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Asset Allocation and Business Owners - Dec. 2011

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Asset Allocation and the Business Owner: Is Your Wealth Management Strategy Ignoring Your Biggest Asset?

Asset Allocation and the Business Owner: Is Your Wealth Management Strategy Ignoring Your Biggest Asset?

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  • 1. Asset Allocation and the Business Owner: Is Your Wealth Management Strategy Ignoring Your Biggest Asset? By Christopher G. Didier and Brian L. Beaulieu SynopsisPerSPeCtIve Although the outcome is highly individualized, the goal of wealthA Business Owner Protects His management is to design a well balanced portfolio. Recent research hasWealth Against the Ups and Downsof the Family Business highlighted the need to go beyond the basics by considering alternativeIn the summer of 2002, Paul, a business investments and tax implications in any asset allocation strategy. But,owner, reflected on his success running the for a business owner, the business should be the first consideration ofhome-building company founded by his effective wealth management. While the business may often be ignored,father in the 1970s. Under Paul’s leadership it is crucial for any asset allocation strategy to integrate the businessand ownership, the company was on its wayto becoming one of the largest privately as one of the owner’s biggest assets. The objective of this paper is toowned home builders in the country. Paul provide the business owner, and their financial advisor, with guidanceestimated his net worth at $50 million, with and a methodology to do so. This paper is written to the business owner.more than 90 percent coming from hisshare of the company’s value. Paul was also However, the concepts presented could be easily applied by anyone whosereceiving substantial yearly distributions. wealth is derived from either a private or a public company.In the past, he had always reinvested the Critical Observationsbulk of the distributions back into thecompany, but remembering how hard • Many business owners do not consider their business assets in thethe last real estate bust had been on his context of their overall investment portfolio.father, Paul asked his Advisor for thoughtson diversifying his investments. Since Paul • Many business owners overestimate their personal level ofwas committed to continuing to grow diversification.his business and had no desire to sell, hisAdvisor suggested that he begin to build a • Many business owners underestimate their risk exposures.portfolio outside of the company, fundedwith a portion of his yearly distribution. • To avoid overexposure to risk, business assets should be considered in constructing the asset allocation of any investment portfolio.In constructing an investment portfolio,however, it was crucial for Paul to not merely • There is a method that can be used to easily factor in mostput together a balanced portfolio across businesses to the asset allocation decision when constructing andiversified assets classes, but also to designa portfolio that would behave differently investment portfolio.from that of his home-building company. (continued)
  • 2. The Problem: Ignoring Business We find all too often that the business (continued from previous page) Assets in Developing an is ignored in wealth managementPaul’s Advisor reasoned that it would be Investment Portfolio planning, diminishing the benefitsimpossible to protect his wealth from of diversification and creating The goal of effective wealththe ups and downs of the business if the management is to design a well- unnecessary risk to the businessbusiness were not considered. balanced portfolio. Although the owner’s wealth preservation strategy.As the home-building industry continued process and outcome are highly If you are a business owner, it isto grow and his business prospered, Paul’s individual, all wealth-management crucial for your asset allocationinvestment portfolio remained steadywith good returns, but with much slower planning begins with such basics as strategy to integrate your business asgrowth than that of his business. From your age or life stage, time horizon, one of your biggest assets.time to time, Paul needed to be reminded risk tolerance, cash needs, and aby his Advisor just why his portfolio was Occasionally, it makes sense not to review of your financial assets with diversify. Entrepreneurs, for example,structured the way it was and why he the end result being the development may be in a wealth-creation mode andwas not getting the same returns that hisbusiness was producing. of an appropriate asset allocation so focused on growing their business strategy. Recent research has that they typically concentrate allFast-forward six years to 2008. the housingbubble had burst, and many home builders highlighted the need to go beyond their assets into their company. Theywere filing for bankruptcy. Although Paul’s traditional financial assets, such as nurture the business carefully as itbusiness may not be worth what is was stocks and bonds, when assessing an grows and hope they can generateat the peak of the housing boom and asset