SEPTEMBER 2014
PAMMAGAZINE.COM
Protecting today’s wealth for tomorrow
IN THIS ISSUE
zNews On the move5 // Calendar7 // Ask the Experts10 // Q&A11
zFeatures The real deal12 // Added value18
zComment Making a splash20 // Focusing through the right lens21
TOP NEWS STORIES
12
KANALY TRUST AND
MERITAGE CAPITAL
ANNOUNCE JV
;IEPXLQEREKIQIRX½VQTEVXRIVW
with specialist hedge fund advisor to
offer alternative investment solutions
TURN TO P4
SEC INVESTOR
ADVOCATE ARGUES
FOR RIA FEE
INTRODUCTION
Rick Fleming recommends agency
charge annual fee to pay for more
frequent examinations
TURN TO P4
SAVILLS LAUNCHES
FO DIVISION
New entity will be three-fold, says
global real estate practice
TURN TO P4
RENEWABLE ENERGIES
DEAL PLATFORM
LAUNCHES
Private client venture aims to
connect investors and capital
raisers in oil and gas, mining and
renewable energy sectors
TURN TO P6
THE REAL DEAL
With a more informed, risk-aware set of high-net-worth
investors keen to allocate funds to real estate, the
sector’s popularity is set to soar
ADVISOR SPOTLIGHT
In with the new
16
CEO Michael
Costa on
Fiduciary Trust
Company of
New England’s
recent launch
FOR MORE INSIGHT SEE: PAMMAGAZINE.COM
FEATURE
Added
value
18
HNWIs’ insurance
cover often fails
to recognize the
growing values of
collections
Re-envision Wealth
Rewards and responsibilities of great wealth
Ascent Private Capital Management of U.S. Bank provides services for families of
significant wealth who want to preserve and protect their assets while putting their
fingerprint on history.
Michael Cole, President
Direct: 415.677.3566
ascent.usbank.com
NOT A DEPOSIT
NOT FDIC INSURED
MAY LOSE VALUE
NOT BANK GUARANTEED
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
PAM
WELCOME
F R O M
T H E
E D I T O
R
C
ompiling my first edition of PAM,
it became clear that a significant
theme running through the industry
is ‘evolution’. From the importance of
portfolio diversification, to the launch
of new RIA platforms, to various
acquisitive moves being made across
the market, it is an exciting time to be
part of the wealth management world.
One ever-changing sector which appears to be turning the heads
of high-net-worth investors is real estate. John D Rockefeller famously commented that “the major fortunes in America have been made
in land”. While this may not always be the case in the 21st century,
investments in land development and real estate are undoubtedly a
stealthy addition to many an investor’s portfolio – and as our feature
on page 12 shows, their importance is set to grow.
Like all investment opportunities, real estate will always carry
some level of risk. One property fund manager compared the industry’s associated uncertainties to the childhood game ‘musical chairs’.
He said: “When the music stops, there will always be another
person without a chair, who is out of the race. But that’s the risk
you take. You just have to play the game, and hope it isn’t you that
loses out.”
The theme of risk – and mitigating risk – was also present in our
investigation into the types of insurance that high-net-worth individuals are purchasing (page 18). As well as highlighting the need to
buy adequate cover for inherited and evolving collections, the idea of
risk management as a tool to avoid or reduce the need for insurance
is also explored.
I look forward to working with all of you during my time on PAM,
and will strive to produce thought-provoking insights from, and for,
the private asset management community.
STEPHANIE BARTUP, EDITOR
[email protected]
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03
PAM
NEWS
LAUNCH
Kanaly Trust and Meritage Capital in
alternative advisory JV
W
04
ealth management firm Kanaly
Trust has partnered with specialist
hedge fund advisor Meritage Capital to develop alternative investment solutions for its
high-net-worth investors. Joe Wade, chief
investment officer at Meritage Capital, told
PAM they wanted to find alternatives to the
“very unfavorable” return-to-risk characteristics offered by traditional fixed income.
Meritage will act as a sub-advisor in the
joint venture, which Houston, Texas-based
Kanaly said had been formed to help its
HNW investors overcome challenges such
as a limited access to adequate managers
and the high cost of entry for clients trying to incorporate alternatives into their
portfolios.
James Shelton, chief investment officer at
Kanaly, told PAM: “From my perspective,
Kanaly has set the investment objective, including our return expectations, the amount
of risk that we would like to take, as well as
liquidity terms that we are looking for.
“I believe our partnership allows us to
customize our strategies to meet these
objectives. I believe this is somewhat different from other partnerships that we have
explored in the past.”
Kanaly Trust currently manages and
advises over $2bn of assets, while Meritage
Capital is a $1.1bn SEC-registered investment adviser specializing in differentiated
hedge fund solutions.
REGULATION
SEC investor
advocate argues for
RIA fee introduction
The US Securities and Exchange
Commission’s (SEC) investor
advocate has recommended that the
agency charge registered investment
Wade added that he had seen an increase
in interest from HNW clients in hedge
funds strategies that have moderate but consistent rates of return, such as arbitrage and
event-driven strategies, and some low-net
exposure of long short equity.
“We are seeing a bigger interest from
people who have been traditional investors
in US government bonds and a little bit of
high yield; they have become very disenchanted with their returns over the last two
or three years. With a strong expectation
of increased interest rates, they are looking
to replace that fixed income allocation,” he
explained.
Shelton said a trend that he had witnessed
was the mutual fund world pushing “a
tremendous amount” of product into the
‘liquid alternatives’ space.
“This space is trying to offer hedge fundlike strategies in ‘40 Act’ mutual funds
[which can accept unlimited numbers of
investors], and they have garnered billions
of dollars in assets,” he said.
“That was one of the reasons that we entered this partnership, because we feel that
there are a lot of challenges in that space: a
short-term track record, high costs. Many
of the very best managers don’t want to
participate in the mutual funds and some of
those investment strategies – that we want
to invest in – don’t lend themselves to a
mutual fund structure.” „
advisers (RIAs) an annual fee to pay
for more frequent inspections of their
operations.
Speaking at the 38th Annual
Southwest Securities Conference in
Dallas, Texas, Rick Fleming said the
annual ‘user fee’ would be a “longterm, sustainable solution” within the
industry, and said funds from such
fees should be limited to expenses
associated with investment adviser
examinations.
Fleming argued that only 9% of
RIAs were examined by the SEC
in the 2013 fiscal year, equating to
a frequency of approximately one
examination every 11 years. He said
this left investors facing “substantial”
levels of risk.
“There are multiple reasons for
the lack of exam coverage, but in my
view it primarily boils down to the
fact that the SEC has not received sufficient resources to keep up with the
burgeoning workload,” he said.
He added that the number of SECregistered advisers had grown by approximately 40% over the past decade
to nearly 11,500.
“As the number of investment
advisers has grown, so too has their
complexity. The amount of assets
managed by investment advisers is on
a steep ascent, climbing from $20trn
a decade ago to an estimated $55trn
by the end of fiscal year 2015,” said
Fleming.
He compared these figures with
the growth of staff in the SEC’s Office of Compliance Inspections and
Examinations (OCIE), which had
increased by about 10% in the past
decade.
REAL ESTATE
Savills launches
JEQMP]SJ½GI
division
Global real estate services provider
Savills has established a new family
office services (FOS) practice.
The new entity will comprise
three aspects, said Savills: the firm’s
own real estate services; providing
guidance on family governance; and
acting as a hub for families and their
advisors in the sector.
Savills said the new venture would
extend its client relationships in the
multi-family office space, especially
with clients in Europe.
Rupert Phelps will head up the
SEPTEMBER 2014
family office team, having served as
director of family office services at
BNY Mellon previously.
Phelps will report directly to Clive
Beer, head of Savills’ UK rural professional services and international
mediation services.
“A key focus is to draw together the
many pools of intellectual capital and
business expertise within Savills from
which families will benefit, together
with offering deep knowledge of
the key intermediaries (especially
lawyers, investment consultants, accountants and professional services
providers) who truly understand and
empathise with the family office sector,” said Beer.
LAUNCH
LCG attracts
investor, launches
private wealth
business
LCG Advisors, based in Tampa,
Florida, has formed a new registered
investment advisory practice which
will provide private wealth planning and investment management
services to HNWIs and families.
The new venture, LCG Private
Client Group, LLC, was formed
following an investment by financial
services veteran Gregg Smith, cofounder of Smith Breeden Associates. Smith will lead LCG’s advisory board and several proprietary
services.
