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
[email protected] and (614) 460-2633.