Building wealth is hard to do, but maintaining that wealth across generations is even more challenging. In The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors + Website, wealth advice expert Gregory Curtis reveals the investment secrets of the world's wealthiest families, so that financial planners, fund managers, and wealthy individuals everywhere can follow in their footsteps. Outlining the best practices for preserving and growing wealth, the book details exactly how to build a lasting financial legacy in the face of taxes, inflation, investment costs, and the conflicts of interest that are endemic to the financial advisory business.
Wealthy families are at the very heart of America's exceptionalism, of the vigor, resilience, and creativity that have made the U.S. the most successful nation in history. The Stewardship of Wealth's discusses the crucial role private wealth continues to play in America's remarkable economic and cultural success and the issues wealthy families and their advisors face, presenting a step-by-step guide to better managing liquid wealth.
- Reveals the wealth management strategies employed by America's wealthiest families and their financial managers
- Explores the challenges to ensuring that money stays in the family, from portfolio design to manager selection to monitoring investment performance, and much more
- Details the essential steps for ensuring a lasting financial legacy
An examination of the key issues involved in managing private wealth, especially for affluent families, The Stewardship of Wealth + Website is the ultimate guide to building a financial legacy that will last.
Table of Contents
Preface xix
Acknowledgments xxxi
Part One The Importance of Private Capital
Chapter 1 Wealth in America: The Indispensable Rich 3
Democracy and Capitalism 6
Capitalism and Its Contradictions 7
Providential Societies 10
Risk and Strength 12
America and Decline 13
On China 15
Addressing the Declinists 17
Conclusion: American Distinctiveness and Private Wealth 19
Notes 21
Chapter 2 Creative Capital 25
A (Brief) Moral History of Capitalism 26
The Ancients 27
Moral Arguments for Capitalism 28
Voltaire 28
Adam Smith 30
Hegel 31
Contemporary Discussions 32
The Moral Basis of Private Capital 33
Creative Capital in America 34
Higher Education: The Case of St. John’s College 37
Politics: The Conservative Resurgence 38
New Business Ideas: Venture Capital in America 39
Creative Capital and Vibrant Societies 42
Why Do Creative Capitalists Persist? 43
The Indispensable Nation 43
Conclusion: Underdogs and Bullies 45
Notes 47
Part Two The Stewardship of Wealth
Chapter 3 Are We Living in a Permanent Financial Crisis? 53
The End of History (Again) 54
A Permanent Financial Crisis? 54
The Cause of the Crisis Matters 55
The Industrial Revolution and Its Aftermath 56
The Great (and Strange) Experiment 57
Seize the Means of Production! 59
The Power to Tax is the Power to Destroy - Societies 60
‘‘Borrowing . . . the Disease is Incurable’’ 61
Now What? 63
But, First, a Note about Germany 66
Investing Capital in a (Very) Uncertain World 67
Conclusion: A World At Risk 68
Notes 68
Chapter 4 Risk 73
Families and Investment Risk 73
‘‘Low’’-Risk Investments 74
‘‘High’’-Risk Investments 75
‘‘Reasonable’’-Risk Investments: Marketable Securities 76
The Law of Supply and Demand (Again) 76
Idiosyncratic Ideas about Risk 77
Real Risks: Those Embedded in the Process of Investing 78
Individual Stock Risk versus Broad Market Risk 78
Price Volatility 79
Wildness in the Tails 81
Investor Behavior 82
Making a Truly Terrible Decision 83
Variance Drain 83
Dick and Jane and Variance Drain 84
Later, at Le Cirque 85
Variance Drain Scenarios 86