“LCG has an unbelievable opportunity to leverage its core skills
in the credit and capital markets
and strong industry relationships
to benefit individual investors like
me,” he said. “The ability to be a
single voice of advice to clients on
both their securities portfolios and
private investments, such as private
businesses and alternative investments, serves a huge need in the
market.”
Brian M. Smith, managing partner
and co-founder of LCG Advisors,
said the formation of a wealth
management platform was a “natural
progression” to the business.
“We have an established track
record of providing objective, independent advice to businesses and
many of the world’s leading financial
institutions and our role has evolved
over the years into more of a trusted
advisor status. So, expanding that
role by providing those same highcalibre services to the individuals
and families we work with was only
natural,” he said.
In conjunction with the formation
of LCG Private Client Group, the
ON THE MOVE
ˆ *EQMP]SJ½GIAbbot Downing has
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Jill ShipleyXSHIZIPSTGSQQYRMGEXMSR
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• Clive BrownLEWFIIRETTSMRXIH
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ManagementXLIEWWIXQEREKIQIRX
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• Advocacy Wealth Management has
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+ISVKMEFEWIH%HZSGEG]
• Shane HillerLEWVIXYVRIHXSXLI7ER
*VERGMWGSSJ½GISJCiti Private BankEWHMVIGXSVERHTVMZEXIFEROIV,IQSZIWJVSQ
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• Deutsche Asset & Wealth Management(I%;1LEWETTSMRXIHCarolyn
PattonXSXLIRI[P]GVIEXIHVSPISJ
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VIPEXMSRW%QIVMGEW&EWIHMR2I[=SVO
4EXXSR[MPPFIVIWTSRWMFPIJSVGYPXMZEXMRK
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• Kaspar Hense LEWNSMRIH9/FEWIH
BlueBay Asset Management´WMRZIWXQIRX
KVEHIXIEQEWTSVXJSPMSQEREKIVJSVKPSFEP
WSZIVIMKRERHEKKVIKEXIFSRHWXVEXIKMIW
,IRWILEWRIEVP]EHIGEHISJKPSFEP½\IH
MRGSQITSVXJSPMSQEREKIQIRXI\TIVMIRGI
ERHLEWWTIRXQYGLSJXLMWXMQI[SVOMRK
JSV(IYXWGLI%WWIX1EREKIQIRXMR*VEROJYVX+IVQER]
• ACE Private Risk ServicesLEWTVSQSXIHAnnmarie Camp XSWIRMSVZMGI
TVIWMHIRXREXMSREPWEPIWERHHMWXVMFYXMSR
PIEHIV&EWIHMR&EWOMRK6MHKI2I[.IVWI]'EQT[MPPFIVIWTSRWMFPIJSVSZIVWIIMRKXLI97HMWXVMFYXMSRSJ%')4VMZEXI6MWO
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WTIGMEPM^IHLSQIEYXS[EXIVGVEJXZEPYEFPIGSPPIGXMSRWERHYQFVIPPEPMEFMPMX]MRWYVERGI7LILEWFIIR[MXLXLI½VQWMRGI
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YQFVIPPETVSKVEQEVSPIXLEXWLI[MPP
GSRXMRYIEPSRKWMHILIVTVSQSXMSR
ˆ -RWXMXYXMSREPEWWIXQEREKIVAdvantus
Capital ManagementLEWETTSMRXIH Jennifer W. DenysEWEWWMWXERXKIRIVEPGSYRWIP
(IR]WNSMRIH%HZERXYWMREWMRZIWXQIRXGSYRWIPERH[SVOW[MXLGPMIRXWSR
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QEREKIQIRXSJEPPSJ%HZERXYW´SYXWMHI
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05
PAM
NEWS
company has hired Rafael Williamson as its chief investment officer.
Williamson, who was most recently
senior investment strategist for Wells
Fargo Private Bank, joins the firm
with more than 18 years of investment management experience.
SURVEY
Female HNWIs
in alternative
investment boom
06
High-net-worth women are turning
to non-traditional investments as
they look to generate income, drive
capital growth and achieve portfolio
diversification, according to research
from MainStay Investments.
More than half (55%) of the women surveyed by the New York Life
company said that over the past year
they had increased their allocations
to alternative investments, and 27%
of women reported that within the
next five years, they plan to further
add to their allocations.
The statistics come from MainStay
Investments’ latest “Investing Outside the Box” study, which compiles
the views of more than 800 US-based
HNWIs aged 40-65.
Of HNW women and men already
invested in alternatives, women have
a higher allocation to non-traditional
investments than men (27% vs. 20%)
according to the survey, while 89%
of women said they would recommend alternative investments to
their peers.
Stephen Fisher, president of
MainStay Investments, said: “While
all investors are growing more
aware of the value of non-traditional
investments, HNW women are especially interested in the benefits alternatives offer. For advisors, this trend
presents a tremendous opportunity
to help HNW women achieve their
investment goals while properly
diversifying their portfolios.”
LAUNCH
Renewable energies deal platform
launches
A
new private client dealflow platform
which aims to connect investors and
capital raisers in the oil and gas, mining
and renewable energy sectors has been
created.
The Commodities Investment Exchange
(CoinVex) platform allows managers of
private equity, family offices and energy
companies to identify global investment
opportunities with renewable energy and
natural resource products.
Through the online platform, capital
raisers can introduce their proposition
to targeted institutional investors, who
can then choose to learn more about, and
potentially invest in, the product.
CoinVex, which is owned and managed
by origination specialists Certus Capital
Partners (CCP), eliminates the role of the
INVESTORS
Global instability
‘should spark
portfolio evaluation’
Ongoing terrorist activity has spiked
concerns over the stability of affluent
investors’ portfolios, with one wealth
manager arguing that this should
be the time to revaluate investment
decisions.
According to Haitham Ashoo,
co-founder of Pillar Wealth Management, investors should make sure
that their portfolios are diversified,
they should steer clear of active portfolio management, and avoid making
financial decisions based on emotion.
His warning came after global
violence and instability such as the
recent US strikes targeting ISIS terrorists in Iraq.
These events, along with worries
about the Federal Reserve ending
broker in securing deal engagements.
Adam Sommerfeld, managing partner
at CCP, said: “We wanted to create an
intuitive dealflow platform that simplified
the deal engagement process for investors
and capital raisers and negated the need for
brokers.
“We believe the platform enables enhanced deal efficiency and a significant cost
reduction on the fundraising process.” „
its market-bolstering stimulus and
raising interest rates, precipitated a
negative return in July for the Dow
Jones Industrial average, the first
decline in 2014.
“You have to allocate your assets
to avoid undue risk, which will help
protect your portfolio through the
inevitable wars, natural disasters, recessions and depressions that will occur,” said Ashoo. “A well-diversified
portfolio provides peace of mind.”
ACQUISITION
Mariner bolstered
by Allied acquisition
Mariner Holdings, the Kansas-based
parent company of Mariner Wealth
Advisors and Montage Investments,
has acquired local investment banking specialist Allied Business Group.
Mariner said the addition of Allied
would allow its subsidiary companies
to better serve their high-net-worth
SEPTEMBER 2014
clients and business owners by
providing advice on private investment opportunities and the ability to
implement a strategic business exit
strategy.
Going forward, Mariner said it
would help grow the Allied practice
by hiring professionals with experience in forensic accounting, business
valuation and investment banking.
Martin C. Bicknell, chief executive officer of Mariner Holdings,
said: “We have long recognized a
need among our clients who own
businesses for additional support in
the areas of business valuation and
exit strategy planning. I am thrilled
to bring the Allied team on board to
support this need.”
The partnership with Allied is the
latest in a series of developments
for the Mariners group. The firm
recently launched both the Mariner
Trust Company, which offers trust
and estate planning solutions, and
FirstPoint Financial, which provides
financial advice to clients with no
minimum asset requirements.
EXPANSION
HighTower
continues
expansion reach
Wealth management firm HighTower
has opened its fourth Florida office
in Fort Myers with an $800m team,
which previously practiced at Merrill
Lynch.
HighTower Fort Myers is the 44th
team to join the HighTower Partnership, and comes just days after the
firm announced it was expanding
its West Coast operations with the
addition of HighTower Bellevue, a
$400m RIA.
The Fort Myers team, which will
focus on serving HNWIs and families, comprises partners Pamela Lynn
Abraham, Jack E. Thomas and Trevor
R. Swartz.
Abraham previously spent 33
years at Merrill Lynch where she led
Pamela Lynn Abraham & Associates,
while Thomas and Swartz led Merrill
Lynch’s Thomas & Swartz Global
Wealth Management. The team collectively supervises approximately
$800m AUM.
