I grew up on Long Island near the State University of New York’s Stony Brook campus. We lived about fifteen minutes from a variety of beaches and docks. From time to time, we’d walk around the docks and I’d look at all these beautiful boats just bobbing in the water.
We never owned a boat. We didn’t know anyone who owned a boat. But on one of these walks, I remember my dad explaining to me that those boats could sometimes cost millions of dollars. He would point out a few that cost more than our house – a concept that probably blew my fragile little mind.
Then he dropped the bombshell – some of those million dollar boats had staff. People who lived on the boat and took care of it.
Whatever was left of my mind was blown.
That’s one of the biggest things that separate the wealthy and the rest of us. You might hire a cleaning service every week or two. You might take your car to a car wash. You might have a landscaping company mow your lawn and tidy up your bushes. You don’t have a full time maid, butler, or gardener on staff.
The closest most people get to full-time help is a nanny to watch your kids.
That’s just half of the equation. The part most people don’t see has nothing to do with the management of day to day operations. It’s in wealth management. The staff that preserves and grows their wealth… that’s the truly game changing difference. Wealth is difficult to acquire and even harder to preserve.
When you package those two together you get what’s known as a “family office.” If you have enough money ($100 million+), you can hire the staff for your own single family office. If you don’t, you can build a close approximation for far less.
Table of Contents
The Family Office
When you have a lot of money, you start thinking about your money having a lifespan.
The proverbial dollar in your pocket could live with you for a few hours, until you spent it on lunch, or it could live with you until you die. What you do with that money, how you care for it, is critically important.
That’s where a family office comes in.
Imagine you were worth billions. Once you bought everything you ever possibly could want, you would still be left with billions. There are dollars that will not only outlive you, but your kids. And their kids. And theirs.
When you have billions, you can and often should pay someone to manage that money for you. You can pay for someone to pay the person who is managing that money for you.
That’s a family office. It’s a company, which is just a legal wrapper around a group of people that manages your assets.
A family office serves two major functions:
- Day to day support – administrative support functions like paying the bills, maintaining vacation homes.
- Managing the family’s wealth – maintaining and growing the wealth through investment management, estate planning, and banking.
Much of what I approximate below is guided by this excellent Credit Suisse whitepaper. This is not a guide to setting up or replicating a family office, it’s a guide for people to approximate the functions of a family office as is appropriate.
Day to Day Support
For the wealthy, the day to day support means making sure all the bills are paid, services are scheduled, and all maintenance work is performed on time.
If you owned several vacation homes, boats, and high end vehicles, this type of support is crucial. If you thought maintaining one home was time consuming, imagine several! Now add in a boat or two and it’s more than a full time job.
Fortunately for regular folks, many of these things can be automated and today you’ll learn how.
Our bill payment is nearly 100% automated with automatic debits from our Ally Bank checking account.
After drawing our financial network map, I rebuilt it so that Ally became my hub. All income flowed into that checking account and all expenses were paid from that account. The only task I need to do is to maintain a minimum balance there so that I’m never caught off guard by a transaction.
We have two monthly bills – utilities and our credit cards.
For our utilities, we use bill pay as initiated on the bank side. Bill pay is amazing and if you haven’t linked up your bills to your checking account, now’s the time to start.
Our electricity provider, BG&E, will send Ally a bill with a deadline to pay. Ally will notify me that they’ve received a bill and it is now set to be paid on the due date. There is zero intervention on my part. All I receive are emails.
For bills that don’t offer automatic debits, I rely on manual online bill pay. Manual online bill pay takes a minute to set up for each bill but you can make payments in seconds. It beats finding your checkbook, writing a check, finding an envelope, addressing the envelope, putting on a stamp, and then dropping it off at the mailbox (typing that out made me tired). And it saves you the cost of a stamp.
Set up automatic debits whenever possible and manual bill pay if there are no other options.
For the credit cards, we have it set on automatic payment in full and this is initiated by the credit card company. All we do is get a statement by email, which we can scan for any fraudulent transactions (this is not entirely accurate, I review transactions more regularly through Personal Capital).
All other bills in our household will directly debit from the Ally account, by ACH, or is billed to a credit card (our Southwest Rapid Rewards credit card).
If your checking account doesn’t offer bill pay for free, find a new bank. This is a must have account feature.
The first tool you’ll need is free – Google Calendar. Use it to schedule all of your annual checkups, tuneups, etc. so you remember exactly when you need to do it.
We don’t have any vacation homes, boats, or high end cars but we do have a pool. We schedule to have our pool closed on September 15th every single year because we know we never use it after that point. We also know that’s when the leaves start falling and maintenance work skyrockets if we don’t close it by then. By setting an annual meeting reminder (technically, an Event within the Google Calendar nomenclature), we never have to try to remember the best time to do it.