Behavioral Finance: Are We Hard-Wired for Failure? 87
Professor Odean on Behavioral-Inspired Wealth Transfer 88
What Can We Do about It? 89
Edith and the Headwinds She Faces 90
The First Thing Edith Forgot: Variance Drain 91
The Second Thing Edith Forgot: Inflation 92
The Third Thing Edith Forgot: Investment Costs 92
The Fourth Thing Edith Forgot: Taxes 92
The Fifth Thing Edith Forgot: Spending 93
What Should Edith Do? 93
Conclusion: Preserving Wealth is Hard Slogging 96
Notes 97
Chapter 5 The Collapse of Ethical Behavior 101
What Caused the Crisis? 101
An Unsavory Rehash of the Ethical Failures 102
Ethical Failures in Subprime Lending 102
Ethical Failures among the Subprime Lending Banks 103
Ethical Failures in Auction Rate Securities 104
Ethical Failures among the GSEs 105
The Contemptible Public Disclosures of Financial Firms 107
Shorting the Securities You Are Selling to Your Clients 107
Paulson Bernanke & Co. and the Conspiracy of Silence 108
How Scandal Became Crisis 109
Trust 109
Customers 110
Why Such an Ethical Swamp? 111
Hedge Fund Wannabees 111
‘‘When the Music Plays You Have to Dance’’ 112
Compensation Follies 113
Conflicts upon Conflicts 114
Where Do We Go from Here? 115
Conclusion: Fixing the Industry 116
Notes 117
Chapter 6 Finding the Right Advisor 119
Open Architecture as a Disruptive Business Model in the Advisory World 120
What is Open Architecture and Why is It So Important? 120
Open Architecture in the Financial Industry 121
The Impact on Investors 123
The Outsourced CIO Model 124
The Evolution of the Traditional, Nondiscretionary Model 125
Documenting the Trend toward the Outsourced CIO Model 126
What’s Driving the Trend toward the Outsourced CIO Model? 126
The Outsourced CIO Model Today 127
Advantages and Disadvantages of the Outsourced CIO Model 129
Is the Outsourced CIO Model Right for Your Family? 132
How to Select a Good Outsourced CIO Advisor 133
Finding the Right Advisor for Your Family 135
Dimensions of the Problem to Focus On 135
The Schulberg Family 136
Gathering Names 139
The RFP Process 139
Where is the Sample RFP? 143
Final Diligence 144
Where Does Diligence Leave Off and Psychodrama Begin? 145
Conclusion: Focusing On a Few Key Variables 146
Notes 147
Chapter 7 Making Family Investment Decisions 149
The Family Investment Committee Today 150
The Origin of the Investment Committee 150
Committee Dynamics 151
Making an Impact 152
Attempts to Deal with the Problem 152
Asset Allocation Guidelines and Investment Policy Statements 152
Using Outside Experts to Populate the Investment Committee 153
The Separate Investment Management Corporation 153
The Family Investment Committee, Tomorrow 153
The Investment Committee Operating Manual 154
Opportunity Costs: Prudence versus Returns 155
Prudence versus Returns for Trustees 155
Prudence versus Returns for Families 157
Striving for Prudence and Returns 159
Conclusion: Focusing On What Families Do Best 161
Notes 161
Chapter 8 Trusts 163
Open-Architecture Trusts 163
A Brief, Unconventional (but Wickedly Accurate) History of the Common-Law Trust from the Client’s Perspective 164
Professional Management 165
Deep Pockets 165
Perpetual Life 166
Sound Exercise of Discretion 166
Down with the Bundled Trust! Up with the Open-Architecture Trust! 166
Activities Required to Operate a Trust 167
The Nitty-Gritty of Establishing Open-Architecture Trusts 169
The Rise of Beneficiary Rights 170
If I Was a Big Trust Institution 171
Semi-Open Architecture Trusts 172
Private Trust Companies 173
Total Return Trusts 174
The Uniform Principal and Income Act 174
Unitrust Legislation 175
The IRS View 175
Total Return Trusts in States without Total Return Legislation 175
Conclusion: Let’s Get Revolutionary 176