The partners bring three colleagues
– director and senior wealth management advisor Mathew Verrengia;
senior registered associate Benita
Alstatt; and client services associate
Tiffany Likness – to the practice.
LAUNCH
Freedom Wealth
Alliance launches
through LPL
LPL Financial has launched a new
hybrid RIA group, Freedom Wealth
Alliance, in Brookfield, Wisconsin.
The new firm brings five financial
advisors as well as additional support
staff, and supports client brokerage
and advisory assets of approximately
$225m to the broker/dealer platform.
W E A LT H M A N A G E M E N T C A L E N D A R
SEPTEMBER 15-16
FIBA Wealth Management Forum
JW Marriott Marquis Hotel, Miami, Florida
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SEPTEMBER 17-18
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SEPTEMBER 16
Operations for Alternatives
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SEPTEMBER 20-22
The FPA Business and Education
Conference
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Management Conference
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SEPTEMBER 17
Wealth Transition: How to retain your
clients as generations pass
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:MWMX[[[R]WWESVK
SEPTEMBER 22-23
FOX Private Family Trust Company
Symposium
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OCTOBER 21-22
The Family Wealth Alliance
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OCTOBER 27-29
Private Wealth Investing Summit:
Harvesting the Returns
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FOX Fall Forum
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07
PAM
NEWS
Freedom Wealth Alliance was
developed from the former Rozman
Wealth Management, founded by
Kurt Rozman, who will now serve as
president of the new entity.
LPL said the new venture would
focus on attracting “overlooked”
independent fee- and commissionbased advisors with approximately
$50m under management and providing them with practice management support.
“Our intention is to provide smaller
independent advisor practices with all
the resources and capabilities of much
larger firms, while enabling them to
provide their clients with the same
high quality, customized, personal
service that was common in previous
generations,” said Rozman.
INVESTMENT
08
Standish:
Opportunities avail
in emerging markets
Emerging markets and selected high
yield debt may currently offer opportunities for HNWIs, according to
Standish Mellon Asset Management
Company.
The Boston-based fixed income
boutique, a part of BNY Mellon, said
periods of market volatility associated
with this type of risk have historically
provided buying opportunities.
David Leduc, chief investment
officer of Standish and author of the
Standish Bond Market Observations
July/August Part II (BMO), said that
over the past two decades, investors
who bought the popular global or
high yield bond indexes during spikes
in volatility on average ended up with
positive total return six months later.
Recently, conflicts in Ukraine and
Iraq have contributed to higher volatility, and risk assets began to sell off,
the report said.
Looking at emerging markets,
Standish said valuations are particu-
'SR¾MGXWMR9OVEMRIERH-VEULEZI
GSRXVMFYXIHXSLMKLIVZSPEXMPMX]
larly compelling in Latin America
and Asia.
However, Leduc said: “We worry
about the vulnerability of the sector
to the eventual tightening of Fed
policy, despite the improvement in
market technical signals.”
Overall, Standish said it expects
the US and China to lead accelerating
global growth in the second half of
2014. The report cites stimulus measures implemented by China earlier
in the year that are beginning to filter
through to the broader economy.
The report also noted that economic
output in the US rebounded in the
second quarter of 2014.
LAUNCH
Dynasty backs
Arbor Trust Wealth
Advisors lift-off
Dynasty Financial Partners has joined
forces with four former United Bank
& Trust advisors to create a Michigan-based wealth advisory platform.
Financial advisors Charles Waterhouse, James Winslow, Carol Sewell
and Gary Haapala have established
Arbor Trust Wealth Advisors with
assistance from New York-based
Dynasty. The four advisors collectively instruct on more than $350m in
client assets.
“Arbor Trust Wealth Advisors was
created to provide sophisticated investment and estate planning advice
to our community,” said Haapala.
“As an independent financial and
investment planning firm, we want to
provide our clients – professors and
administrators, physicians, entrepreneurs, and others – with complete
objectivity and transparency.”
Dynasty’s RIA core services platform will provide turnkey marketing,
CRM, financial planning, proposal
support and client reporting to the
new entity.
Shirl Penney, president and CEO
of Dynasty Financial Partners, said:
“Charlie, Jim, Carol and Gary are extraordinary investment advisors with
a deep commitment to their unique
Southeast Michigan community. We
are excited to be their transition and
growth partner, and we are proud to
add them to our Dynasty Network of
truly independent advisors.”
ACQUISITION
NFP snaps up
&IRI½X6IWSYVGIW
NFP, a New York-based brokerage
and wealth management firm, has
acquired consulting and brokerage
firm Benefit Resources, Inc.
Cincinnati, Ohio-based Benefit Resources has been a member of NFP’s
Benefits Partners organization since
2008. The firm specializes in group
benefits, HR and benefit compliance,
benefit administration and individual
insurance.
The firm will continue to be led
by managing director Tim Marcagi,
who said he would be focusing on
strengthening the corporate benefits
presence in the Midwest region.
Ed O’Malley, president of NFP’s
corporate client group, said: “Benefit
Resources brings over two decades of
employee benefits and HR expertise
to our team, further strengthening
NFP’s ability to provide superior
services to our business clients.
“We are excited to welcome the
Benefit Resources team to the NFP
family and look forward to leveraging their significant track record of
success.”Q
For Wealth Management services
focused on getting the most out
of all you’ve worked for, go west.
• Our Private Client Advisors provide highly personalized
and dedicated service.
• We can tailor a personalized suite of Banking, Investment,
Trust and Estate Services to best fit your goals.
• We’re backed up by the global resources of the fourth
largest bank in the world, BNP Paribas*, so you can invest
with confidence.
* by Bloomberg and Forbes 2012.
Speak to Private Client Advisor
1-877-898-1003 or visit bankofthewest.com/wm
Equal Housing Lender. Deposit and loan products offered by Bank of the West. Loans subject to credit approval.
©2014 Bank of the West. Member FDIC.
Bank of the West Wealth Management offers products and services through Bank of the West and its various affiliates and subsidiaries. Securities and variable annuities are
offered through BancWest Investment Services, a registered broker/dealer, Member FINRA/SIPC. Financial Advisors are Registered Representatives of BancWest Investment
Services. Fixed annuities/insurance products are offered through BancWest Insurance Agency in California, (License #0C52321), through BancWest Insurance Agency in Utah
and through BancWest Investment Services, Inc. in AZ, CO, IA, ID, KS, MN, MO, ND, NE, NM, NV, OK, OR, SD, WA, WI, WY, HI, Guam and CNMI. Bank of the West and its various
affiliates and subsidiaries are not tax or legal advisors.
BancWest Investment Services is a wholly owned subsidiary of Bank of the West and a part of the Wealth Management Group. BancWest Corporation is the holding company
for Bank of the West. BancWest Corporation is a wholly owned subsidiary of BNP Paribas.
PAM
ASK THE EXPERTS
SEPTEMBER 2014
A S K T H E E X P E RT S
In this feature, subscribers and readers of PAM can write in about questions or problems plaguing their wealth
management practices. In return, they will receive practical advice from top experts. To submit a question, email
editor Stephanie Bartup at [email protected].
10
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HMWGSRRIGXFIX[IIRZEPYEXMSRWERHVIEPMX]#
A )VMG6)VZMRGSJSYRHIVTVIWMHIRXERH')3SJ6IEPMX]
Shares
Financial advisors are all too familiar with the frustration clients
feel when market valuations don’t reflect the reality of corporate
fundamentals. After all, investors expect some connection between the underlying fundamentals of a company and its share
price. Instead, a company’s stock price often has little to do with
its actual health, as signaled by its dividends, earnings and cash
flows. And that’s because stock prices are based on popularity
and emotion – not reality.
Compare the price performance of the S&P 500 with its
fundamental growth components from 2000 to 2013. Over that
time, dividends rose by 115 to 120% but share prices for the
same basket of stocks only rose by 30%. Companies like CocaCola, IBM or Microsoft grew their dividends and earnings year
after year, but their stock prices stayed flat. The picture becomes
even sharper with tech companies. Since 2000, the stock prices
of companies on the NASDAQ 100 have remained flat, while
dividends have grown nearly 4,000% (source: Bloomberg).
Our research suggests that stock prices have less to do with
the health of a company and more to do with investor perceptions and emotions. External factors, including economic developments, world events, political turmoil, media hype, or even
the offhand comment of an industry analyst, can cause share
prices to soar or tumble. This endless, uncontrollable stream of
external factors drives market volatility, but it is really nothing
more than noise and distraction. Regardless of market noise,
most companies will carry on today and tomorrow much as they
did the day before.
