Ten Principles for Good Wealth Management

06.02.2014
Written by Spiros Margaris. Published in Huffington Post UK

The important question that family offices must constantly ask themselves: “Is our wealth management good wealth management?”

Can the partners (asset managers, specialists) satisfy the requirements stated in the Ten Principles for Good Wealth Management?

There are many definitions for family offices. What most could agree on is that they manage the complex needs of very wealthy families with liquid assets above USD 100 million.

The family offices needs and key issues ranging from wealth management, accounting, consolidation, liquidity management, wealth preservation, controlling and family governance to tax planning, estate planning, succession planning and philanthropy.

The principles should be useful to Single-Family Offices, and Multi-Family Offices (serve two or more families), since they demand the highest standards from the partners they choose to manage their complex wealth.

The principles are suitable not only for family offices but also for individual investors to better evaluate and select their wealth management partners.

It is necessary to gain a comprehensive understanding of the family offices interests and thoughts to understand their needs and priorities.

The three fundamental objectives „For me, my business or my heirs“ need to be understood. That is what it all comes down to.

The motto of the LEGO group was always “Only the best is good enough!” That is exactly the motto family offices live by when they choose their partners. The partners must never forget.

Family offices require conflict-free advice from their partners that should be understood as the basis of their working relationship.

Family Offices wealth management is either handled entirely in-house, fully outsourced to outside partners or a combination of both. The ten principles will apply equally for intern and extern partners.

Within most family offices, asset allocation, manager (partner) selection, monitoring, risk management and reporting make up the bulk of their wealth management responsibilities.

The strategic asset allocation helps to achieve target returns, lower risks and manage liquidity needs.

The ten principles will deal only with the wealth management and not address the equally important part of structure needs and services of family offices. One should never forget though that the two are not mutually exclusive but inescapably linked from the very beginning.

The ten principles should serve as guidelines for family offices decision-makers and their partners to achieve the best possible wealth management outcome.

Of course, there is an infinite number of principles for good wealth management that one can choose from but here are the ten most important principles.

Here there are.

Ten Principles for Good Wealth Management

Good wealth management means:

1) Do not lose money

This is the most important point of all. The only thing that is more difficult than making money is making up a loss.

To understand the importance, one has to imagine an investment loss of 20 percent. In this case, one would have to earn 25 percent to get back the original level where one started. With a 50 percent investment loss, one would need a performance of 100 percent.

2) Make money

Without performance, there is no need for wealth management, or for partners to apply for a mandate.

Never should one lose sight of the fact that money management success depends on it.

3) With heart and soul

Partners need to show outstanding commitment to giving their best. They will need to devote themselves, heart and soul, to managing the family office mandate

They need to understand the responsibility that comes with managing the assets entrusted and the risks involved.

4) „Skin in the game“

Partners need to have their money, or their skin, in the game. They need to have a direct interest not to lose money entrusted to them.

They have to share the pain of investment losses.

5) Focus

Specialization helps to provide the most added value to family offices. The family offices look for partners with exceptional expertise and professionalism to be able to take advantage of investment opportunities.

If the market opportunity set does not fit the partner's skills, the mandates must be returned that is part of the professionalism family office expect from their partners.

6) Embrace the competition

The competition with all its highs and lows helps all involved assessing, as objectively as possible, the performance of the asset management mandates given to partners. Partners must take complete responsibility for both losses or poor results. Setbacks are part of the business. The real question is how we deal with them.

“We cannot change the cards we are dealt, just how we play the hand.”

- Randy Pausch (1960-2008)

7) „Put the fish on the table“

It is better as a partner to pick up the phone first to break the bad news to the family office. Although it might be extremely unpleasant, it is part of the responsibility and professionalism that comes with a money management mandate and the trust given.

Further, it helps all participants to assess as quickly as possible a difficult situation, decide on the next steps and thus to deal as effectively with the unfavorable consequences.

8) Deal with pressure

„If you can't take the heat, get out of the kitchen.“

That applies to all aspects of the business.

9) Assess chances and risks

Without risk, there is no chance or reward. Making money depends on identifying opportunities in uncertain market periods.

10) Never forget point 1

„Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.“

- Warren Buffett (1930)

THE BRAVE STEP: Ten Principles for Good Wealth Management (PDF)