Notes 176
Part Three The Rich Get Richer
Chapter 9 Designing Taxable Investment Portfolios 183
The Markowitz Revolution 184
Problems with Mean Variance Optimization 185
Computational Power 185
Garbage In, Garbage Out 186
The Challenge of Developing Thoughtful Data Inputs 187
Multivariate Modeling 187
Taking Taxes into Account 188
Monte Carlo Simulations 189
The Problem of Fat Tails 190
Best Practices in Designing Investment Portfolios for Families 192
What Are the Objectives for the Portfolio? 192
Current Claims versus Growth Claims on a Portfolio 193
Matching Portfolio Assets to Each Type of Risk 194
Traditional Asset Allocation Modeling 195
Modern Asset Allocation Modeling 196
Satisfying Portfolio Claims Prudently 197
Conclusion: Art versus Science 198
Notes 198
Chapter 10 Adding Value to Family Investment Portfolios 203
Moving from the Current Strategy to the New Strategy 203
Adding Value through Manager Selection 205
Adding Value by Tactically Repositioning the Portfolio 206
Adding Value through Opportunistic Investments 207
Adding Value through Monitoring and Rebalancing 209
Conclusion: We Need All The Value-Add We Can Get 210
Notes 210
Chapter 11 Investing in U.S. and Non-U.S. Equities 211
U.S. Large- and Mid-Capitalization Stocks 212
U.S. Small-Capitalization Stocks 214
International Developed Country Stocks 216
International Diversification is Unnecessary 217
Just When You Need It, Diversification Doesn’t Work 218
It’s Easier and Safer to Gain International Exposure by Investing in ADRs 219
The Bottom Line 219
Emerging and Frontier Markets 220
Emerging Markets 220
Frontier Markets 221
Conclusion: Equity Securities Are At the Core of Most Portfolios 223
Notes 223
Chapter 12 Investing Globally 225
Why Go Global? 226
Why Stay Home? 228
Global Investing in the Real World (or, Maybe, Real Investing in a Global World) 229
Is ‘‘Global Equities’’ an Asset Class? 229
Is It Possible to Succeed as a Global Equity Manager? 230
Can a Global Manager Outperform in the U.S. Portion of its Portfolio? 231
Do the BRICs Really Matter as Much as We Think? 231
What about Investing in Multinationals? 233
The Challenge of Stock-Picking in ‘‘Non-Nonsynchronous’’ Markets 233
Thinking Nonmonolithically 233
Conclusion: Think Globally, Act Locally 234
Notes 237
Chapter 13 Investing in Real Assets 239
Real Estate 239
Leverage 240
Why Invest in Real Estate? 240
How to Invest in Real Estate 241
Oil and Gas 243
Value Creation Mechanisms 244
Hedging to Protect Value 245
Investing Strategies 246
Recommendations 248
Commodities 249
Sources of Return from Commodities Investing 250
The Commodities Indexes 251
Historical Risk, Return, and Sharpe Ratios 251
Historical Correlations 252
Some Thoughts about Historical and Prospective
Commodity Returns 252
The Role of Commodities in a Diversified Portfolio 253
Effects of Rebalancing 254
The Impact of Extreme Events 254
Summary 255
Conclusion: The Use and Misuse of Real Asset Exposure 255
Notes 256
Chapter 14 Investing in Fixed Income 259
Mistakes Bond Investors Make 259
Employing Managers Who ‘‘Cheat’’ 259
Paying Too Much for Bond Management 262
Employing Best Practices in Building Bond Portfolios 262
Building Laddered Bond Portfolios 263
Owning Only High-Grade, Noncallable, Long-Term Bonds 264
Actively Managing Municipal Bonds 264
Actively Managing Corporate Bonds 267
High-Yield Bonds 267
Managing Cash 269
Conclusion: Fixed Income is Underappreciated 270
Notes 271
Chapter 15 Investing in Hedge Funds 273
What is a Hedge Fund? 274
Types of Hedge Funds 275
Challenges for Hedge Fund Investors 277
Building a First-Rate Hedge Fund Portfolio 285
Conclusion: Should Anyone but Yale Invest in Hedge Funds? 288
