After the sale of a business, an owner “cashes out” with a lump of wealth that can be quite overwhelming. For the lifetime of the business, the majority of an owner’s wealth is tied up in that venture. Liquid assets were always poured back into the business for investment in capital improvements or to finance growth.
“It’s daunting to think about investing your life’s worth and your family’s entire fortune,” says Joel J. Guth, an advisor in the Citi Family Office at Smith Barney, a division of Citigroup Global Markets. “Owners must adopt a completely different mindset once the business is monetized.”
Smart Business spoke with Guth about asset management strategies after a business is sold and how to build a balanced portfolio with a variety of investment alternatives.
What challenges do owners face when confronting asset management planning?
First is the sheer amount of wealth that compounds during the life of the business. Owners must decide how to manage the ‘liquid’ after the sale of the business assets that represent their pasts and futures. That’s a lot to process. Second, owners face more choices in how they manage their assets than ever before. Beyond the equity market, they can opt to invest in alternative investments. Third, most owners have difficulty setting realistic expectations for investment performance. By nature, business owners are driven and demanding. They expect results, and this tenacity is what helped them grow successful companies. But successful investors must think in the long-term.
How can an advisor assist owners?
An advisor who specializes in wealth management should be capable of explaining investment choices, detailing pros and cons and discussing performance in good and bad economies. Owners should develop an investment policy statement a thesis describing how they will run their money. I urge clients to think about these questions: What investments are you willing to consider? What returns do you expect within what targeted timeframes? What risks are you willing to accept?
What strategies should owners adopt?
Ideally, owners should establish a portfolio of non-correlated assets. This involves investing in assets that move show positive performance at different times because of different factors. For example, an owner invests in stocks and real estate. When stocks are down, real estate generally performs well, and vice-versa. An owner who only invests in the public market is not spreading out risk.
What about alternative investment options?
There are many investment vehicles, but two alternatives that wealthy owners can consider are private equity and hedge funds. Private equity funds are managed by individuals who buy a controlling or majority stake in a privately held business. This type of investment is illiquid and long-term. But, if owners purchase private equity at below fair market value, they can compound their investment much faster than if they would have invested in traditional stocks. As advisors, we preach investing for the long-term, which is exactly what this vehicle requires.
Hedge funds are an underlying ownership structure a partnership between the client and fund manager. Because these funds are structured, an owner relies more on the fund manager’s skill than actual market performance. They are not regulated by the SEC and are not for all investors.
How should owners evaluate their investment performance?
Owners should establish reporting mechanisms and set a timeframe for determining whether to make changes to their portfolios. Advisors should have quarterly discussions with owners, explaining market and economic trends. How do these factors impact their asset management strategy? What changes are necessary, if any? Ultimately, owners should evaluate the success of their investments over a business cycle, which is typically three to five years.
Citi Family Office is a business of Citigroup Inc., and it provides clients with access to a broad array of bank and non-bank products and services through various subsidiaries of Citigroup, Inc.
Citi Family Office is not registered as a broker-dealer or as an investment advisor. Brokerage services and/or investment advice are available to Citi Family Office clients through Citigroup Global Markets Inc., member SIPC. All references to Citi Family Office Financial Professionals refer to employees of Citibank, N.A. or Citigroup Global Markets Inc. Some of these employees are registered representatives of Smith Barney, a division of Citigroup Global Markets Inc., that have qualified to service Citi Family Office clients.
Citigroup Global Markets Inc. and Citibank, N.A. are affiliated companies under the common control of Citigroup Inc.
Alternative investments referenced in this report are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices; lack of liquidity; volatility of returns on transferring interests in the fund; potential lack of diversification; absence of information regarding valuations and pricing; complex tax structures and delays in tax reporting; less regulation and higher fees than mutual funds; and advisor risk.
JOEL J. GUTH is an advisor in the Citi Family Office at Smith Barney, a division of Citigroup Global Markets. Reach him at firstname.lastname@example.org and (614) 460-2633.