allocation strategy, recognizing maximum returns. They usually don’tperhaps not what it was worth in 2002, the need to also consider alternativehis company will remain successful in the invest outside their company. asset classes like real estate, privatelong run because Paul has made good equity, hedge funds, commodities and Established business owners,business decisions. even an individual’s lifetime earnings however, typically begin movingAnd, since Paul’s investment portfolio was potential. While still in the embryonic into a wealth-preservation mode atdesigned to behave differently than thehome-building industry, it’s riding out the stages, the implication of taxes in some point. They have already builtroiling economic changes with modest but allocation decisions is being studied their companies into sustainablepredictable growth. Paul is grateful that, as well.1 entities, and they may be interestedwith the assistance of his Advisor, he has in harvesting some of the wealth theydeveloped a portfolio that can help protect It is clear there are many have created. Some look to create anhis family’s long-term wealth, regardless of considerations when developing an investment portfolio outside of theirthe recent downturns in his business. allocation for any individual, but company because they are concernedUnfortunately, not every family business for those whose wealth is primarily about the risk of the business whileowner has considered the consequences derived from a business they own, others are simply looking for a placeof betting all their wealth on investments the business should be the priority.that are likely to follow the same trends to invest their excess cash.affecting their business. Simply beingbalanced and diversified across asset 1 See:classes and investments may not be Indjic, Drago – “Strategic Asset Allocation with Portfolios of Hedge Funds” AIMA Journal, December 2002.enough to ensure wealth preservation; Idzorek, Thomas M. – “It’s now possible to prove that private equity has a place in a diversified collection ofit has to be effective. effective wealth assets” Morningstar Advisor, Winter 2008.management and asset allocation starts Van Eck Associates et al “Asset Allocation: Consider the Commodities You Already Own” Seeking Alpha,with understanding the expected market November 2007.cycle of your biggest asset, your business. Ibbotson, Roger G.; Chen, Peng; Milevsky, M.A. and Zhu, Xingnong – “Human Capital, Asset Allocation, and Life Insurance,” May 2005. Yale ICF Working Paper No. 05-11.then you can use that knowledgeto design a balanced and diversified Reichenstein, William – “Calculating After-Tax Asset Allocation Is Key to Determining Risk, Returns, and Asset Location,” Journal of Financial Planning, July 2007.investment portfolio that helps protect Horan, Stephen M. – “Applying After-Tax Asset Allocation,” The Journal of Wealth Management, Fall 2007.your family’s wealth against overexposure Wilcox, Jarrod; Horvitz, Jeffrey E and diBartolomeo; Dan – Investment Management for Taxable Privateto those same cycles. Investors The Research Foundation of CFA Institute 2006. -2-
  • 3. Overlooking the Elephant be difficult to find reasonable data for in the Room the business that can be easily For many established business owners, compared. Many privately held their business often represents their companies are highly specialized or single greatest asset. And since wealth are in a niche market, or both. In preservation requires balance and other cases, businesses might be serving diversification, that business must be an emerging industry. Unlike public considered in designing their investment companies with stringent reporting portfolio. It’s the elephant in the room – requirements, financial data about ignored surprisingly often, despite its size. private, closely held companies may not be easily accessible. Even when data is John Ward is a Clinical Professor readily available it can be extremely time and Co-Director of Northwestern consuming to model. When asked in a University’s Kellogg School of Generally, advisors and other recent survey why portfolio Management Center for Family business consultants understand construction was becoming more Enterprises. He has consulted with a the risks associated with a difficult, the top three answers given number of owners of family businesses concentrated asset; in fact, by financial advisors were: greater and based on his experience says that they are often the ones who product selection, more time “most business owners are concerned recommend diversification to the consuming and complicated advice about the risks within their business business owner to begin with. topics.2 The response seems to reinforce and work to reduce their risk exposure the idea that some advisors may not through diversification.” However, have the time, skill-set or resources to Professor Ward also says “it is rare that adequately model the business an owner considers the performance component into asset allocation. behavior of their investment portfolio relative to their business.” 