Notes 290
Chapter 16 Investing in Private Equity 293
Why Invest in PE? 294
Persistence of Returns 294
The Importance of Diversification 295
Private Equity Returns 296
The Return Characteristics of PE Investments 296
Gaining Exposure to Private Equity 297
PE Funds of Funds 298
A Global Asset Class 298
Illiquidity and the J-Curve Effect 299
Ramping Up to Your Target Allocation 300
Waterfall Analysis 300
Secondary PE Investing 302
The Evolution of Secondary Investing 302
Secondary Investing Strategies 303
Identifying High-Quality Secondary Funds 304
Conclusion: The Ultimate Aspirational Asset 304
Notes 305
Chapter 17 Working with Money Managers 307
The Business of Money Management 308
Hapless Asset Management 308
Survivorship Bias 311
Fees and Costs 311
Traditional Managers 313
The Main Problem: Recent Good Performance is Almost Irrelevant 314
Characteristics of Best-in-Class Managers 317
Objectionable Characteristics 320
Finding Best-in-Class Managers 320
Monitoring Best-in-Class Managers 323
Active, Indexed, Fundamental, and Structured Products 324
Alternative Managers 326
Working with Hedge Funds 326
Working with Private Equity Funds 328
Conclusion: At Least Managers Are Interesting 329
Notes 330
Chapter 18 Managing Investment-Related Taxes 331
Designing Portfolios from an After-Tax Perspective 332
Asset Location 332
Asset Class Strategies 333
Tax-Aware Managers 333
Identifying Tax-Aware Managers 335
Harvesting Losses 337
Conclusion: You Can’t Eat Gross Returns 338
Notes 338
Chapter 19 Asset Location and Implementation 341
Asset Location Issues 341
Examples of Asset Locations and the Associated Investment Implications 342
Implementation Issues 347
Macro Considerations 348
Micro Considerations 351
Implementing in PE and Hedge 353
Conclusion: It’s Not Just a Technical Issue 353
Notes 353
Chapter 20 Monitoring and Rebalancing Taxable Portfolios 355
Performance Monitoring 356
Money Manager Reports 356
Bank Custody Reports 357
Investment Consultant Reports 357
Conflicts between Reports 358
Interpreting Performance Reports 359
Monitoring Manager Performance 360
Rebalancing Taxable Portfolios 362
Setting Strategic Ranges 363
Rebalance Back to What? 363
How Often to Rebalance? 364
Conclusion: Monitoring and Rebalancing Are Stewardship Issues 365
Notes 366
Chapter 21 Investment Policy Statements 367
The Investment Policy Statement 367
Spending Policy Statements 369
Cash Guidelines 369
Manager Guidelines 369
The Investment Committee Policy Manual 370
Letters to the Family 370
Conclusion: Don’t Skimp on Documenting Your Decisionmaking 370
Chapter 22 Miscellaneous Challenges for Private Investors 371
Asset Custody 371
What Services Does a Custodian Offer? 372
Evaluating Custodians 373
Custody Pricing 374
Custody for Taxable Accounts 375
Securities Lending 376
Brokers as Custodians 377
Concentrated Security Positions 378
Dealing with the Emotional Impact of a Concentrated Position 381
Strategies for Diversifying Concentrated Positions 382
Establishing a Family Office 384
Why a Family Office? 384
What is the Minimum Size for a Family Office? 384
What Responsibilities Are Carried Out by a Family Office? 384
Where to Begin? 386
Are There Alternatives to the Stand-Alone Family Office? 387
Family Investment Partnerships 387
Philanthropy 389
Conclusion: There Are Challenges Everywhere We Look 392
Notes 392
Afterword: On Happiness 395
Stereotypes of the Rich 396
The Rich and the ‘‘Faux Rich’’ 396
The Real Way the Rich Are Different 398
Children and the Wealthy 400
Marriage and the Wealthy 400
Work and the Wealthy 401
Failed Stewardship and Family Unhappiness 403
Wealth and Happiness 405
Notes 405
About the Companion Website 407
About the Author 409
Index 411