Capturing earnings and dividend performance while minimizing market volatility is, of course, how investors grow and
protect their assets, so they have always sought to buy shares in
companies with good fundamentals. But at the end of the day,
the stock price of any company, healthy or not, is based on stock
market returns, and these, in turn, are based on marketplace
noise. The challenge is to invest in companies when they perform – not when the market decides their stock is more valuable.
The only way to uncover actual performance is to isolate individual corporate fundamentals from stock prices. And as a proxy
for corporate profitability, dividend growth represents a meaningful driver of return as distinguished from price return, because
dividends represent a claim on profits by shareholders. Companies want to grow their dividend payments – cutting them is a
measure of last resort. As a result, dividend growth tends to track
corporate earnings growth, but with much less volatility.
REGARDLESS OF MARKET NOISE,
MOST COMPANIES WILL CARRY ON
TODAY AND TOMORROW MUCH AS
THEY DID THE DAY BEFORE
By utilizing instruments such as dividend swaps, futures,
forwards and options, investment vehicles can be constructed
which track the underlying dividend growth of a company while
mitigating the influence of price. For years, institutional investors, including large hedge funds and proprietary trading desks,
have utilized these strategies to remove stock prices from their
investment equations and isolate dividend growth.
In the mass market, however, the transaction costs involved in
this approach often eat up the profits of smaller investors, making it difficult for them to achieve similar results. It is interesting
to note that European investors can directly access this market
through futures, and as a result, there has been a strong rise in
trading in dividend futures in Europe over the past 10 years.
In the US, there remains a major unanswered need in the
investment world for liquid, transparent and cost effective
strategies that can deliver the growth of corporate fundamentals
without exposure to volatile stock prices. Looking for viable
solutions to this problem, both the CME and the CBOE have
recently filed their intent to list contracts tied exclusively to the
dividends of the S&P 500. We believe this type of approach –
one that segregates underlying fundamental characteristics from
price volatility and market noise – offers an attractive antidote to
the frustrations so often experienced by investors. Q
PAM
Q&A
SEPTEMBER 2014
Q&A
Successfully advising a divorce
settlement
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is unique and solutions must be tailored
for those going through divorce are term
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to that specific individual’s needs – make
and whole-life.
A A financial advisor can help determine
sure to listen and act as an advocate for
how much a client needs to live on to
the client. Getting to know the client’s
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sustain their current lifestyle. An advisor
goals – their needs, wants and wishes – is
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can help analyze cost basis and unrealkey to the success of the relationship.
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ized gains and make sure that the client
A Advisors have to be prepared to have
is cognizant of these when deciding on
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difficult conversations. First, they may
a settlement. In many marriages, one
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have to tell a client that he/she has to go
spouse assumes all financial responsibiliA Once the settlement is reached, an
back to work in order to sustain their
ties, but in a divorce, the other spouse beadvisor should create a holistic financial
lifestyle. For example, in a divorce settlecomes at a disadvantage. An advisor can
plan. A client needs to see where they
ment, one client may receive mostly illiqplay a key role in helping to educate the
are today and where they want to be in
uid assets, such as the family home. This
latter – this can be invaluable. The client
the future. What might have been most
settlement will not create any cash flow,
should be mindful of capital gains, as well
important to a couple may be different for
therefore the advisor might suggest they
as understand that not all assets should
an individual. The client needs
be analyzed the same and that
to identify and prioritize goals
retirement accounts are pre-tax
to create ‘what-if ’ scenarios
money, while other accounts
ARE YOU CAPABLE OF GIVING
and analyze their probability
are after tax. A financial adviof success. Developing a cash
sor will take the time to do an
UNBIASED ADVICE FOR EACH
flow maximization and lifestyle
in-depth discovery and get to
SIDE DURING THEIR DIVORCE?
analysis will help this process.
know the client, identify their
goals, understand their values
IT IS IMPORTANT TO BE HONEST Next, the advisor will create a
portfolio and check the client’s
and listen to their fears, and
WITH YOURSELF TO AVOID A
risk tolerance, since they may
help the client get organized,
CONFLICT OF INTEREST
not be able to tolerate as much
consolidating their financial
risk as they previously could.
documents.
Alternatively, the client may be
too conservative – therefore, it
Q (SIWMRWYVERGITPE]EVSPIMR
is advisable to spend time educating the
consider selling their home and purchase
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client about risk vs. return so they are
a smaller one to have other investments
A Often the court will stipulate that the
comfortable with the investment choices
that produce income. Second, your client
spouse responsible for paying alimony
that are recommended. Additionally, an
shifts from a married couple to two single
payments buys an insurance policy to
advisor must make sure that the client
spouses, leading to a redefinition of the
ensure that alimony and/or child support
updates their will, trustees and guardclient. Are you capable of giving unbiased
continues to be paid after his/her death.
ians as well as amend their beneficiaries
advice for each side during their divorce?
If your client is the recipient of alimony
on retirement accounts and insurance
It is important to be honest with yourself
payments, it is ideal for them to be listed
policies. Q
to avoid a conflict of interest. Though
as the policy owner. The policy owner
divorces may seem amicable at first, they
will know if the policy is active because
Rachel Gottlieb is a financial advisor at UBS Financial
can get ugly fast! Lastly, divorce is an
of notices of payment lapses. AdditionServices Inc., 590 Madison Ave., New York, NY 10022.
ally, only the policy owner can voluntarily emotional process, which requires an adAs a Certified Financial Planner™ and a certified divorce
cease the policy or change the beneficiary. visor to recognize and be sensitive to what financial analyst, Rachel manages over $350m in assets.
11
PAM
SECTOR FOCUS: REAL ESTATE
The real deal
12
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T
he US world of real estate
is an infamously ‘peaksand-troughs’ market; but a
growing number of investors are reaping the rewards
which come from diversifying their portfolios with
property investments.
Knight Frank’s 2014 Wealth Report revealed that
North American UHNWIs allocated an average of
20% of their investment portfolios to real estate in
2013 – up by 59% from allocations set in 2012. The
report said that 47% of these ultra-high-net-worth
individuals (UHNWIs) would increase this allocation further in 2014.
“More and more investors, especially HNWIs and
UHNWIs, are looking to diversify out of the usual
long-only stock and bond allocation model and
are looking for alternative investments,” says Allan
Swaringen, president and CEO of Jones Lang LaSalle
Income Property Trust.
“These investors are also looking for non-correlated, income producing investments – and commercial
real estate has shown to have very strong non-correlated metrics, at least to stock and bonds.”
Swaringen adds that higher quality core real estate
has generated about 70% of its returns over the last
10-20 years from its income generation – making it
an attractive proposition for investors.
BY STEPHANIE BARTUP
The fact that both interest rates and bond yields
are currently sitting at near historic lows, and
show no signs of imminent change, is another
element peaking the interest of high-net-worth
clients.
Burl East, portfolio manager to the sub-advisor
of the recently launched Altegris/AACA Real Estate Long Short Fund and CEO at American Assets
Investment Management, says that with such low
rates, investors have been seeking out income, of
which real estate is “a consistent producer”.
“If you look at what the largest and most
sophisticated investors allocate to real estate, it’s
generally 5-15% [of their portfolio] and individual
investors are following suit,” he adds.
Bernard J. Haddigan, senior managing director:
investment properties at CBRE Capital Markets,
says he has noticed a marked increase in the
amount of money pursuing US real estate, “for
cash, for stability and for portfolio diversification”.
“At a global level, there’s a lot of political
instability in various countries, [so we are] seeing significant capital coming into the US, from
central and South America, from Israel; if you’re
in Argentina or Venezuela, the world of US real
estate looks pretty attractive,” he says.
“Some [investors are] seeking a safe haven, some
are seeking better returns – and as a result of the
capital pursuing real estate, yields have dropped
SEPTEMBER 2014
and prices have jumped considerably over the last
24-36 months in the US.”
Compared to other alternative asset classes which
are perceived as being more risky, such as oil and gas
or energy, real estate is a more risk-averse investment
strategy. With a constant need for housing and commercial developments in cities across North America,
investors are scrambling to get the best deals.
Another reason the market is being driven upwards, says Haddigan, is that there is a lot of money
being deployed into the market from pension funds,
insurance companies and general debt lenders.
“Because there’s so much money pursuing real
estate, it’s becoming very competitive, so we are
finding that lenders are increasingly willing to take
higher risks,” he says.
As the cost of capital gets cheaper, better opportunities arise for developers and investors alike.
Prospects of acquiring and generating better returns
based on cheaper debt structures are becoming more
frequent.
