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Asset management for family business

Maurice Smith is a business journalist with 20 years' experience in newspapers and broadcasting. He is the author of Great Scots Families in Business.

Increasingly, family business members expect a far more specialist knowledge in asset management from their advisors and it is up to the potentional advisors to be able to supply relevant and informed advice, taking into account their client's individual needs

A successful British business-owning family decides to sell out to an American rival, after months of deliberation.

The working family-managers of the business want the deal to be good for their customers, employees and – of course – the family itself. But they also need the transaction to be profitable, transparent and as tax-efficient as possible.

The vendors want payment in promissory notes, to take advantage of taper relief under UK capital gains taxation rules. The buyers, being Americans, do not want to make a long-term commitment to pay in sterling – given the risk of exchange rate fluctuation over the years during which the notes will come up for conversion into cash.

The principal vendor, leader of the family business, stood to gain the most from the deal. But he had several other concerns: a negative performance by the US dollar would hit the value of his US-denominated promissory notes, which can be cashed usually only over a certain pre-arranged period of time.

His advisors came up with a nifty solution, in the form of a specially-constructed hedge, which will protect the payments from the vagaries of the foreign exchange markets.

But the entrepreneur needed more advice. He wanted to buy a home abroad and use his promissory notes to raise hard cash to achieve this. And he wanted to improve the yield on his promissory notes by gaining an exposure to equity markets.

The result was complex, but of enormous value to the vendor. His advisors effectively created a complete package including a dollar/sterling hedge fund, loans for property guaranteed by promissory notes and an exposure to equities to impove yield.

All in all, not the type of service the average businessman could expect from his local High Street bank.

These complex packages are becoming increasingly de rigeur for the growing band of asset management specialists operating in Europe's major financial centres, especially London and Zurich. Apart from conventional family businesses who might have raised windfall funds from mergers or acquisitions, a large number of younger entrepreneurs made their millions during the booming late 1990s.

Several private bankers and similar advisors report that they remain very active working for such individuals, many of whom made their fortunes by selling out before the Internet 'bubble' burst in late 2000.

Inevitably, when a certain type of business emerges like this, many advisors will claim to have all the right answers for the newly-wealthy or for long standing family enterprises whose principal members have amassed substantial cash or other assets and are looking for the right kind of help.

So where should you go to get the right type of advice? The real answer will depend on your needs. However, it is important to make sure that you know what you want to achieve, before setting out to find the best available help.

Finding the right fit
There are many specialist 'boutique' advisors who will attend to quite specific needs such as tax, international investment, legal structures, etc. Many people with funds to invest are likely to have trusted advisors such as accountants or lawyers who may also be able to introduce the right sources of advice.

Several of the major European banks have long-standing experience of running 'family offices' for dozens of major concerns who have large funds to manage and need a specialists' understanding of their needs. Examples include UBS, Schroders and Julius Baer.

Additionally, some private banks – once the domain of royalty and the privileged, land-owning classes – have begun to move beyond their traditional roles as lenders. Their success is underlined by the fact that several mainstream UK and mainland European banks have created specialist services aimed at high net worth individuals.

"It is true that some of the traditional private banks remain very conventional, acting as lenders with some other discrete functions," observed one experienced advisor. "But increasingly they are having to acquire new skills, and recruiting people who know more about asset management than a traditional banker would do."

It is estimated that more than two-thirds of all multinational companies are privately owned and there is plenty of evidence that the number of private companies in any economy is related closely to the number of millionaires with money to invest in that economy.

"The services on offer have, in tandem with the private clients themselves, become increasingly sophisticated," commented Martin Anderson, head of corporate advisory services at Schroders Private Bank. "In addition the individuals seeking this level of advice are not interested in going to one advisor for one thing and to somewhere else for another. Therefore private banks need to employ people who can advise on every asset class (equities, bonds, cash and alternative investments such as private equity and hedge funds, etc). Today's private banker is a financial expert with an ability to see the 'bigger picture' when helping a client to develop an investment strategy or financial solution."

Anderson points out that individuals are seeking more structured products to ensure greater protection against market fluctuation and therefore protect value.

He also points out that, as a result of the volatility in the equity markets since March 2000, clients are increasingly looking at the absolute rates of return, (ie they are benchmarking their portfolios against cash returns) and are looking for 10-15% return per annum over the long-term. "This is where alternative investments such as hedge funds, private equity and property really come into their own," he adds.

How far should individuals or companies go in constructing their asset management? A lot of that depends on the level and value of assets, the countries in which they are managed or based, and what clients actually want from their money. "You would not sell a 10-year bond to an 80-year old, would you?" explained one private banker.

In simple terms, cash talks. A larger client for most private banks and asset managers would have UK£25m to invest or manage, and at that level is most likely to require advisors to pitch for the business in a 'beauty parade', or competitive tender. Some with considerably less may also seek some kind of tender, and will want to be convinced that their potential advisor is well qualified and able to resource the account. Advice like this is not cheap and managing a diverse asset base can be time-consuming and complex in terms of deciding options for each kind of investment.

"You need more than £300m to justify running a family office," points out one experienced advisor. "People should be very aware of what they want and who should manage it for them. At that level there are opportunities for serious asset growth, but there are considerable risks for the reckless investor.

"Some of the gains made by individuals and companies during the TMT (telecoms, media and technology) boom were phenomenal but the severe lurches in value experienced in that sector during recent years underline the fact that investments can be won and lost very easily."

At Schroders, Anderson believes the wealthy entrepreneurs who made substantial gains were those who took thorough advice, for example to hedge the value of their assets against market fluctuation and spread risk as a result. "It is vital that individuals and families take advice from financial experts so that they can plan for both the short and the long-term. An uneducated decision can potentially lead to very large losses," Anderson explains.

Rules of engagement
Broadly, there are two simple rules for individuals who want the right type of advice about asset management.

- Investors should not be afraid to demand evidence of strong asset management performance from those who seek their business. That evidence should be thoroughly presented and should be compared to the market as a whole.
- Look for a spread of capability among those advisors who want your business. Some banks are still very conventional and this may not be the kind of assistance needed for complex asset management.

The right advisor may be one who has in-house expertise across a range of activities and structured products. They should be able to present evidence that this expertise is well-founded, competitive and relevant to your needs.

Finally, individuals should have as clear an idea as possible as to what they want from their assets. Do you have an aversion to property or certain types of equities? Is your priority to make longer-term investments for your children or to keep cash free for new business ideas?

Some newly-enriched entrepreneurs dream of retiring young, but there is plenty of evidence that this option does not necessarily work out for the type of person who thrives on competition, the work ethic or developing new schemes.

"It is important to understand where the client is coming from, what are his needs and aspirations, his age and his interests. A 40-year-old with a young family and a financial windfall will want something very different from a 65-year-old in semi-retirement," points out one consultant, who has recently advised a younger retail entrepreneur who made more than £100m from a company sale, but who has kept some of that money free to invest in two new businesses.

Asset management decisions should seek to maximise value and protect long-term growth, but they should also be flexible enough to cope with changing needs.

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