Wealth

How the World's High-Net-Worth Grow, Sustain, and Manage Their Fortunes

• Publisher: Wiley
• Year: 2010
• ISBN:
  9780470675113
• Edition: 1
• Topic: Business
• Subtopic: Wealth Management
• Index: Business

In Wealth, Merrill Lynch and Capgemini present a readable guide on what drives the success of HNWIs, as well as the trends, growth, increased complexity and competitiveness of the global wealth management market, all based on over a decade of research.

Full of wealth-building strategies for HNWIs everywhere, as well as for those who aspire to join their ranks and those who advise them, Wealth is a complete guide to successful holistic wealth management. Comprehensive coverage includes:

• What you should aspire to achieve with your wealth management goals.
• New ways in which HNWIs should be thinking about planning for the future.
• How to get to the next level of wealth.
• Trends, similarities and differences in various regions around the world.
• Innovative approaches to asset allocation and alternative investments.
• The increasing role of philanthropy, the growing importance of inter-generational wealth transfer, and other emerging issues for HNWIs.
• In-depth interviews with prominent high-net-worth and ultra-high-net-worth individuals as well as advisors.
• Provocative thinking on where the future of the wealth management industry is going.

CHAPTER 1

The Evolution of Wealth Management

PREPARING THE NEXT GENERATION

Judged strictly by outward appearances, the twenty-odd twenty- somethings gathered at the Steinberg Conference Center at the Wharton School are indistinguishable from the grad students passionately debating the pros and cons of conducting business in Africa in Conference Room A, or collectively salivating over the bounties bestowed by the judicious deployment of Investment Logarithms in Conference Room B. Among the nineteen males and seven females (median age: twenty-five) dutifully taking notes at the afternoon session are the generationally and demographically predictable percentage of skin piercings in locations other than the ear (4), hair dyed in primary colors other than blonde (3), two-ply V-necked cashmere sweaters in a dazzling array of designer colors (6) and non-native accents (2). In fact, the only commonly shared trait separating this group from any other attending conferences at Wharton is rather discrete: the approximate average net worth of the participants’ parents was easily north of US$100 million. Or as the folks at MasterCard put it, “Priceless.”

Welcome to Merrill Lynch’s Financial Boot Camp, a high-touch, high-focus financial literacy program offered exclusively to the offspring of ultra-high-net-worth (UHNW) clients around the globe by the firm’s Global Wealth Management division “designed to give the next generation a higher level of understanding and comfort with money,” according to its mission statement. “The agenda not only targets the hard financial concepts but also addresses the softer issues associated with family wealth.” This is a fine example of how the wealth management industry has developed into one of the most sought after segments in financial services—it is no longer simply based on transactions with well-established clients, but has begun to focus on investing in relationships that will be of value in the future.

Expertly honing in on a few of the softer issues, Beverly Hills psychologist Lee Hausner (author of Children of Paradise, “a comprehensive parenting guide for financially advantaged families [that] offers a clear nine-step program for affluent parents to improve their skills and inspire healthy values in their children”) kicks off the session by breezily drilling her raw recruits on the broader implications for human relations of the uneasy conversations on the ever-emotionally-charged subject of money that the wealthy frequently have with their non-wealthy peers.

Now a partner at IFF Advisors, a California-based consulting firm “created to enhance the human, intellectual, social and financial capitals” of its clients, “empowering them to do the right things by doing things right” with their money, Dr. Hausner candidly confronts such hot-button topics as that hardy perennial of the celebrity tabloids, the prenuptial agreement, followed by the awkwardness associated with requests for repayment of casually extended personal loans to non-wealthy “friends,” and the bizarre hesitation so many people (wealthy and non-wealthy alike) seem to feel about challenging glaring overcharges on restaurant checks, for fear of being made to look cheap. But by far the keenest source point of tension, which drew the highest volume of knowing nods and winces from the crowd, is Dr. Hausner’s scalding treatment of the topic “Speaking with Significant Others When Fiscal Unequals.” The gist of Dr. Hausner’s advice is that when the wealthy enter into relationships (God forbid marriage) with those from less privileged backgrounds, difficulties may well ensue that could make that staple of late-night talk show humor, the prenup, seem like the soundest investment the family could make since it bought big into Google at US$120.

In many wealthy families, particularly those in which the family fortune has been earned not inherited, some degree of confusion may reign regarding the question of how best to talk to the offspring about the money they’re likely to inherit as opposed to earn…because every self-made entrepreneur or corporate executive who goes on to reproduce is destined to rear not fellow scrappy pull-oneself-up-by-the-bootstraps types but children of privilege—or as Dr. Hausner would prefer to have it, “paradise.” With the notable caveat, of course, that there’s often trouble in paradise.