The real estate business in general is notoriously cyclical; the global downturn in 2008 had an
inevitable and severe effect on property markets
worldwide, marking a slow crawl to recovery which
began to only really set in by 2011. But experts say
that the past couple of years have seen a new, more
risk-aware investor emerge, and their influence on
the market is growing.
Berk Nowak, partner at Highmount Capital LLC,
noted that private real estate investors in the US are
now much more conscious of factors beyond just
returns. “Liquidity, in the form of Real Estate Investment Trusts (REITs), and cashflow are much more
prevalent in an investor’s mind these days,” he says.
Newcomers to the real estate investment world
are also ramping up the levels of interest in the area,
says Wonsun Willey, tax partner at Sensiba San
Filippo LLP.
“The interest we are seeing is more on the part of
HNWIs that have not had real estate in their investment portfolios before,” she says. “These clients,
who might have built their wealth from selling their
company or taking it public, are usually interested in
diversifying their investments; they are interested in
something other than equity or mutual funds.”
THE REIT MOVE
Traditionally, investments within the property market have been made through Real Estate Investment
Trusts (REITs) – the property sector’s equivalent
of equity mutual funds. Particularly for first-time
or amateur investors, experts say REITs are a good
vehicle through which to invest.
The main benefits of capitalizing through a REIT
can be broken down into two categories; firstly, the
ability to outsource management expertise to a firm
that specializes in all of the complexities of owning
and managing a commercial property; and secondly,
K E Y M O V E M E N T S I N R E A L E S TAT E
R E G U L AT I O N
Wonsun Willey, tax partner at Sensiba San Filippo LLP
Some of our clients invest very heavily in real estate
– real estate makes up perhaps 50% of their investments. There have been several regulatory changes
in the last few years affecting these clients, including the introduction of net investment income tax
(NIIT) in 2013. The 3.8% NIIT applies to taxpayers
on their rental income if their adjusted gross income (AGI) is over $250,000
for married filing jointly and $200,000 for single filers. However, your rental
income is exempt from this tax if you’re a “real estate professional”, involved
in actively managing your real estate investments for more than 750 hours
per year across the property portfolio. You can make a one time election
to group the real estate portfolio into one activity. In 2013, we started to
monitor our clients’ property management and work out how much time
they were spending on property management like contacting the repairs
companies, reviewing lease agreement, and making other property management decisions. Those hours are documented on a log and if they exceed 750
hours per year, the client is a “real estate professional” and is not subject to
the net investment income tax.
We are also seeing more and more 1031 exchanges taking place under
Section 1031 of the United States Internal Revenue Code, as property prices
have started to increase. The 1031 exchange allows real estate investors to defer
paying tax on the gains made from a real estate sale by reinvesting the proceeds
in a like-kind property. The 1031 transactions have really become the number
one audit item for clients in California. The California Franchise Tax Board is
looking at 1031 cases very closely because many taxpayers tend to assume that
under 1031, the transaction is as simple as selling a property and investing all
your funds in a new property and there are no other specific requirements.
However, there are many requirements that they have to satisfy. The most
common mistake clients make is facilitating their own exchange, instead of
using a qualified 1031 facilitator. Secondly, not only do the funds from the
first sale have to be completely invested into the new purchase, the investor
cannot have a reduction in the liability from the first property to the second.
If you have a reduction in liability from the first to the second property, that
reduction will be recognized as gain. There are also strict timelines in place
for investors to be aware of – you have 45 days from the close of the first
property’s sale to identify up to three replacement properties, and 180 days
to close the purchase of the replacement property. The 1031 exchange is a
great tax deferral tool, but be aware of the rules and know that it is being
watched over closely by the tax authorities.” Q
it offers the capacity to diversify as the move essentially allows an individual or family office to own an
investment in numerous properties with hundreds
of different tenants across scores of different geographic markets.
Conversely, purchasing a piece of land or property
outright can be fraught with difficulties.
“Direct property purchase should be left to very
large and very sophisticated entities that have the
scale to buy enough assets in enough sectors in
enough markets to achieve diversification,” says
East. “Very few HNWIs have that scale. They typi-
13
PAM
14
SECTOR FOCUS: REAL ESTATE
cally would not know what they were doing, and the
investment outcome would be unpredictable.
“A much more practical process is to invest in real
estate stocks like REITs and developers that happen
to be public and to do this with a professional real
estate portfolio manager that knows the companies
and markets and can build a portfolio with diversification and growth opportunity.”
However, there appears to be a shift in the number
of individuals purchasing these assets directly. In
Knight Frank’s 2014 Wealth Report, North American
wealth managers and private banks reported that
71% of clients held direct ownership of their property
investments, while 23% invested through a fund.
Haddigan says that there has been a real increase in
the last two years in the level of interest from HNWIs
buying real estate directly. He says that typically, these
direct purchases will be top-tier, ‘stable’ properties,
including drug stores, department stores and quickservice restaurants – buildings which demand typically long-term leases and are easy to manage.
“HNWIs are not really buying add-value properties, they’re buying stable properties. The funds, however, are willing to take a little more risk and do some
significant redevelopments or financial restructuring
in situations where they are adding value,” he says.
“On the fund side, they are dealing with large scale,
multi-billion dollar portfolio and value creation
deals, whereas the HNWIs are buying more in the
$2-10m price range.”
Rob Gilman, CPA and co-practice leader of
Anchin, Block & Anchin’s real estate industry group,
agrees that there has been a noticeable change in the
way real estate investments are being made, and says
that HNW clients are not necessarily taking the REIT
route.
“I’m seeing them being done through real estate
syndications where a promoter puts together a
deal and they’re raising money through LLCs,” he
explains. “So an investor will put their money in as
part of a partnership, and they’ll pool their money
together. There are a lot of ‘one off’ deals being done
in this way – money will be raised for that one piece
of property and the investors will put their money
directly into the LLCs.”
A high proportion of investments are being made
in densely populated cities in North America, such
as New York, Chicago, San Francisco, Los Angeles
and other major urban areas. Where there are opportunities for blossoming jobs, retail, education
and tourism markets, there are opportunities in real
estate – both in development and through existing
properties.
“These densely populated areas are obviously
popular,” says Haddigan. “There’s more potential
tenants and on the commercial and multifamily side,
apartment buildings are being actively pursued by a
wide range of investors.”
Gilman says that on the development side, a lot of
money is flowing into the building of condos.
“The return [on a development project] will be
much greater but a little bit more risky because you
have to make sure the project actually gets completed,” he says. “However, based on where the condo
market is, especially in Manhattan, when the prices
that people are getting for these buildings are higher
than they’ve ever been, there’s a big return.”
BARRIERS TO ENTRY
Moving into the market for the first time – particularly through direct purchases – is not without its
challenges for HNWIs. With ever-increasing regulation, an incredible amount of knowledge is required
to thrive in the sector.
“Investing in a direct property purchase requires
a fair amount of specialized legal, technical and
environmental expertise, which some UHNWI’s
and family offices may have, but most don’t,” says
Swaringen.
He points out that owning property directly
comes with a whole new set of responsibilities, as
the purchase requires ongoing management, leasing
resources and expertise.
NEW YORK OFFICE RENTAL GROWTH IN 2013
Eastside 4.8%
Upper Fifth/Plaza -18.5%
Park Avenue -1.8%
Sixth Ave/Rock Ctr 11.1%
Times Sq South 7.6%
Westside/Times Sq 16.5%
Grand Central -1.0%
Penn Station 15.1%
Chelsea -25.9%
Park Avenue South 15.5%
Flatiron/Union Sq 23.8%
Village 41.9%
Lower Sixth Ave -4.8%
Hudson Sq 9.8%
Soho/Noho 4.8%
World Trade Center/
World Financial Center
0.0%
City Hall/Insurance -2.0%
Financial 2.3%
Source: The Wealth Report 2014/Knight Frank
SEPTEMBER 2014
GLOBAL COMMERCIAL PROPERTY INVESTMENT (US$BN)
1000
800
600
US$bn
“Someone has to take the calls in the middle of
the night when a water pipe bursts or when the rent
check doesn’t come in; someone has to call the tenant and ask for the rent,” he adds. “Essentially, you
have become a landlord.”
Finding the right REIT to invest in also comes with
its own set of issues to manoeuvre, with East describing the amount of confusing information which is
handed to advisors as “the biggest challenge”.
“Advisors are bombarded with sales pitches, and
since they are not in the real estate business, they
frequently lack the background or knowledge set
to make a good judgment as to what’s best for their
clients,” he explains. “For a generalist, which most
advisors are, it’s frequently overwhelming.”