We also have a John Deere riding mower, which needs to get winterized and tuned up every year. That’s scheduled for a little later and is based on when the leaves are off the trees (usually late October).
While you’re at it, put reminders of anything else you feel is important in your life. A two week reminder that it’s your significant other’s birthday, a month reminder that it’s your anniversary, or just a bi-weekly reminder to say “I love you” just in case life gets too hectic and you forget. Nothing is too big or small. You aren’t charged by the reminder. 🙂
It’s important to get these dates out of your head and into an electronic scheduler that will remember for you.
This last set of services is a catch-all for everything else they may do – like book airline tickets and hotel rooms. For this, you can hire a virtual executive assistant.
When a family office provides this service, they’re just being a virtual executive assistant but at a much higher hourly rate.
If you have tasks that don’t require the person be physically present, document what you’d like them to do, including step by step instructions, and task the job to a virtual assistant.
One of the more popular EA services is Zirtual. I’ve never used them.
Wealth management is where a family office justifies its fees. The day-to-day removes some headache and provides convenience, but wealth management keeps those bills paid.
Managing wealth has two main functions.
The first function is as a portfolio manger. The second is as a wealth advisor.
A portfolio manager is responsible for the investment portfolio while the wealth advisor deals more with planning, wealth transfer, and taxes.
Be Your Own Portfolio Manager
I’m sure you’ve read about how most investment managers can’t beat their own benchmarks (in 2014, 86% of active large-cap fund managers didn’t beat their own benchmarks), which goes to show that active management isn’t all it’s cracked up to be.
You can get 95% of the results by doing two things:
- Invest on a regular basis: Make regular contributions to your retirement accounts.
- Rebalance on a regular basis: Once a year, rebalance your portfolio back to your target percentages.
The biggest problem with retirement investing isn’t asset allocation, it’s that people aren’t saving enough. Just start saving and pick the asset allocation later, if that decision leaves you feeling handcuffed.
Or here are four approaches that are just as good as anything (I use Vanguard as examples because I use them and they have extremely low fees, you can use whatever low-cost option you want):
- 120 Minus Age: 120 minus your age should be your target percentage allocation in equities. If you’re 30, that means 90% in stocks. 10% in bonds. You can get this through Vanguard by investing in the Vanguard Total Stock Market Index (VTSMX) and the Vanguard Total Bond Market Index (VBMFX). If you want a little spice in your life, you can take some of the 90% in stocks and go with the Vanguard Total International Stock Index (VGTSX) to get some international. (you can also do 100 minus your age)
- Target Retirement Fund: Target retirement funds are a type of fund that adjusts the allocation automatically based on the target retirement year. It will invest in other funds. If you invest in the Vanguard Target Retirement 2045 (VTIVX), it’ll adjust for a retirement in 2043 – 2047 with an assumption you’ll be 65 in 2045.
- Go with a Core Four: Coined by Rick Ferri, the Core Four is a very simple plan – it’s the core foundation of your investment strategy and consists of Vanguard Total Stock Market Index Fund Investor Shares (36% VTSMX), Vanguard FTSE All-World ex-US Index Fund (18%, VFWIX), Vanguard REIT Index Fund Investor Shares (6%, VGSLX), and Vanguard Total Bond Market Index Fund Investor Shares (40% VBMFX). You then layer any additional investments on top of this for added excitement but the Core Four form the basis of your portfolio.
- Go with a robo-advisor: Still not confident with one of the first three options, go with a robo-advisor like Wealthfront and Betterment. They have reasonable fees and can handle things like tax loss harvesting, rebalancing, and the like.
You have an allocation, time to set up automatic contributions so you’re saving each month. If you’re investing through a retirement plan at work, make sure you’re automatically contributing on a monthly basis. If this is outside of the workplace, work with your brokerage to find out how to make automatic contributions.
If your brokerage does not offer automatic contributions, you have two options. One, switch brokerages. Two, set reminders in your Calendar. At this point, you have all the information you need to take action.
What about year to year adjustments outside of age-based allocations? If you’re using Target Retirement, it gets handled for you. If you’re using one of the others, you just need to make your adjustments when you rebalance each year. The adjustments you make should be relatively small at first, eventually as you near retirement you’ll want to adjust them to become more conservative.
What if I think there’s a sector poised for a downturn/upturn and I want to take advantage? Here’s where most people say “don’t mess around, just buy an index fund and be done with it.” Let’s be real, it’s an itch. If you have an itch, you have to scratch it or it gets worse. Scratch it by paper trading and seeing if you’re any good at it. If after year, you’ve eeked out a gain worth pursuing, carve out a few thousand dollars to put towards this side hobby. I do this with dividend investing.