2. Illiquidity – Some owners don’t regard the business as part of their Generally, advisors and other business investment portfolio because typically consultants understand the risks it’s an illiquid asset. Since such associated with a concentrated asset; businesses are usually not on the sales in fact, they are often the ones who block, they are not considered by recommend diversification to the accountants and financial advisors business owner to begin with. Why, as “marked to market,” that is, then, are businesses “not considered or they have not been valued for the overlooked in business owners’ invest- potential amount they would bring ment portfolios,” as Professor Ward says? on the open market. To owners, and Reasons a Business May Be those who advise them, the portfolio Bypassed in Asset Allocation becomes something separate from the 1. Hard to Compare – Most often, business. They regard the portfolio financial advisors don’t attempt to as the place where they invest model the business component into distributions they take from their the asset allocation and determine business, not as something that should how its performance relates with other be complementary to the business. assets in the portfolio because it can The implications can be serious given2 Investment Management Consultants Association and Cerulli Associates, Spring 2008 -3-
  • 4. the current focus on the inclusion of my business.” (See “The Fear ofThe Fear of Losing Control of alternative asset classes such as Losing Control,” in sidebar at left). private equity, hedge funds and 4. Calling in a Cadre – SomeBy nature, business owners are real estate in many asset allocation business owners believe they arereluctant to surrender their strategies. These non-traditional achieving portfolio diversificationwealth to someone else, says Sara asset classes often have their by hiring several different moneyHamilton, CeO and founder of the own liquidity risks which, if not managers to invest their non-Family Office exchange (FOX). FOX considered along with illiquidity business assets. But often, theseprovides research, education and of a business, may unintentionally money managers are thinking alikeadvice to more than 500 members compound the liquidity problem as and buying the same or similarin 22 countries, who represent assets, which means the owner isfamily business owners with a whole. now overexposed to the sameassets ranging from $30 million 3. Familiarity and Control – investment risks. Unfortunately,to several billion dollars. Business owners make the major this approach still ignores theIt comes down to a matter of decisions in their businesses. elephant in the room. If thecontrol, she says. They are accustomed to being in performance of those investments control, and they are confident in has a high correlation with the“Someone who launches a their judgments. While confidence performance of their business, asbusiness is almost always a driven, is good, over-confidence can they often do, the risk exposure topersistent, insistent person who lead an owner to underestimate the business owner may be muchlikes being in control,” she says. the risk in their business and, more than was anticipated.“that’s why they don’t go work forsomeone else. they think: ‘I know correspondingly, his or her need Including Your Business inhow to build furniture. I know to better balance their portfolio. Your Asset Allocation Strategy:how to take care of my clients. I’m This “control” mindset has further 3 Important Stepsin control of managing business implications on their portfolio Despite these obstacles, we havedevelopment.’” strategy as well. Since non-business found it is quite possible to apply financial investments are beyondFor the same reason, she says, certain techniques to model mostbusiness owners don’t quite trust their control, they can be out of any business into an asset allocationfinancial markets; the outcome their comfort zone and may feel strategy. The three-step processis out of their control. “turning uncharacteristically hesitant. Faced described below is not an exactcontrol of their wealth over to with this, business owners will science, but it will allow you to bettersomeone else is a foreign concept. typically either stick to investments understand how your investmentInstead, they may reinvest they are familiar with, or they may portfolio relates to your business,everything they’ve got back into defer entirely to their financial which will put you in a better positionthe business so there isn’t a lot of advisor for portfolio strategy and to manage your risk exposure.liquidity. It’s the known versus the construction. Finally, businessunknown,” she observes. owners may not feel the need to 1. Create a Business Market Indexthe ability to deal with the known discuss their business with the Similar to the way indices areand the imperative to invest only advisor since the business is already built for businesses to use for under control. This ultimately canin things they can control may benchmarking and trend purposes, result in the advisor creating aexplain why so many business- your company’s data can be analyzed portfolio of investments withoutowning families often invest their and compared against industry data any consideration of the business.non-business assets in real estate, and macroeconomic indicators. Every The advisor may even hear theHamilton says, citing research business owner say “You take care company, large or small, public orFOX has done on typical asset of the portfolio and I will take care private, experiences up and downallocations. cycles. Your company’s business cycles (continued) -4-
