A reader asks:
An acquaintance of mine has just sold his company for a huge sum, in the hundreds of millions, in cash. He tells me he is setting up a whole management office, with all kinds of investment professionals, for the task of investing, tracking and managing that portfolio.
I have been wondering – with that size of investment, would it make sense to just do as I did, select a group of diversified ETF to buy and be done with it? Or is there a point at which it no longer is a workable thing to do?
I have a feeling that my acquaintance thinks that with smart enough staff he can do better than market average, but I tend to doubt it, as the performance of funds with billions of dollars tends to show. I have the impression that in his world of the super-rich, a “simple” strategy would be looked down upon as simple-minded.
So – what do you think? Is there such a thing as “too big to be simple”?
The short answer is, no there is no such thing as too big to be simple.
You could argue that people with greater amounts of wealth are exactly the ones who should be keeping things simple. Life can get complicated when you have that much money. Everyone wants to take advantage of you. It can become easier to lose track of what it is you’re really investing for.
Problems arise when ultra-wealthy people assume the normal rules don’t apply to them.
I don’t need to pay attention to the tried and true common sense investment principles. I’ll just hire the best people. I have connections. You get what you pay for. I can get access to exclusive deals and investments.
There is no secret club that gets all of the best investment ideas, strategies, and funds. Adding degrees of difficulty to your investment plan doesn’t make your life any easier.
There is no exact science to figure out the right way to invest a nest egg of this size but there are plenty of wrong ways. I’m not a huge fan of offering a prescription without performing a diagnosis first, so here are a few questions I would ask if I was in this position:
Do we have what it takes to operate a full-fledged family office? For some, a family office is a status symbol. It shows that you’ve really made it to that next echelon by hiring in-house staff to handle your investments, tax situation, budgeting, cash flow needs, and anything else related to your finances.
But overseeing a family office requires a huge investment, not only in dollars but in time. Building out your own investment office is no small feat because there’s no playbook on the number of people required, investment strategies to employ, or resources necessary to manage the operations.
I’ve seen numbers ranging from $100 million to $1 billion in terms of how much money is required to even think about having your own family office. But at these asset levels, it really comes down to how comfortable you are in building and overseeing an investment office, your understanding of the operations, and how much control you desire.
How much control do you want? Beyond the status symbol elements in play with this much money, some wealthy families simply want to have more control over their finances. It can make you feel like you’re really steering the ship when you have a dedicated staff at your disposal. But you also have to balance this control out with the fact that a small team of people will likely never give you the depth or breadth of talent you’d receive by outsourcing to a larger firm.
That’s the trade-off you make for keeping things in-house. There are also multi-family office platforms that help with this somewhat by pooling resources but in that scenario, you lose some of the control and exclusivity.
What is your mission? At this level of wealth, the end goals are much different than your average high net worth retiree. So it really makes sense to understand what the purpose of the money is and explicitly lay that out to keep everyone on the same page. You can’t overlook a goals-based framework simply because your goals are different than most investors.
A few other things to think about for the few people who are lucky enough to have the problem of figuring out how to invest enormous sums of money:
First, do no harm. You have a much larger margin of safety with more wealth but that also opens you up to the potential for bigger mistakes from a lack of discipline. “Don’t screw things up” is a good starting point.
Avoid filter failure. Everyone will be trying to sell you something. Choose wisely because there will be lots of faulty promises. Choose people of good character to work with over performance and promises.
Governance will matter more than the portfolio. Whether a family office operation is used or not, the first thing you need to have in place as an ultra-wealthy family is the correct governance structure. The portfolio is almost secondary to policy, documentation, and the decision-making process.
Know what you own and why you own it. Having a deep understanding of your philosophy, portfolio, and stated mission are the biggest benefits of implementing a simpler approach. This doesn’t necessarily mean a portfolio consisting entirely of ETFs but it does mean avoiding complexity for the sake of complexity or ego.
I will refrain from using the title of a 1990s Notorious B.I.G. song to explain my point here but just because you have more money doesn’t mean your problems automatically disappear.
There’s a lot to be said for simplifying in both life and finances when you have a lot of money.
Family Office Hurdles