The goal of a wealth manager should be to act as the family's chief financial officer, Alec Haverstick said. Think of high-net-worth individuals as companies with their own balance sheets that sometimes need restructuring.
Haverstick said too many family planners focus on financial products and securities and don′t consider housing needs, investing in hard assets, an affordable lifestyle, cash-flow requirements or even liabilities. He suggests a new paradigm that focuses on analyzing cash flow and risk management.
He started with a case study on a hypothetical individual, Hiram Smith, the founder and majority owner of a publicly traded company who borrowed against the company stock to invest in other assets. His assets include the family residence, vacation homes, agricultural land, private equity and hedge fund investments, and an extensive collection of fine art and antiques.
With the decline in the stock market last year, the bank liquidated his stock and issued a margin call for a few hundred million dollars. This puts Smith in a precarious position. If he declares bankruptcy, according to the Sarbanes-Oxley rules, he would never be able to hold an executive position in a public company again. If the bank were to force a liquidation of assets, it would likely be poorly compensated. The best solution would be to offer Smith a workout plan, letting him keep his job and lifestyle and giving the bank a better chance of recovering its losses in the long run. However, with banks under excessive scrutiny nowadays, this might not be possible. What′s the solution?
A good outcome would entail a private loan to help Smith out. Private investors often provide such mezzanine funding, and the terms aren′t too onerous. Haverstick said. He cited one such loan for $500 million with a five-year term at LIBOR plus 4.5 percent, plus 20 percent of the upside on the borrower's investments in private equity and hedge funds. The loan was cross-collateralized by first liens on the borrower's primary residence, land holdings and direct investments. Such a loan would have allowed Smith to keep his job and given him room to come back up over the next few years.
Such out-of-the-box thinking is the real value that family wealth managers will be offering in the future, Haverstick said.
Global Conference 2013
Former Prime Minister Tony Blair, philanthropist Bill Gates and Strive Masiyiwa of Econet Wireless discuss advancing prosperity in Africa.