  • 5. and what influences them can be your business would be considered (continued from previous page) estimated along with how the sales non-cyclical and thus will have a“they feel most comfortable rates change over time. By examining lower correlation to the economy.putting liquid assets into real this data you can determine: But that’s not necessarily true of allestate versus marketable service industries. For example, the • where your company is in thesecurities. real estate is tangible, financial services industry is obviously business cycleconcrete, it’s under their control, tied closely to the equities market andand they’re used to buying real • which indicators actually lead likewise the economy.estate in their business. they’re your business, and First, we look at the markets in whichnot as trusting of the financial • where you can expect your company the business operates and competes,markets. they like owning physical to be in 12 to 24 months. and then we work on creating aassets.”Another foreign concept tobusiness owners and business- Example Business Market Analysisowning families is the idea of SALES INDICATOR 115viewing the company not only 145as an asset but also one that issubject to risk from market swings 130 110and other factors.“A business owner never feels his 115 105own business is a risky venture,”Hamilton continues. “Hardly ever 100 100do they see risk in what they ownand manage because they’re 85 95totally in control.” For the same Company Salesreason, they may resist taking Indicatoradvice from someone else, she says. 70 90 99 00 01 02 03 04 05 06 07 08“Yet almost every financial advisorI know, when they talk to abusiness- owning family, is To determine when future sales highs weighted Business Market Indexdefinitely talking to them in and lows may occur, this analysis (BMI) to reflect the company’s degreethe context of the business compares your company revenues with of involvement in those markets.and the risks involved in that a selection of economic indicators. Let’s say a company’s products orcore business. But the idea of It’s not enough to simply know sales services are sold to these markets:comparing their company against trends. It is imperative that the future 50 percent of sales go to industrialother assets whose economic sales highs and lows, which affect markets, 19 percent to law firms,cycles correlate with that of the business valuation, are considered 17 percent to accounting firms andbusiness is just not something within the context of other assets. 14 percent to “other.” We look formany business owners have The type of business drives the external data to reflect the business-thought about.” process. A manufacturing business will cycle behavior of each identified market.But perhaps it’s time to consider it, typically have a higher correlation to If sufficient company data are available,she says. the economy, much the same way the we can actually test the relationships equities market tends to perform. By before constructing the BMI. The contrast, if you operate a law firm or “other” category would probably be one that’s tied to the legal industry, allocated to a general category, such as -5-
  • 6. GDP, if it’s deemed to have some indexes we established, we can create a cyclicality. If “other” has no discernible weighted BMI of that company. business-cycle relationships, it’s desig- By examining historical returns and nated as a non-cyclical business measure. volatility of the BMI it is possible to This example will apply in many cases, model future returns as well as the ups Defining Correlation – but sometimes a broad sales-market and downs, or volatility, of the business. In designing an asset allocation designation needs to be better defined. It won’t be a perfect benchmark, but strategy, financial advisors may chart In the above example “Industrials” can it’s a close approximation – and a far how a group of assets correlate, or comprise a wide variety of products, better option than not considering that perform against each other over each with different business-cycle business at all. time. If a portfolio is well-balanced, behavior. For instance, the business cycle each individual asset class within the 2. Build a Correlation Matrix of the commercial aircraft subset may be portfolio can be expected to vary in Once the Business Market Index that is performance. two assets A and B can quite different from that of the power generation subset, or that of a metal- reflective of a company’s business cycle have a correlation that ranges from -1 to is determined, a correlation matrix that 1. For example, if Asset A is up and Asset working business, or one that produces B is also up, they are said to be positively compares the company’s performance a product for the housing industry. correlated. If A is up, but B is down, they against the performance of other Before