“In less affluent families,” Hausner cautions, “money is often more about context than subtext. Kids constantly hear their parents argue about money. They’re told that the family can’t afford this or that, whether it’s a trip to Walt Disney World or a college education. In high-net-worth (HNW) families, the kids might see the glossy brochures on the dining room table describing the next high-end vacation, or see the grand estate with the ten cars parked in the garage. But despite the visibility of that wealth, those same families often prefer to treat money as if it’s taboo—a topic off-limits to honest discussion.”

As Bertrand and Bob observe in the Foreword, the pace of global wealth creation has been remarkable—if not downright startling—over the past decade, which goes a long way toward explaining why wealth management issues have become so top of mind from New York to London to Mumbai to Beijing. Naturally, these established and newly minted millionaires want to know how to stay ahead—making wealth management so topical. But the mass affluent—emerging everywhere from the United States, Europe and increasingly the far-flung corners of the world—are paying attention to what works and what doesn’t. They wisely want to learn from other successes and mistakes. They want a shot at joining the club. And they want a shot at doing what the wealthy have done since time immemorial—preserving and protecting their wealth for the next generation and even generations beyond. For that to take place, the next generation has to be educated about the perils and minefields of money—hence the financial boot camps conducted at Wharton and elsewhere globally.

In the here and now of the twenty-first century, wealth management firms of any size and scope are aggressively stepping into the breach, spying an opportunity to strengthen the advisor-client bond with the family by offering financial education for offspring as a natural adjunct to estate planning, philanthropic advice, alternative investments or exclusive access to an event starring a noted author, an invitation to a museum gallery on a closed day, tickets to the theater or a concert, a fly fishing outing on a noble estate in Scotland, or a round of golf at St. Andrews or Pebble Beach.

And if that all sounds like a far cry from Merrill Lynch’s humble origins, well, welcome to the brave new world dominated by the wealthy and ultra-wealthy—the natural outcome of the stunning success of global capitalism in concentrating and consolidating family, personal and household wealth worldwide. In an era of galloping financial surplus, many firms have been obliged to adopt an outlook and skill set more commonly associated with private bankers domiciled in Switzerland, Luxembourg or other tax havens. They must transform into firms intensely focused on meeting the needs of the wealthy and ultra-wealthy in all their variability and complexity. As Merrill Lynch’s Private Banking and Investment Group promisingly proclaims, “Substantial wealth is different. It deserves substantially different care.”

Clearly such services are not typically available to the HNWI or the average investor, yet many of the lessons learned and applied herein can be adapted to multiple environments. For example, when anticipating the advent of a pending intergenerational wealth transfer, clearly communicate your expectations for the next generation, and seek to ensure that the next generation grasps and internalizes what tools and skills will be required to meet those expectations. Getting the next generation more deeply involved in actively thinking about and managing whatever level of wealth they aspire to or already possess can only be a positive development for all concerned.

Taking It from Wall Street to Main Street to Rodeo Drive

The securities industry in the United States in the early decades of the twentieth century was so scandalously under-regulated that most Americans, not without cause, saw little reason to distinguish between the purchase of corporate securities—stocks or bonds—and spending a long boozy night at a casino.

One of Wall Street’s most rigidly held traditional precepts at the time was that it was ungentlemanly for brokers to advertise. Charlie Merrill, the son of a prosperous doctor who had suffered an irreversible financial setback after being badly beaten during a holdup near his home in Jacksonville, Florida, was one of the first to break from tradition by garnering his first clients by sending out a soberly written letter to a select list of New York physicians, offering them the chance to consider the purchase of a few promising shares in firms whose attractiveness he outlined in a low-key fashion. Merrill’s conviction that a core value would be the provision of accurate and timely information to clients—a common practice fifty years later—was decades ahead of its time.

In 1915, Merrill and his partner, Edward Lynch, established a retail organization distinguished by the embrace of a pervasive philosophy that today would go by the name of “transparency.” Merrill personally coached every new recruit to avoid overselling clients on specific securities, particularly if they offered a rapid speculative route to profit. “A salesman deserves no credit for any sale made on the strength of exaggerated statements,” Merrill insisted in a widely circulated internal memo.

Not long before the 1929 stock market crash that he predicted, Merrill placed a US$5 million bet on the long-term future of the securities industry by purchasing a controlling share in E.A. Pierce & Co., the largest “wire-house” in the country. The overarching vision was to create a nationwide chain of brokerage houses, linked by telephone and telegraph wire, that would serve the financial needs of America’s burgeoning middle class in the same way that the Safeway supermarket chain—Merrill’s largest single personal investment—met its biological requirements.