Understanding a fund manager’s ability to source
and exit investments is a fundamental skill that needs
to be proven to potential investors. Because of the
risks in this field, Nowak says his firm typically seeks
organizations where they can invest on a ‘principalto-principal’ basis, meaning they have the ability to
talk directly with the leaders and key decision makers
at the management firm. This typically leads them to
boutique organizations much like their own as opposed to large institutional managers. Their comfort
with a “manager’s ability to utilize leverage effectively” is also important before making an investment.
Another stumbling block comes in the form of the
minimum fund requirements often demanded by
REITs. In order to have a diversified real estate offering, it is preferable to have investments in different
areas – a microcosm of a full and varied portfolio of
investments – but high entry costs usually hitting the
$1m mark sometimes make this an impossibility.
400
200
0
2007 2008 2009 2010 2011 2012 2013 2014 2015
(f ’cast) (f ’cast)
AS AWARENESS INCREASES ALONG WITH
THE SEARCH FOR INCOME, WE ENVISION
THE INTEREST AND INVESTMENT IN REAL
ESTATE INCREASING
ALLAN SWARINGEN, JONES LANG LASALLE INCOME PROPERTY TRUST
If a client had assets of $20m and wanted to allocate 5-10% of this to real estate, they might have an
overall budget of $1-2m to plough into the sector.
Splitting this $1-2m allocation over three to five
years, and across several funds can be tough, as fund
managers can be reluctant to accept an amount below $250,000. It would appear that UHNWIs need to
inject a large amount of cash into a fund in the hope
of getting a decent return.
Finding funds which are diversified in terms of
both management and the vintages they offer can
also be time consuming for wealth managers.
Source: The Wealth Report 2014/Knight Frank
Swaringen describes investment diversification as
“the most challenging aspect” of owning higher quality commercial real estate due to the high entry price
points for a single property ($20-$30m). In this case,
an investor keen to spread investment risk across 10
properties, would have to plough in $200-$300m as a
starting point.
Despite the hurdles the market presents, it shows
no signs of slowing down from an investment perspective. According to Knight Frank’s 2014 Wealth
Report, just 7% of UHNWIs in North America said
they would decrease their property allocation in
2014; meaning an enormous 93% expect to retain or
further grow their real estate assets.
East says that this trend is likely to continue as real
estate produces very consistent returns for investors
over long periods of time.
“As awareness increases along with the search for
income, we envision the interest and investment in
real estate increasing,” he says. “Again, the challenge
is matching the right investment to the right investor, so it places a serious amount of responsibility on
the advisor to understand what they are investing in
on behalf of their client.”
Haddigan agrees that investments into the sector
are likely to continue spiraling, predicting that as
long as interest rates stay at low levels, the US market
will remain robust for the next 24-36 months.
“Right now, most investors are optimistic that
the market is going to be strong for the next several
years,” he says. “Of course, we don’t know [what
will happen in terms of] global politics or interest
rates climbing, but at this point, the market seems to
be operating as though it’s going to be an optimum
time to be an investor here in the US in the next
couple of years.” „
15
PAM
WEALTH MANAGER FOCUS
Advisor Spotlight:
Fiduciary Trust Company
of New England
New Hampshire continues to draw attention from wealth
managers keen to take advantage of its favourable tax and trust
legislation. PAM speaks to Michael Costa, president and CEO of
XLIPEXIWX½VQXSPERHMRXLIWXEXI
O
BY STEPHANIE BARTUP
16
ver the past decade,
New Hampshire has
developed a reputation as something
of a haven for trust
managers. With
favourable tax and
investment laws,
which were implemented through the state’s Trust
Modernisation and Competitiveness Act (2006), it
has become one of the most attractive jurisdictions
in which to base such a fund.
Fiduciary Company Incorporated became the latest firm to set up shop in the state, forming Fiduciary Trust Company of New England in Manchester,
New Hampshire, in August this year. The 129-yearold firm, which is currently responsible for over
$11.7bn of assets under supervision, provides investment management, corporate trustee and financial,
estate, and tax planning services.
“New Hampshire has put a stake in the sand, and
has really set out to be the best place to create a trust
and conduct our business; as a result of the legislation, the volume of trust assets coming into the state
has increased significantly,” says Michael Costa,
president and CEO, Fiduciary Trust Company of
New England.
Costa says that as most of the firm’s clients are
wealthy individuals and families, the favourable income tax and transfer tax regulation are often points
of interest.
“Taxes really affect clients at every stage of life so
it’s important to understand and plan accordingly,
to reduce the tax burden while the client is alive and
also after they die,” he explains. “One of the things
we can avoid in this state is the generation skipping
tax, which is applied every time you pass on wealth
Michael Costa, president and CEO,
Fiduciary Trust Company of New
England
to a generation that is more than one level below, for
example, to grandchildren.”
Costa describes the tax, at approximately 40% (on
top of assets that may have already been taxed for
estate tax purposes), as “pretty extreme”. However,
under New Hampshire law, it is possible to form a
perpetual trust – something which is not permitted
in most states.
“In most states, there’s a rule against perpetuities, so trusts cannot continue on indefinitely,” he
explains. “In New Hampshire, you can set up a
perpetual or dynasty trust, and if you use the generation skipping tax exemption that’s available for each
individual [currently about $5.3m per individual, or
$10.7m for a married couple], you could potentially
set aside millions of dollars in assets that will pass on
to future generations free of transfer taxes.”
As well as heading up the company’s newest
operation, Costa is also vice president of its affiliate,
the Boston, Massachusetts-based Fiduciary Trust
Company – where he has worked for 24 years.
He says that having worked in the industry since
the early 90s, he has witnessed a change in the role of
the wealth manager over the past couple of decades.
“The most significant change during my time
in the business is probably the move toward open
architecture, which basically involves outsourcing
the actual management of the assets,” he says. “Two
decades ago, it was common practice for firms like
ours to construct very traditional, balanced portfolios, with a US-centric view of the world.”
THE MOST SIGNIFICANT CHANGE
DURING MY TIME IN THE BUSINESS IS
PROBABLY THE MOVE TOWARD OPEN
ARCHITECTURE, WHICH BASICALLY
INVOLVES OUTSOURCING THE ACTUAL
MANAGEMENT OF THE ASSETS
MICHAEL COSTA, FIDUCIARY TRUST COMPANY OF NEW ENGLAND
SEPTEMBER 2014
He says that typically, it would previously have
been a two-third/one-third split portfolio, made up
of high-quality US stocks and laddered US bonds.
Today, however, Costa reveals that Fiduciary Trust is
more focused on asset allocation and open architecture.
“Instead of that two-dimensional investment
solution of just stocks and bonds that we select
internally, our portfolios now typically include as
many as 14 different asset classes; both domestic and
international equities and fixed income, and alternative investments,” he says. “Each slice of the ‘pie’ in
those allocations is filled with top-tier managers that
we select and conduct due diligence on. That’s really
how we structure our portfolios now, and it’s very
different to how things were done 20 years ago.”
As the role of the wealth manger has evolved, so
too have the investment habits of the clients they
represent. Costa says that today, HNWIs are “much
better informed” than they were years ago, in terms
of planning and investment advice.
He attributes this development to the availability
of information over the internet and the growing
popularity of business TV news, such as Bloomberg
and CNBC, which he says has given rise to a demand
from clients for greater sophistication in planning
and investment solutions “at every level of wealth”.
“In order to compete as a wealth management
firm today, you have to offer more than just the traditional balanced portfolio of stocks and bonds; you
also have to take a global perspective in portfolio
construction,” he explains.
“In the wake of the most recent financial crisis,
our clients are certainly placing greater emphasis on
risk management, so we’re particularly focused on
managing downside risk. We think having a broader
range of investments which are not highly correlated
with each other in the portfolio really helps to truncate the loss of capital during those down periods.”
Costa adds that, over the past few years, Fiduciary
Trust’s clients have expressed a heightened interest in
alternative investments. Fiduciary Trust has grown
its commitment to alternatives over the past 12 years
or so, and now, says Costa, a typical portfolio might
comprise 20-35% alternative asset classes.
“We define those alternatives as everything from
publicly traded REITs and NASDAQ-listed limited
partnerships, to things like private equity funds,
commodities, hedge funds and so forth,” he explains.
“We use a pretty broad array of asset classes in the
portfolio.”
In terms of challenges facing the private clients Fiduciary deals with, Costa says that deciding what to
do about the fixed income section of their portfolio
is something that is currently troubling clients and
investors alike.
