How do the rich secure their money?
Discussion
twinturboz said:
Yup Apple's cash is in it's own hedge fund Braeburn Capital, I think it's the world's biggest.
Yes, it's an interesting situation - a company which believers it can make a better return by investing in other companies rather than developing its own business - at the moment. Highly unusual to be both successful and in that position.Apple company value (approx.) $600,000,000,000
Braeburn fund value (approx.) $200,000,000,000
In other words, Braeburn accounts for about one third of the total value of Apple.
To answer the OP's question:
Seriously wealthy people will have their money invested across a diverse and usually very cautious portfolio of assets. Property is a favourite and equity and bond exposure generally follow property. They will create (as has already been mentioned) a "Family Office", that is to say a small company that manages their personal wealth (and sometimes offers to manage the wealth of others - for a fee, of course).
Your question, however, was on where they keep their cash. They will use a proper private bank, one that doesn't lend other than from its own assets. I can cite Duncan Lawrie as an example. They offer private banking and various other services, but they do not lend against other deposits (as every mainstream back does), they only lend against their own assets.
This means that your deposits (of any size) are never subject to default. Of course you don't earn any interest (though you can earn a giddy 0.125% gross on their Instant Reserve Account!) so you will be losing against inflation, but your cash is safe.
Seriously wealthy people will have their money invested across a diverse and usually very cautious portfolio of assets. Property is a favourite and equity and bond exposure generally follow property. They will create (as has already been mentioned) a "Family Office", that is to say a small company that manages their personal wealth (and sometimes offers to manage the wealth of others - for a fee, of course).
Your question, however, was on where they keep their cash. They will use a proper private bank, one that doesn't lend other than from its own assets. I can cite Duncan Lawrie as an example. They offer private banking and various other services, but they do not lend against other deposits (as every mainstream back does), they only lend against their own assets.
This means that your deposits (of any size) are never subject to default. Of course you don't earn any interest (though you can earn a giddy 0.125% gross on their Instant Reserve Account!) so you will be losing against inflation, but your cash is safe.
Lottery winners get introduced to Coutts they have a Coutts man who does nothing but "handle" lottery winners, he is a friend of a friend I've met him a few times. The sad thing is many winners of £2-3m think that after they have bought range rovers for all their offspring and bought their council houses that they will live like the Beckhams. He says its quite sad to see how some of them ignore the advice given and end up not far from where they started
The idea that the wealthy set up a Family Office to invest in very conservative assets is in my experience inaccurate. If they want to target say 3 to 5% returns (which in this day and age isn't that conservative) they can easily do that by giving Blackrock/Pimco/M&G a lump of money with specific return targets...what is known as a Managed Account. You don't need to hire and build an expensive infrastructure of your own to target those returns.
Family Offices in my experience where they are investing capital themselves target at least 10% IRR's/Returns and depending on asset class/jurisdiction much more.
These people have generally got rich by taking risks and continue to back themselves to do so. It's just not in their nature to take the foot of the pedal otherwise they'd have done so way before they'd amassed their vast fortune.
Family Offices in my experience where they are investing capital themselves target at least 10% IRR's/Returns and depending on asset class/jurisdiction much more.
These people have generally got rich by taking risks and continue to back themselves to do so. It's just not in their nature to take the foot of the pedal otherwise they'd have done so way before they'd amassed their vast fortune.
Cheib said:
The idea that the wealthy set up a Family Office to invest in very conservative assets is in my experience inaccurate.
Here's the data.8% cash
12% bonds
15% real estate
And just 25% equities and 26% VC/PE/HF
http://www.globalfamilyofficereport.com/
walm said:
Cheib said:
The idea that the wealthy set up a Family Office to invest in very conservative assets is in my experience inaccurate.
Here's the data.8% cash
12% bonds
15% real estate
And just 25% equities and 26% VC/PE/HF
http://www.globalfamilyofficereport.com/
I work for a Family Office.....95% of the staff work on Alternative Assets as is the case with the other Family Offices we work with.
Cheib said:
Sure but most of that gets allocated on Managed Accounts to the like of other managers. The people that are actually employed in the Family Office will almost in entirety be working on the Alernative Assets. As I said you don't need to employ people directly to invest in Fixed Income or Equity markets....it's just not economic. For example if you want to get M&G to manage £500mil of capital allocated to Global Fixed Income they'd probably charge you somewhere between £700k and £1mil a year. You couldn't possibly run a team to manage that much capital for anything like that.
I work for a Family Office.....95% of the staff work on Alternative Assets as is the case with the other Family Offices we work with.