we can construct a business-cycle financial assets is created. This lets the are negatively correlated. If they increase together in equal amounts, then they benchmark for the business, our job is owner see which assets are more highly have a correlation of +1. If they move in to find these differences. Then, when correlated to the business. For example, equal amounts in the opposite direction, we’ve determined what the end-market a correlation matrix for a “Sample they have a correlation of -1. components should be, we research Company,” a national distribution relevant data streams. We standardize company, is shown in Table 1. From the the data so that the market activity table you can see that, on a relative basis, is expressed in a common unit, most International Equity has the highest often by indexing each of the series to a correlation with the Sample Company at common base. By applying the weighting 0.38 while Intermediate Taxable Bonds scheme to each of the market component has the lowest correlation at -0.40.tABLe 1Correlation Matrix Large Cap Small Cap International Emerging REITs High Yield Intermediate Cash Commodities Hedge Fund Sample Equity Equity Equity Markets Bonds Taxable Bonds of Funds CompanyLarge Cap Equity 1.00 0.88 0.69 0.61 0.59 0.53 0.18 -0.03 -0.27 0.46 0.37Small Cap Equity 0.88 1.00 0.62 0.72 0.68 0.59 0.08 -0.04 -0.14 0.53 0.18International Equity 0.69 0.62 1.00 0.58 0.49 0.42 0.14 -0.12 -0.18 0.38 0.38Emerging Markets 0.61 0.72 0.58 1.00 0.34 0.50 -0.26 -0.12 -0.14 0.59 0.03REITs 0.59 0.68 0.49 0.34 1.00 0.54 0.36 -0.11 -0.22 0.22 -0.02High Yield Bonds 0.53 0.59 0.42 0.50 0.54 1.00 0.27 -0.05 -0.31 0.25 0.08Intermediate Taxable Bonds 0.18 0.08 0.14 -0.26 0.36 0.27 1.00 0.19 -0.11 -0.13 -0.40Cash -0.03 -0.04 -0.12 -0.12 -0.11 -0.05 0.19 1.00 -0.01 0.10 -0.14Commodities -0.27 -0.14 -0.18 -0.14 -0.22 -0.31 -0.11 -0.01 1.00 0.12 0.12Hedge Fund of Funds 0.46 0.53 0.38 0.59 0.22 0.25 -0.13 0.10 0.12 1.00 0.34Sample Company 0.37 0.18 0.38 0.03 -0.02 0.08 -0.40 -0.14 0.12 0.34 1.00 Intermediate Taxable Bonds has International Equity has highest lowest correlation with correlation with Sample Company Sample Company -6-
  • 7. We can then use the correlation matrix understand how your company behaves to build an overall asset allocation that’s relative to other asset classes you can better structured. To be fully balanced, balance your risk exposures. the owner would want to invest more Some scenarios: heavily in asset classes with a lower • A real estate developer would want correlation to the business and start a portfolio with a low correlation to avoiding asset classes that are more real estate. We’ve observed that many highly correlated with the business. business owners choose to diversify by Put another way, owners and their building a portfolio of assets they may advisors would look for assets that have be more familiar with, such as real as low a correlation as possible – perhaps estate or private equity. Unfortunately, even a negative correlation to their a large component of most businesses business. The goal is to make sure the is already significantly invested in realIt is critical to understand how owner isn’t overexposed to swings in the estate – in an office, warehouse oryour business behaves relative business cycle. manufacturing plant. So diversifyingto your other holdings, or, how This might suggest that instead of by adding more of what you areit correlates with other types of heavily investing in real estate or a familiar with may not be diversifyingfinancial assets. portfolio of domestic equities, other at all. investments need to be considered. • If profits of your business get squeezed These might include traditional as when commodities, such as energy well as high-yield bonds; stocks and and raw materials, are rising, it may bonds of international and emerging make sense to include commodities markets; and alternative investments in your portfolio. On the other such as private equity, hedge funds, hand if you owned a company in the and commodities like gold, oil and energy business, you should actually corn. We realize that some of these restrict your portfolio managers from investments may be abhorrent to some investing in commodities and other business owners because they may be sectors, such as emerging markets, unfamiliar to them, or the return that may be linked to commodities. potential may not be what they’re used Should the commodities continue to in their business. However, if real to rise, in either case your exposure estate or equities suddenly headed down would be balanced. in value, inclusion of some or all of these • It is important to understand what types of investments should buffer the sectors are dominating returns in total portfolio against a meltdown. the equity markets. In the 1990s, 3. Balance Your Risks technology companies comprised It is critical to understand how your a substantial part of the S&P 500. business behaves relative to your other If you had a tech business whose holdings, or, how it correlates with other success was based on selling into that types of financial assets. That way, you industry, you may not have gotten can avoid being overexposed or heavily the balance you thought by simply concentrated in assets that mirror your investing in a broad market equity company’s business cycle. Once you fund that benchmarked itself against the S&P 500. -7-