At a two-day managerial conference held at New York’s Waldorf Astoria hotel in April 1940, Merrill outraged his audience by suggesting that the lofty financial services industry had much to learn from the lowly food industry. “When a customer comes into a Safeway,” he insisted, “she is entitled to buy with confidence, [knowing] that she will get full value at the lowest possible price.” Brokerage or investment banking customers of the new Merrill Lynch should expect nothing more and nothing less. “We must bring Wall Street to Main Street,” Merrill charged persuasively, “and we must use the efficient, mass merchandising methods of the chain store to do it!”

Financial writer Martin Mayer would eulogize Merrill’s crowning achievement as having coaxed the broad public into the financial markets “not as lambs to be fleeced but as partners in the benefits.”⁸

TRANSITIONING FROM A TRANSACTION-BASED INDUSTRY TO WEALTH MANAGEMENT

From its inception in 1915 by Charles Merrill and Edward Lynch, the firm of Merrill Lynch pioneered the transformation of the financial services industry from an enterprise based on the processing of individual transactions to a fee-based wealth management enterprise. A key figure in this evolution was Donald Regan, an ex-Marine World War II veteran and Harvard graduate who became CEO of Merrill Lynch in 1971 (and would go on to serve as Treasury Secretary under President Reagan).

Along with a number of his senior executives, Regan pushed for the scrapping of the regulated commission rates that for decades had kept Wall Street profits artificially high while providing a nearly insurmountable barrier to entry for “average investors.” He further challenged the traditional ways of the Street by taking the firm public in 1972, insisting that Wall Street firms that championed the sales of securities by publicly owned firms should practice what they preached and go public themselves.

But the chief insight that crowned the Regan era was his realization that trading and brokerage not just on Wall Street but around the world would soon be extensively automated. The long-term impact of technology on the brokerage business, he forecast, would be the erosion of the traditional source of profit for retail financial firms: high commissions on individual and block trades. In light of this realization, Regan launched Merrill Lynch Asset Management, a pioneering attempt to redefine the fundamental purpose of a traditional brokerage firm into an organization specializing in wealth management.

In the wake of wide-ranging deregulation at the national level, the overarching question posed by Regan’s grand strategy was, what was the future of the financial services industry? Regan’s key contribution was to promote the continuing conversion of the industry from a gentleman’s club catering to the needs of the old money elite into a convenience-based service model dedicated to vastly improving the lives and financial security of the mass affluent. What would become industry practice within a few decades was—like Merrill’s own innovations—rather radical for its time.

Paramount among the mass-market tools that Merrill Lynch developed to engineer this pronounced and profound shift of emphasis was the CMA (Cash Management Account), a first in the industry. The product of a creative collaboration between Merrill Lynch’s wealth management business and a team of academics at Stanford’s Research Institute, the CMA combined a checking account with a money market account, a brokerage account and a credit card account—a potent combination providing an extraordinarily convenient streamlining of services in an era before ATMs, PCs, and even handheld calculators. Having a CMA meant that for the first time, brokerage customers intending to buy and sell stocks no longer had to physically write checks and ensure that they were physically delivered to their brokers, who would then deposit the checks in their brokerage houses. The brokers would in turn track purchases of individual securities by actual stock certificates and check stubs, which clients were obliged to physically store in safety deposit boxes at their banks or brokerage houses.

Critics hotly denounced the CMA as a sneak attack on the Glass-Steagall Act, the Depression Era U.S. law that maintained a strict separation between the banking and securities industries. But the CMA had been scrupulously designed to pass muster with the relevant regulatory authorities and by 1977 the Federal Reserve Board, the Justice Department and the SEC had all given the green light for its rollout. As for the death of Glass-Steagall, although it survived for another two decades, the critics were spot on. When Citibank CEO Walter Wriston was asked in 1979 to describe the financial institution of the future, he replied without hesitation: “Don Regan already runs it—and it ’s called Merrill Lynch.”⁹

ADVOCATING THE TRIPLE-A WEALTH MANAGEMENT STRATEGY

From the point of view of both firm and consumer, the CMA was a highly effective tool for managing the purchase and tracking of securities transactions. But its larger implication for the industry (and for its clients) was that it spearheaded a broad-based philosophical shift on the part of the entire industry away from a transaction-based to a fee-based foundation. John L. “Launny” Steffens, Merrill’s Consumer Markets division chief at the time, publicly proclaimed that “profitability—both for our clients and for the firm—can no longer hinge on day-to-day transactions.” He passionately advocated a “Triple-A” strategic approach to managing the new broker-client relationship, which was comprised of a tripod supported by the following three legs:

1. Asset gathering;

2. Asset allocation;

3. Asset management.

“We believe long-term relationship building is best achieved by consultative selling,” Steffens contended, describing the ideal broker-client relationship as one in which the financial firm would assist its clients across a broad spectrum of financial activities, including setting aside funds for education and retirement, establishing trusts, long-term health...