Sharp losses can create a rift in the family, leading to interpersonal and intergenerational problems.
We have often heard that the principles of investment are the same for all investors, and most of us will agree to that. But when we design portfolios for ultra high networth (UHNW) investors, things start becoming a bit complex. The sheer size of the portfolio, the direct or indirect linkages to family business or an entrepreneurial venture, sensitive family dynamics add a lot of interplay and, hence, complexity to the wealth planning process. For starters, while a simple asset allocation plan may be good enough for most investors, for an UHNWI we have to create segregated ‘need pools’ which will have very different portfolios.
Let’s take the case of a business family running a single line of packaged consumer goods business. The family may need to keep some money aside for emergencies and unforeseen issues in the family business that then needs to be invested in very low capital risk products with high liquidity. Some capital must be set aside to support their lifestyle, cash flow needs and, hence, will need to yield a net return that beats ‘lifestyle inflation’. This pool will be relatively liquid and mostly in listed securities. Finally, some pool of capital will be segregated to focus on future wealth creation, which naturally comes with high risk investment options such as venture capital investing. This last pool also gains importance when a family member has to be allocated some capital for entrepreneurial endeavours outside the family business.