  • 8. erging Markets High Yield Bonds • Your business and the real estate you that generated net proceeds of $4.1 own are considered to be illiquid million in cash. The owner decides to assets. That is to say there is no active consult with a professional advisor to market in which you could easily and get some input on how a portfolio of immediately turn the asset into cash. $5 million (the stock portfolio plus the You will need to balance that lack of new cash) should be invested. liquidity with more liquid assets in The owner informs the advisor that he your investment portfolio. So even is looking to diversify and invest the if an asset class has a low correlation money in something that will provide POrtFOLIO A 3 with your business, you may need to a reasonable return. As the business has REITS limit the amount of that asset class in been doing very well there is no need your total portfolio in order to balance for any income from the portfolio so the Small Cap Core 5% your overall liquidity risk. return can be reinvested. Large Cap 15% 40% Core Assuming the owner’s financial advisor Bringing it All Together to Better Manage Your Risk Exposure has adopted a model focused on International 20% asset allocation, a typical portfolio Equity Every company, large or small, public or recommendation might be a diversified private, experiences up and down cycles. 20% group of asset classes including domestic With careful data collection, these and international equities, some bonds Intermediate Bond cycles can be forecasted fairly accurately and perhaps some real estate. It may to help owners plan and maximize look very similar to Portfolio A. the profits of their businesses. In the same way, that type of knowledge can Based on historical data, Portfolio A has POrtFOLIO B 4 also help owners plan and increase the produced a reasonable return and has High Yield Bonds performance of their total portfolios. not gone down as much as the rest of Small Cap Core the market during bad times. Looks OK 5% Let’s look at an example of how 5% right? Or is it? Commodities Intermediate this might work in practice: Take a 10% 50% Upon examining a correlation matrix, Bonds distribution business that is currently Emerging worth $20 million. The owner has developed using the company’s BMI, 10% Markets total real estate holdings, including and comparing it to Portfolio A, you his primary residence and a vacation would find that most every asset class 20% home, of $2.5 million. He has a modest in the portfolio has a relatively high Cash correlation with the business. This investment portfolio of individual stocks and mutual funds that he means that it is fairly likely that the bought over the years from his broker portfolio will move, at least directionally, totaling $900,000. The owner recently in lock-step with the business. When the completed a sale and lease back of the business underperforms, the portfolio building where his business is located returns will likely be poor as well. 3 Portfolio A is a hypothetical portfolio with an annualized return of 8.05% over the 10 year period 1/1/1999 to 12/31/2007. The maximum one year decline was 25.03% over the same period. The indices that were used to construct and back-test this portfolio and corresponding asset class were as follows: S&P 500/Large Cap Core, U.S. Small Cap Stocks/Small Cap Core, MSCI EAFE/International Equity, FTSE NAREIT/REITs, LB U.S. Aggregate/Intermediate Bond. This information has been obtained from sources we believe to be reliable. We cannot, however, guarantee its accuracy. Past performance is not necessarily indicative of future performance. The stated market indices are unmanaged indices used to measure and repeat performance of the market in general. Direct investment in an index is not possible. The investment results depicted herein represent historical gross performance with no deduction for management fees or transaction costs. Dividends are assumed to be reinvested. 4 Portfolio B is a hypothetical portfolio with an annualized return of 7.83% over the 10 year period 1/1/1999 to 12/31/2007. The maximum one year decline was 5.95% over the same period. The indices that were used to construct and back-test this portfolio and corresponding asset class were as follows: S&P 500/Large Cap Core, U.S. Small Cap Stocks/Small Cap Core, MSCI EAFE/International Equity, FTSE NAREIT/REITs, LB U.S. Aggregate/Intermediate Bond. This information has been obtained from sources we believe to be reliable. We cannot, however, guarantee its accuracy. Past performance is not necessarily indicative of future performance. The stated market indices are unmanaged indices used to measure and repeat performance of the market in general. Direct investment in an index is not possible. The investment results depicted herein represent historical gross performance with no deduction for management fees or transaction costs. Dividends are assumed to be reinvested. -8-
