the ‘Newsletter’ Category

Family wealth: finding purpose, fighting entropy

01 / 15 / 2019
by Charles Skorina | Comments are closed

A conversation with Stuart Lucas: wealth manager, educator, and family scion

Stuart Lucas has double-barreled credentials as a wealth manager.

He's a Harvard MBA who worked for years with top-shelf financial firms including Wellington Management Company and Banc One (now JP Morgan Chase), where he led their Ultra HNW unit.

And, he is himself an heir to family money by way of his great-grandfather, E. A. Stuart, who founded the Carnation Company.  In 1985, the closely-held business was sold to Nestle, and the proceeds were distributed among Mr. Stuart's descendants.

In 2004, Mr. Lucas merged his professional and personal worlds by founding Wealth Strategist Partners, which continues today as the investment advisor to his and selected other family offices.

He has gone on to design and lead a Private Wealth Management executive education program, designed specifically for wealthy families at the University of Chicago Booth School, now in its 12th year.  And, as an adjunct professor, he has taught a Wealth and Family Enterprise Management course at the MBA level.

All this experience has also been distilled into his widely-read book, Wealth: Grow It and Protect It, for general readers; and into academic-quality papers for The Journal of Wealth Management.

We're delighted that he made some time to talk to us.

Keeping it in the family

It is better to have a permanent income than to be fascinating.

- Oscar Wilde

Skorina: Stuart, you've focused on high-net-worth families and their money for decades as a practitioner; an academic; and even personally, as a member of an extended, affluent family.  You probably know as much about this stuff as anyone in the business.

Where do you begin with a new client who has to deal with all of this for the first time?

Lucas: Charles, it's true I've been doing this for quite a while, but no one knows everything about it.  I learn something new every day.

A family office with significant wealth has many moving parts.  There's money-management per se, which you focus on; and it's crucial.

But, there are also the structural, legal, and tax issues.  And there are opaque but vital intra-familial and cultural issues that have to be dealt with.  They're all important, and all inter-related.

The laws and tax rates keep changing, so do markets, and so do the families themselves.  We try to design and execute an integrated strategy that balances all these elements.

Skorina: So, how do you start the conversation with a new client

Lucas: When we sit down with a family who's thinking about hiring a wealth manager or setting up a family office, my top discussion points are:

  • What do you want to accomplish with your wealth?
  • What's the right structure for managing your family money? How will it be governed?
  • How will your family members be educated about their wealth and held accountable to each other?
  • Do you understand that taxes affect everything? Tax-planning is critical for wealth-preservation.
  • You will need help: a wealth advisor, an attorney, an accountant, and perhaps a family-office or outsourced chief investment officer.

 

The first - and foundational -- question to answer is: What do you want to accomplish with your wealth?  A sense of purpose is as important in managing family money as it is in managing a business or any other human enterprise.

And it helps to weld a family together.  To keep them engaged, they must find a balance between their common and individual needs.



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Five-year endowment performance: no bed of roses

12 / 19 / 2018
by Charles Skorina | Comments are closed

Five-year endowment performance: no bed of roses

Chief investment officers at endowments, foundations, and family offices are the top guns of the institutional investment world.  They have an infinite investment horizon, a global playing field, and can invest in anything anywhere - within the broad policy limits set by their institution.

We, and many others, regard the CIOs at major American universities and foundations as the best of the best.

We lean heavily on university endowments for our performance studies and benchmarks because that's where the data is.

Foundations, family offices, and Wall Street firms employ top investment professionals, but it's difficult to extract meaningful data from opaque sources.  So, we go with what we can get.

A five-year return: the Goldilocks number

Institutions go on forever, but chief investment officers unfortunately don't.

Five-year returns give us a good -- albeit imperfect - picture of how CIOs are doing their jobs.  A longer timeframe would blur the responsibility for results as CIOs come and go.

In our chart below, the median tenure of CIOs happens to be exactly 5 years.  (The mean is higher, tipped by a handful of very senior CIOs.)

In our SEER reports (aka: Skorina's Enhanced Endowment Reports) we use the five-year rankings for our own headhunting purposes, and we let you look over our shoulders.

Boards and investment committees set broad policies.  Executing those policies in the day-to-day scrum of the markets -- especially in the hiring, firing and monitoring of external managers -- is the province of the CIO and his/her staff.  As recruiters, we try to understand who's doing it well, or not so well.

Risk versus return – it’s personal

We know that nominal returns don't reflect the different risk-appetites of different investors; and ranking doesn't tell the whole story.

There may be good reasons why one institution prefers a more, or less, conservative risk-return trade-off versus its peers.  We'll say more on that point down below.  But five-year nominal return is our starting point.

Our dataset consists of 34 big, over $1 billion AUM, North American endowments reporting as of early December.

