Sept. 7, 2023: The biggest challenges in wealth management today
Martim De Arantes Oliveira, managing director of Geller Advisors, leads a multidisciplinary team of subject matter experts tasked with delivering integrated advice in all key disciplines of wealth management.
There’s been a surge in the growth of family offices in the past decade. What do you think accounts for that?
Certainly, there’s been a rise in wealth. There’s no doubt we've gone through the second Gilded Age, and I think that a lot of that was driven by easy money with low interest rates, a pretty resilient economy and one of the longest economic growth spurts that we've had in history. And I think that there’s been a desire to bring a lot of these services in-house as opposed to outsourcing them. There's been a decline in trust as far as wealth management is concerned, and a lot of these ultra-high-net-worth individuals want to have in-house advice. Also, I think that there's more complexity out there; and because of that, individuals want to tailor what they have in-house to their particular needs. They don't want to work with a big bank or brokerage house that builds a kettle of soup, if you will, and serves everyone out of that same kettle of soup.
We’ve gone through a turbulent period as of late. What are the biggest challenges facing family offices, whether economic headwinds or potential regulations on the horizon?
There are three things to deal with. One is a change in the low-interest-rate regime and being in a more normalized environment. We’ve got some very rich individuals out there who have never seen a high-interest-rate environment, so they're having to adjust their viewpoint and the way they operate.
The second thing that can't be ignored is the political and societal situation that we're in. There is this feeling that wealth comes with a certain stigma — as a result, the tax environment could change.
And the third thing is exogenous events such as climate change or the geopolitical situation. There is this perception that our institutions are no longer able to deal with these big issues.
Jumping off that last point, is that impelling family offices to look for private sector solutions to some of these big problems in terms of investing?
Absolutely. I was born in Europe and I'm intimately aware of what the European governmental framework looks like. If you stand up and you say I'm gonna fix it myself, you've got the weight of government pushing back on you. And at some point you say, “OK, I give up.” In the United States, you still have the ability to be consequential and to foment change. Part of the allure, part of the benefit of having a lot of money, is to use that money to prompt change. And I think that that's something that these individuals relish, and this type of what I call new wealth is deeply connected to noneconomic issues. There’s a sense of responsibility, especially with next-gen investors, to do something about the issues of the world, whether climate change or public health. The Vanderbilts and previous dynasties, they may have been big into education; they may have built libraries, etc. But the focus of this new wealth is a lot more about what you can do to leave a dent in the universe, to quote Steve Jobs.
What investing areas are family offices excited about?
Obviously, artificial intelligence, as something that’s transformational. It’s very relevant and interesting, but it comes with some potential pitfalls when it comes to execution and implementation. Tech continues to be a huge theme, be it software or hardware. Biotech and the intersection of biotech and big data continues to be very attractive to family offices. Private credit is another one. Hedge funds have made a comeback of sorts, after a decade of being the stepchildren of the investment world, because the current volatility in the investing environment tends to be extremely beneficial to hedging strategies and due to the fact that their fee structures have become more competitive.
The ins and outs of being philanthropic
By KAMEL TARAZI
Like most people, I am sure that you have been solicited by multiple philanthropic organizations for donations. Often, when the doorbell or the phone rings, and we encounter a request for cash, we feel cornered but wish to be a good citizen and therefore donate some amount to a good cause. However, we feel uninformed as to who this person is — are they representing the organization they claim to represent? Or even more so, is this organization an actual charity that is well-run, so that most of my philanthropic effort and outlay is used for its intended purpose?
Many wealthy individuals and families have established private foundations so that they can keep control of the funds they use to support philanthropic endeavors. Many of these are in the public eye and must disclose their information annually. You may not feel that such an option exists for you, but there is a vehicle you can use that will provide a similar level of control. Donor-advised funds (DAFs) have existed for quite some time and can be a great solution for those who have prioritized philanthropy in their financial planning.
It's easiest to describe DAFs through examples.
Let’s say you win a lottery and receive $50 million in cash. You’ve historically provided some portion of your income to philanthropic purposes and wish to do the same with a significant portion of the lottery proceeds, to the tune of $20 million. You are well-aware that by doing so, in the same year you are receiving this prize, you will deduct this donation, thereby reducing your income tax for the year. However, you do not know where to donate this large sum in an effective manner and don’t want to make a hasty decision.
A DAF is an intermediary charitable organization where you may donate funds in the current year but can grant these funds to their final beneficiary — i.e., operating charities — at another time in the future. Also, they can serve as your due diligence representative, as you will not be able to grant funds from the DAF unless the grantee is a recognized charity. By advising fundraisers that you will be donating through your DAF, you can validate their request for a donation.
DAFs don’t have to be used solely for large-income events. They can be your charitable checking account, so that you can be financially efficient with your donations while granting as you see fit. For example, donate 50% of your income annually, and when a natural disaster happens a few years down the road, you can effectively give all of your DAF balance to help the victims.
Another benefit to a DAF is that it will accept long-term appreciated securities. When you donate such securities, you can avoid the capital gains tax while also receiving a deduction on the market value of the securities. This is true whether or not you use a DAF; however, the process is made simpler when going through a DAF than liquidating the securities in the DAF and granting the cash to its intended beneficiary. This is especially helpful when you feel that the security has peaked in value, but you don’t wish to realize the gains, and you are unsure as to which charity you wish to donate the funds.
A few major financial institutions have established a DAF — Fidelity, Schwab and Vanguard are some of the largest. There are also faith-based DAFs such as the Jewish Communal Fund and National Christian Fund.
We can assist you in establishing a DAF and help you determine not just how to donate, as there are several options (e.g., cash, highly appreciated securities), but also how to invest the donated assets. There is no point in holding assets without receiving some rate of return, whether it is interest on fixed-income securities or market appreciation and dividends on stocks.