Right, but you are now just talking about what people in the Family Office actually do with their time.I work for a Family Office.....95% of the staff work on Alternative Assets as is the case with the other Family Offices we work with.
The allocation of assets, which is what everyone else is talking about, isn't mostly in alternative assets.
It's in the boring stuff - as above in the chart.
So aren't you being disingenuous to say...
Cheib said:
These people have generally got rich by taking risks and continue to back themselves to do so. It's just not in their nature to take the foot of the pedal otherwise they'd have done so way before they'd amassed their vast fortune.
??
walm said:
Cheib said:
Sure but most of that gets allocated on Managed Accounts to the like of other managers. The people that are actually employed in the Family Office will almost in entirety be working on the Alernative Assets. As I said you don't need to employ people directly to invest in Fixed Income or Equity markets....it's just not economic. For example if you want to get M&G to manage £500mil of capital allocated to Global Fixed Income they'd probably charge you somewhere between £700k and £1mil a year. You couldn't possibly run a team to manage that much capital for anything like that.
I work for a Family Office.....95% of the staff work on Alternative Assets as is the case with the other Family Offices we work with.
Right, but you are now just talking about what people in the Family Office actually do with their time.I work for a Family Office.....95% of the staff work on Alternative Assets as is the case with the other Family Offices we work with.
The allocation of assets, which is what everyone else is talking about, isn't mostly in alternative assets.
It's in the boring stuff - as above in the chart.
So aren't you being disingenuous to say...
Cheib said:
These people have generally got rich by taking risks and continue to back themselves to do so. It's just not in their nature to take the foot of the pedal otherwise they'd have done so way before they'd amassed their vast fortune.
??Cheib said:
No. Because the returns on 75% of the portfolio (in your example) are (and especially in the current environment) frankly almost irrelevant to what can be returned on Alternative Assets...i.e. the boring stuff is almost irrelevant when looking at returns on the overall portfolio.
I agree 100%.But the question was how do the rich secure their money not how do the rich secure their INCOME!
(And the OP made clear he was talking about assets rather than returns.)
I only really posted because davepoth implied that maximising the return was the main aim, and I still think that obviously that is hugely important but to a surprising extent (IMO) assets are held in more conservative low-return vehicles like property and bonds even though, as you say, the returns are paltry.
If the main aim of the truly wealthy was to maximise returns, then they would be 80%+ equities and alternatives not the other way round, surely?
I used to think that the truly wealthy went round punting 50% of the net worth on buying privately held companies or maybe on gambling that they found the next Tesla or Google.
But they don't for the most part.
They just buy half of Oxford Street and some GE bonds while allocating a little bit for the riskier stuff.
Cheib said:
These people have generally got rich by taking risks and continue to back themselves to do so. It's just not in their nature to take the foot of the pedal otherwise they'd have done so way before they'd amassed their vast fortune.
I think that's right. It's in the blood!If anything it's the "next generation" who are wealthy but don't understand money so go running off to advisers and end up with a "safe" portfolio - whatever one of those might be.
walm said:
If the main aim of the truly wealthy was to maximise returns, then they would be 80%+ equities and alternatives not the other way round, surely?
Depemds on the Family Office....I think. If it's "relatively small" i.e. say £200mil to a £500 mil they probably run a conservative asset mix because by the measure of the Super Wealthy they're rich but not so rich that they can afford to take huge risks. And lets say they want to invest £50mil in alternatives out of their £200mil. £50mil is not enough to justify having a dedicated team and you have an issue deploying that capital because most of the decent opportunities are in the £10 to £50mil investment bracket which are too big for you to contemplate because that £50mil is not going to be in one investment.
If it's say someone like a Saudi Family with tens of billions then there problem is finding enough opportunities to deploy capital so again they end up with a lot of vanilla/defensive investments.
Broadly speaking the Family Offices that really take a lot of risk relative to their size and don't have much exposure to vanilla investments are in the £1bil to £10bil bracket because they're in what is known as the "sweet spot" where there are plenty of investment opportunities in that £10 to £50mil bracket which are available to them and they can resource those opportunities correctly.
Family Offices used to compete with the likes of PE and Hedge Funds for a lot of these investment but the massive amount of red tape and regulation has meant those competitors who were once extremely fast moving now have to take their time, prove every decision has gone past four different risk committee's etc whilst the Family Office the only risk meeting is with the bloke whose money it is.
I've been involved in transactions where prices and economics have been agreed on a "handshake" and then we go through three months of due diligence work and legal work before it's legally done consumated. That would never happen with an institution managing someone else's money (rightly so). That's a huge advantage.
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