That's only about a third of the whole big-endowment roster.  It leaves about 50 who have yet to be heard from, and another dozen or so who disdain to report their returns at all, even when we ask politely.

But our gang of 34 is big enough to show us how the whole league has performed, and it includes many of the brand-name schools and all the traditional Ivys.



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A Family Office Home Companion

11 / 21 / 2018
by Charles Skorina | Comments are closed

Honey, We're Rich!

Say what, dear reader?  You have just been blessed with a humongous liquidity event?

After decades of work and a bit of luck you "suddenly" have millions, perhaps even tens or hundreds of millions of dollars in investible wealth after selling your business or going public.

You are now officially rich, and it feels great.

But wait.  What's that?  Obscure family members you never knew existed are beseeching you for "loans"; allegedly good causes from Missoula to Mozambique are demanding donations; sketchy financial "advisors" are bombing your email and phones with "once-in-a-lifetime opportunities."

First things first

We've recruited family office investment heads and advised on selecting wealth-management firms.  But it works both ways.  We listen very carefully to our clients and learn a lot from them.

Here is some advice from clients who have been through it.

1. The very first thing.  Hire a tough, experienced lawyer who is used to dealing with wealth managers, brokers, and solicitors.  (Not just the firm who helped you with routine legal chores on the way up.)  It will be money well spent and you won't regret it.  You will need a real pro to run interference for you against the sharks.

2. The very next thing.  Hire a reliable and reputable accountant who understands the complexities of wealth-management.  You will need financial controls and a voice of caution.  Dollars can slip away fast without an experienced check on your newly-rich exuberance.

3. Take your time.  No sudden moves.  Think about how to organize your affairs, your objectives, impact on family-members and upcoming generations.

4. Establish a realistic spending rate.  And stick to it.  One rashly-purchased yacht, jet, or hobby-ranch can punch a surprisingly big hole in your seemingly-unsinkable new fortune.

Fortune and fate

Entrepreneurs and business titans mostly made their money from shooting the lights out on a single venture.  Dell, Brin, Gates, Zell, Zuckerberg, went "all in" and won big.  Their recipe?  Highly-concentrated investments, risk-taking, innovation, and sheer audacity.

But here’s the nub.  Wealth is created by entrepreneurs, but maintained by diversification, sophisticated risk-management, and prudence.

And that's the dilemma.  People good at wealth-creation have had little time or experience with wealth-maintenance, where capital preservation is paramount, and diversification is the key.  It's a different mind-set and a different set of skills.

Family wealth management: build or buy?



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Compensation and chief investment officers

11 / 04 / 2018
by Charles Skorina | Comments are closed

Who are the best-paid endowment CIOs?

Compensation is a delicate issue; but recruiters need to keep track of it.  And, we see no reason why we shouldn't share some of that bounty with our readers.   (See our complete compensation chart just below.)

Most of it is publicly available, anyway; as long as you're willing to scrounge for it.  Private schools and some publics disclose it in IRS filings.  The hitch is the long time-lag -- more than two years -- before the data is publicly available.  The corresponding data for most public schools is often fresher, but it's scattered among various and often quirky databases in various jurisdictions with various disclosure rules.

It's ironic that data for public colleges has sometimes been the least public.  But that's changed somewhat in recent years as more states adopt sunshine laws for public-employee pay generally.  Or, you can file a FOIA request.  But it's been like pulling teeth in many places.

And, even when public-school CIO comp is published, it can't always be trusted.  Clever college administrators have sometimes found (or constructed) loopholes in those sunshine laws which let them conceal part of the CIO pay-package.

A recent and noisy case in point arose in Michigan.  The official University of Michigan salary-disclosure listing (page 447) for 2017 showed CIO Erik Lundberg's total comp as $720,000.

We've been skeptical of that number for a while, but the U was eventually prodded into disclosing that Mr. Lundberg actually made $2 million in 2017.

Although the gross number had become public, the Detroit Free Press still sued the University to obtain details about how it was calculated.  

The judge sided with the Freep, but the university argued that they had legitimate reasons for keeping them private.

"Despite the court's ruling, we believe disclosure of the ... Incentive Plan will put U-M at a competitive disadvantage," a school spokesman said.  "Because there are very few public universities in our endowment peer group, virtually no comparison [sic] schools will ever have to make their plans public.  These are the employers against which the university competes for talent recruitment and retention."

The fact that a major university would go to some trouble to avoid disclosing that information does speak to the highly competitive market for top CIOs.  If you have a good one (and Mr. Lundberg is very good), there's always anxiety that someone with deeper pockets will whisk him or her away.   And, if you're crafting a competitive offer, it certainly helps to know exactly what you have to beat.

As the Lundberg case confirmed, these pay packages are complex.  In our chart below, we can only offer the bare numbers.



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CA vs NY: Performance and pay at the Mega-pensions

07 / 31 / 2018
by Charles Skorina | Comments are closed


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