“At a time when global growth is really still in
question, and risk levels across the globe remain
elevated, you would normally want to have at least
Fiduciary Company Incorporated has set up shop in New
Hampshire, forming Fiduciary Trust Company of New
England in Manchester in August
a neutral allocation to fixed income and perhaps
an overweight position in bonds,” he says. “But
with yields at or near historical lows, we think fixed
income investments look unattractive.”
As an alternative, Costa says absolute return oriented hedge funds are particularly striking propositions. He explains that the firm’s portfolios have
an overweight position in those strategies at this
point, as it can provide a bond-like risk and return
profile with low correlation to traditional stocks and
bonds, and very little sensitivity to interest rates. He
describes the category as “particularly compelling” at
the moment.
The past few weeks appear to have been a period
of change for the Fiduciary brand, as the expansion
into New Hampshire was quickly followed up with a
new leadership announcement at its sister company,
Fiduciary Trust, and its parent company, Fiduciary Company Incorporated. Austin V. Shapard will
succeed Douglas R. Smith-Petersen as president
and CEO of the two companies having spent more
than eight years at global wealth management firm
Rockefeller & Co.
Although a change of management doesn’t necessarily spell major changes for the firm immediately,
Fiduciary’s north-eastern expansion and management overhaul inevitably raises the brand’s profile.
“We do think the launch of the New Hampshire
trust company has the potential to raise awareness of
our brand nationally; the opportunity for us extends
well beyond this area, because clients from all states
can benefit from New Hampshire’s trust laws”, says
Costa.
However, he adds that while not actively trying to
further its geographical spread, the firm has begun
to extend the reach of its services, with particular
attention being paid to attorneys in New York.
“There are a lot of large, wealthy East Coast-based
families that have advisors in New York,” he explains.
“Attorneys are typically a good source of referral
business to us, so it makes sense to show them what
we have to offer.” „
17
PAM
FEATURE
Added value
18
High-net-worth individuals (HNWIs) have more need for specialist
insurance cover than ever before – but their evolving collections
often fail to recognize a change in value
A
BY STEPHANIE BARTUP
s a property, collection or
wine cellar gathers dust
over time, it also gains
– or occasionally loses –
value. Yet, as these assets
prosper and change,
adequate insurance protection all too often slips
through the net.
“One of the most common pitfalls that HNWIs face is that they underestimate the value of
their home and contents when buying insurance,”
explains Mark Lee, general insurance manager at
Wesleyan.
For those underinsured, any claim could be
subject to an average clause that could significantly
reduce any pay out they receive and, in a worst-case
scenario, the cover could be withdrawn completely
and declared void.
“Unfortunately, the first time they often discover
there is a problem is when they need to make a
claim,” adds Lee.
With a growth in value comes an increase in
clients’ financial exposure should a loss occur. This,
combined with the growing number of natural disasters in the US in recent years, such as the increase
in frequency and severity of wildfires in the western
US, highlights the crucial role that insurance can
play in protecting a family’s wealth.
HOME AND AWAY
Experts say the issue of under-insurance has become
more prominent in the past few years, during which
time HNWIs have tended to spend more of their
money on passion investments, such as jewellery,
cars, antiques and luxury travel, rather than investing their entire asset allocation in more traditional
means.
“The kind of products [we are seeing more
interest in] have a greater emphasis on valuables,
including jewellery and antiques, and many tailored
policies now include jewellery and fine art appraisals,” says Lee. “We’ve seen an increased demand for
fleet car insurance as families find it can be cheaper
to put all of their vehicles on one policy rather than
insure them separately.”
Roy Ballentine, CEO of multi-family office Ballentine Partners, says that insurance needs for such
luxury items have increased recently; and adds that
covering valuables in transit between various locations or between bank vaults and homes has also
become more of an issue for high-net-worth clients.
Although moving valuable goods from one location to another can be covered under one policy,
the insurer will require that a certain amount of
notice is given before the removal can take place – if
they fail to do so, their assets will not be adequately
covered.
“The logistics are heavy going,” says Ballentine.
“There might be 150 pieces of jewellery in some
HNWIs’ collections – how you go about correctly
identifying which piece is out of the vault at any
given time and where it is supposed to be located, is
a significant undertaking. They have to be photo-
ONE OF THE MOST COMMON PITFALLS
THAT HNWIs FACE IS THAT THEY
UNDERESTIMATE THE VALUE OF THEIR
HOME AND CONTENTS WHEN BUYING
INSURANCE
MARK LEE, WESLEYAN
SEPTEMBER 2014
graphed, catalogued, numbered; then the catalogue
must be distributed in a secure way and kept up to
date. It’s a complex process.”
As well as moving objects from country to country, HNWIs’ personal travelling needs also have to
be properly assessed and insured.
“It would not be unusual for one of our clients
to own a home in New York, and a pied-à-terre in
London or vacation villa in Mexico, or live in Boston
and have a yacht domiciled in the Cayman Islands,”
says Jerry Hourihan, president AIG private client
group, US and Canada.
While each of these homes might be safe to travel
to and from, high-net-worth clients will inevitably
have to travel through more perilous parts of the
world.
“At this point, getting things like medical insurance worldwide, evacuation and liability can be a
challenge,” acknowledged Ballentine. “Some families’ reviews of insurance can take years to complete
– there are a lot of pieces to the puzzle.”
UNUSUAL ARTEFACTS
Alongside the insurance needs of individuals and
their expanding or evolving collections are the more
quirky, one-off pieces that need adequate insurance. Ballentine says antique cars can be a particular
problem because they are often still roadworthy,
making it difficult to insure them for a collectiononly purpose.
“We have clients who literally own one-of-a-kind
vehicles, so they are irreplaceable,” he adds. “However, they are very active auctions with cars that
rare, so they change hands often enough. From that
perspective, they’re not that difficult to value, but it
can be challenging to insure.”
In some cases, though, an extraordinary piece
cannot be given an appropriate value. Lee says although Wesleyan is a bespoke provider of insurance
products, there are some instances where it is difficult to put a true value on unique or unusual items.
He gives an example of a collector of space memorabilia who asked the company to cover a spare part
from astronaut Neil Armstrong’s spacesuit.
“It could have been seen as a worthless piece of
equipment that NASA no longer needed, but its
connections to the lunar landing, even though it
didn’t actually go to the moon, meant it had a high
value, albeit one that was difficult to measure,” he
explains.
“In cases like this we would look at what the
owner paid for it, taking into consideration whether
it was a charity auction as well as looking at the
market value of other similar items or items with
similar connections. We would also ask experts to
offer their opinions on the value as well.”
MITIGATING THE RISK
Along with using insurance as a risk transfer tool,
insurers say they are also seeing increased demand
for risk management services; in a bid to mitigate
risk by alternative means, HNWIs are seeking out
methods to reduce the size of insurance premiums
and the number of policies needed by becoming better informed and changing their habits.
Hourihan says that the risk management enquiries range from background security checks for personnel employed by clients, to Cardio-Pulmonary
Resuscitation (CPR) training for their staff, to ‘specialized preparedness’ programs aimed to minimize
damage from wildfires and hurricanes.
Lee adds that if a client has a substantial wine
collection, their insurance broker can advise how
to store it properly so the wine doesn’t spoil or
depreciate in value – reducing, but not negating, the
likelihood of an inappropriate insurance claim being
made.
SOME FAMILIES’ REVIEWS OF INSURANCE
CAN TAKE YEARS TO COMPLETE – THERE
ARE A LOT OF PIECES TO THE PUZZLE
ROY BALLENTINE, BALLENTINE PARTNERS
19
Going forward, the role of insurance is only set
to grow in the lives of high-net-worth clients. With
constant evolutions and advances in technology,
concerns over adequate online protection – in terms
of financial transactions, privacy and cyber-crime –
will continue to grow.
As the age of HNWIs lowers and younger people
become more affluent, the array of electrical gadgets
they use to conduct business becomes more hi-tech,
often leading to gaps in the types of insurance cover
purchased.
“Covers protecting identity-related crime will
become more prevalent as more people enter their
personal information online and hackers and criminals become more sophisticated,” says Lee.
Hourihan adds that with so much personal
information now available and accessible online,
high-net-worth individuals may be exposed “simply
through their digital and social media activities”.
“Cyber liability will certainly be an ongoing concern,” he predicts.
As the insurance needs of HNWIs grow with the
advancing 21st century, Ballentine says that the
demand for specialist products will continue to soar.
He names international insurance, personal liability,
and insuring young adults from wealthy families
on cars and properties for the first time they leave
home, as the products he sees growing in demand.