  • 9. From a “wealth preservation” point of business may not protect your family’s view, a potentially superior portfolio can long-term wealth, since the trends that be constructed utilizing asset classes that move the value of the portfolio may have a low or even negative correlation be similar to the trends that affect the with the business. For example, most fortunes of your business. Therefore, it is of the asset classes that make up crucial for your asset allocation strategy Portfolio B have a relatively low or to integrate your business as one of your even negative correlation with the biggest assets. We have provided you sample company. This portfolio has with a simple methodology to do so. a significantly lower probability of You must also realize that real estate being down when the business is down might not necessarily cushion your relative to Portfolio A. Keeping in wealth throughout a volatile economic mind the business asset, this portfolio cycle. A significant portion of your also has substantial liquidity to balance company’s value might already be in realIf your business is one of your the illiquid business and real estate of estate, so you may already have enoughbiggest assets and it has not been the owner, just in case the good times exposure to that asset class. And, as we’veadequately considered in your the business is currently experiencing recently experienced, real estate valueswealth management strategy, don’t continue. Finally, both Portfolio can sag as quickly as they can soar.perhaps it is time you should A and Portfolio B have about the sameconsider it. Lastly, keep in mind liquidity risk. In return expectation based on historical your quest to balance your risks it is performance, while Portfolio B has important to understand that your about one third the downside potential, business and the real estate you own are or risk, as does Portfolio A. illiquid. Be sure you have ample liquidity As this example demonstrates, the extra in your investment portfolio so that effort required to bring the business you can meet any unanticipated cash into the asset allocation mix can pay-off needs. This is particularly a concern on in the form of a more thoughtful asset the downside of the business cycle when allocation and a superior investment credit conditions tighten and liquidity is portfolio with a definite focus on at a premium. wealth preservation. If your business is one of your biggest The Bottom Line assets and it has not been adequately John Kenneth Galbraith, considered considered in your wealth management by some to be one of America’s most strategy, perhaps it is time you should famous economists, said: “One of the consider it. Visit with your financial greatest pieces of economic wisdom is to advisor and have him or her re- know what you do not know.” Based on assess your asset allocation. Work to our experience and that of consultants understand how your business behaves like John Ward of Northwestern relative to your investment portfolio first University and The Family Office and make any changes required to ensure Exchange’s Sarah Hamilton, who spend they perform differently. After you their time working with business owners, have taken this important step toward many business owners do not know how preserving your wealth, you can move the performance of their business relates on to other important issues that impact to that of their investment portfolio. asset allocation, like the need to consider alternative investments, your lifetime As we have discussed, an investment earnings potential and taxes. portfolio that does not consider your -9-
  • 10. ABOUt tHe AUtHOrS: Christopher G. Didier is Managing Director, Private Asset Management Group with robert W. Baird & Co., headquartered in Milwaukee, Wisconsin. He holds an MBA from the University of Chicago and is a CFA Charterholder. Along with ed DeFrance and David Klenke, both CPAs and CFAs, he formed a private asset management team that focuses on high-net-worth individuals and families, and family offices. Chris and his team specialize in serving the wealth management needs of current and former CeOs of public and private companies. Chris was named to Worth magazine’s “top 100 Wealth Advisors” in 2007. You can contact Chris at 414-765-7095 or cdidier@rwbaird.com. Brian L. Beaulieu has been an economist with the Institute for trend research in Concord, New Hampshire, since 1982, serving as its executive Director since 1987. He does applied research into business cycle trend analysis and the use of cyclical analysis at a practical business level. Brian has been quoted by the Wall Street Journal, New York Times, Barron’s, USA Today, Knight Ridder News Services, Reuters, CBS Radio, The Washington Times, KERA TV, Business News Network TV, and is a regular columnist and contributing economist to national trade associations and publications. He is Chief economist for vistage International and teC, global organizations that comprise more than 14,000 CeOs. You can contact Brian at 603-226-9331 or Brian@ecotrends.org.© All rights reserved. this information cannot be represented or used without the consent of the authors. - 10 - MC-23727 First use: 06/2008

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