Keep the bulk of your funds within your core portfolio but there’s nothing wrong with taking a few dollars out of the side to invest with.
What about consolidated reporting? This will be one service you won’t be able to replicate easily. My recommendation is to consolidate your accounts so they are all held in one brokerage account. You get consolidated reporting because your accounts are consolidated.
Alternatively, you can use a data aggregation dashboard to pull from multiple brokerages. Services like SigFig and Personal Capital won’t give you a consolidated report for the year but it will put all your investments in one place.
If you have investments that aren’t trackable through a brokerage or bank (think anytime you get a Form K-1, like for real estate or a partnership), you may want to look at a service like Vyzer. Vyzer offers tracking but you can also just send them your financial statements and they will parse it for you.
Be Your Own Wealth Advisor
If your estate is worth many millions, you should not be using standard templates. The templates themselves aren’t the problem though, what you’re missing is a vision of the big picture.
Wealth advising isn’t difficult, it’s just a big list of things you need to consider. This is challenging when you don’t have the list. It’s like navigating in the dark, you can walk around just fine but you don’t really know what you’re doing and you hope you aren’t screwing up.
Here’s an easy to understand example from estate planning. The federal estate tax kicks in when the estate being transferred is greater than $12.06 million for individuals ($24.12 million for couples) for 2022. You can avoid this tax by using irrevocable trusts, but you wouldn’t know that unless you studied estate planning or worked with a professional. That’s a simple case, things get far more complicated as you move up the wealth ladder.
How do you do this yourself? You work with professionals.
If you or someone you know has ever had major renovation work on their house, you often work with a general contractor. The general contractor is your point of contact. He, or she, is responsible for hiring the subcontractors who are specialists. The general contractor oversees the work and the specialist subcontractors do the work.
To do this yourself, you will be the general contractor of your wealth plan. This will require a bit of expertise but I’ve worked with a financial advisor and to the best of my knowledge these were the pieces I needed.
Here are the specialists you will need (at a minimum):
- Certified Public Accountant – tax planning and tax return preparation/filing.
- Estate Planning Attorney – setting up your estate.
- Insurance Agent – ensuring you are properly insured against potential risks, including death, disability, and medical problems.
For every real live human specialist, there is a do-it-yourself option. If your situation is simple, the DIY option will work just fine.
When you use a DIY option, you lose the expertise and experience of the specialist’s help in determining what you’ll need will be. If they’re basic, then you surrender nothing. Software has gotten so sophisticated that most scenarios are covered, you just don’t have the option to ask questions.
In some cases, that won’t matter (you can prepare your taxes with tax preparation software). In others, you may want to consult with the specialist even if you won’t use them because you learn you don’t need them (estate planning). Doing something (like using software) is better than doing nothing.
Let me repeat that for emphasis.
Doing something is better than doing nothing.
If you aren’t sure about hiring an estate plan lawyer, get the software package today and complete it. In case something happens between now and when you get your ass in gear, you have the software… plus you’ll have answered all of the difficult problems. The rest is just paperwork.
Finally, before you select a specialist, you’ll want to meet with a few to get a sense for costs and expectations. These services are like buying anything, you need a few quotes to know what you’re getting into or you may overpay or underserved.
(if you are not so wealthy that estate planning is a crucial piece, writing your will is still important and something you should do even if it means relying on software)
Schedule Wealth Management Events
Every quarter, schedule a meeting with any stakeholders (spouse!) and go over your wealth management plan. Check-in on any action items you’ve left outstanding (getting life insurance, finishing will, etc.) and get in the habit of checking in on your finances to ensure they’re on track and fulfilling your needs.
One of these meetings, usually the year-end one that coincides with your tax planning, re-evaluate your contributions and rebalance as necessary.
Vanguard released a report that explained “there is no optimal frequency or threshold when selecting a rebalancing strategy. … the number of rebalancing events and resulting costs (taxes, time, and labor) increase significantly.” They conclude if costs for rebalancing are high, do it annually. Otherwise, do it whenever the allocations get out of whack by 5% thresholds.
That about covers it!
If you take care of the above, you have a close approximation to a home office – minus a few of the pieces that are crucial for those managing wealth in the hundreds of millions. I didn’t talk about a few subjects, like risk management, because it was outside our scope but there are a few fantastic resources you can turn to (including the Credit Suisse whitepaper) for a deeper dive into those issues.
This is also a work in progress – if you see a big piece missing (or a big misunderstanding) – let me know in the comments!