“There are more wealthy families out there now –
that means more demand for these insurance types,”
he says. “And that demand will only grow.” „
PAM
COMMENT
SEPTEMBER 2014
Making a
splash
The unprecedented amount of viral publicity that the ALS
ice bucket challenge garnered last month has encouraged
high-net-worth clients to think about their philanthropic
habits, says Ken Nopar, founder of Nopar Consulting
20
D
uring August, the ALS
ice bucket challenge
raised over $100m,
which is more than five
times the amount the
Amyotrophic Lateral
Sclerosis charity raised
in the whole of 2013.
Because of the huge amount of attention the event
has received, one of the unexpected benefits is that it
has provided a unique and natural opportunity for
financial, tax, legal and family office advisors to talk
with both their current and prospective clients about
their charitable plans.
Many clients wait until the last few months of the
year to plan their charitable giving, but the attention that ALS has received has caused a number of
them to think much earlier than normal about their
own favorite charities and how they should support
them. Though ALS has been the primary beneficiary
of the attention and donations, other non-profits
will also consequently benefit.
Most clients recognize that support for ALS is
worthwhile, but many wish that their own favorite
charities could be the beneficiaries of the avalanche
of attention and donations. Some may even fear that
the organizations they support may suffer because
other donors will divert their charitable dollars to
ALS, but like donations after disasters, donors have
contributed to ALS in addition to and not in place of
their usual contributions.
The attention that the ALS challenge has received
provides an opening for advisors to talk with their
clients now about their charitable giving plans not
just for this year, but also for the future. Numerous
studies have shown that clients would like their advisors to proactively engage them in this discussion.
However, some advisors have been reluctant or
uncomfortable about initiating the charitable conversation, even though it is essential to understand their
clients’ charitable intentions in order to provide them
with the best short-term and long-term financial, tax
and legal advice. Starting this conversation earlier this
Albuquerque, NM, Mayor Richard Berry takes part in the challenge
Nopar Consulting
advises and trains wealth
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year will allow both advisors and their clients to minimize the year-end stress of deciding where to give,
which assets to contribute, who should be involved,
how to give, how much to give, and even why to give.
Having these discussions at the very end of the year
often limits the advisors’ ability to utilize certain assets for charitable contributions or create appropriate
charitable vehicles, although many donor-advised
funds can be opened within a day.
If advisors are looking to talk with clients about
their charitable plans, ALS has provided an opportunity. Simply asking them whether they or anyone
they know took the ALS challenge will encourage
them to talk about their feelings about the event, and
evolve into a discussion about their own charitable
plans and favorite non-profits.
Finding out whether a client is currently involved
with any non-profit organizations, and in what
capacity (for example, donor, volunteer or board
member), and finding out their timeframe for
giving, how much and which donations the client
would like to make will all be additional questions
following on from the conversation.
There will be more information to garner from
high-net-worth philanthropists, such as whether
there are any donations they have made and later regretted or conversely, left them particularly satisfied,
whether they have considered donating non-cash
assets, and whether they have any charitable vehicles
in place such as a donor advised fund or private
foundation and whether these work well for them.
Once advisors have determined their clients’
charitable intent, they will be in a better position
to make recommendations to help clients achieve
their charitable goals, as well as allow the advisors to
bring in additional assets under management. This
discussion can also deepen and create a longer-term
relationship with clients as they will appreciate the
advisors’ efforts to help them, as well as the causes
and non-profit organizations that are most important to them. „
PAM
COMMENT
SEPTEMBER 2014
Focusing through the
right lens
T
Jordan Waxman, managing director, partner, HSW Advisors, HighTower, discusses his approach to advising
athletes and entertainers
he stories of professional
athletes and entertainers
who, through mistakes or
mismanagement, squander
their fortunes and end
up young and broke, are
numerous.
Armchair quarterbacks
and rookies can claim they know better, but the
potential pitfalls are plentiful, and the business of
advising these young professionals has not evolved
enough over the years to change the statistics. The
following is a primer on how we advise this group of
talented individuals and families with unique needs.
The body of the camera through which we view
this discipline is something my father imparted to me
before I began in this business 20 years ago: “Everyone puts his pants on one leg at a time.” The takeaway
here is that our clients should all be treated as ultrahigh-net-worth individuals in need of sophisticated
independent financial, tax, legal and investment advice – regardless of whether they are Hollywood stars,
pro athletes, business executives or entrepreneurs.
In our experience, most advisors who have famous folks as clients are what my partner, Ken Hoffman, calls ‘blind squirrels’. They may have one or
two such clients, and focus on investing the client’s
assets without an integrated, panoramic approach.
So, the next order of business is to apply the specific planning lenses through which we concentrate
our efforts:
• Career length and retirement: Consider that most
families that accumulate wealth do so over a long
career and look to retire in their 50s, 60s or 70s,
living off pensions and portfolios for an average of
20 years. Most young stars have careers of indeterminate length, and very long retirements of up to
50 years. It is therefore critical to understand the
arc of a meteoric career, and importantly to tailor
changes in risk-taking, planning and investments
to coincide with these stages.
• Understanding and modulating through the arc
of a career: Although the first professional contract
differs in tenor depending on the sport or entertainment division (size, frequency of payments, percentage guaranteed), it nevertheless has the common
thread that it is the largest income the individual
– and often the family and client’s community – has
seen. This creates a sense of obligation for the pro to
take care of others, and from our perspective, an urgency to create financial literacy around budgeting,
taxes, disability planning and making smart choices
according to their lifestyles. The next contracts (if
any), while successively more lucrative, may not
come with guarantees. As the earnings and savings
increase, the attention to taxes, wealth transfer,
philanthropy, insurance and asset protection, figure
more prominently.
• Security needs: Proper planning for substantial families always includes protecting assets from potential
creditors, litigants and (heirs’) spouses. However, by
their notoriety, and the perception of their wealth,
famous clients are clear targets for every frivolous
lawsuit imaginable; from paternity suits to personal
injury. It is critical for the advisor to be fluent in
asset protection techniques or at the very least ally
with sophisticated legal counsel to implement the
structures that will ring-fence liability and save
money, energy and time. These public personae also
need all types of security: personal as well as financial. As well as facilitating family security for home
and travel, advisors must provide a secure repository
to digitally store sensitive files and documents.
• Protecting the legacy: Whether a client is a
computer programmer, chef, physician, athlete or
entertainer, wealth creators face the real challenge
of protecting and transmitting their values and
wealth across generations. A critical discipline we
employ is values-based planning, through which
we facilitate the creation of a unified family mission statement, a set of common core values, and
the specific action steps that reinforce the family’s
identity and the legacy they wish to leave.
• Taking the last shot: Star-struck advisors are of limited use to famous clients. They end up focusing on
the wrong subject. Undoubtedly, to properly advise
athletes and entertainers takes focus and knowledge
of circumstances during their professional careers
while the cameras are clicking. However, it comes
with the ultimate responsibility of understanding them as people, with the same needs as other
substantial families, and the same mortal concerns
about life, health and security as every fan. „
21
PAM
SEPTEMBER 2014
SERVICES DIRECTORY
CONTACT Natasha Pearl, CEO / [email protected] / +1 (212) 289 6700
Deborah Mariani, Manager / [email protected] / +1(212) 289 6700
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www.astonpearl.com
CONTACT Paul Funk / [email protected] / +1 (212) 504 1884
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www.crystalco.com
CONTACT Jacqueline Valouch, VP, Charitable Planning Consultant / New York / +1 (212) 335 6432 /
[email protected] / Stephen Brooks VP, Charitable Planning Consultant / San Francisco /
+1 (925) 407 6737 / [email protected]
*MHIPMX]'LEVMXEFPIERMRHITIRHIRXTYFPMGGLEVMX][MXLEREXMSREPHSRSVEHZMWIHJYRHTVSKVEQLEWLIPTIHEHZMWSVWERHXLIMV
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www.FidelityCharitable.org
22
CONTACT [email protected] / +1 (646) 414 6945 / 1251 Avenue of the Americas New York, New York
10020 / [email protected] /+1 (973) 597 2366/65 / Livingston Avenue, Roseland, New Jersey 07068
0S[IRWXIMR7ERHPIVTVSZMHIWEJYPPVERKISJLERHWSRMRRSZEXMZIPIKEPWIVZMGIWXSEKPSFEPGPMIRXIPISJLMKLRIX[SVXL
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www.lowenstein.com
CONTACT Diane Giles, 1166 Avenue of the Americas, New York, NY 10036
+1 (212) 345 3618 / [email protected]
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ww.marshpcs.com
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2013
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