Commerce Family Office - Wichita State University

“WHEN YOU’VE SEEN ONE FAMILY OFFICE. . .” WSU ACCOUNTING & AUDITING CONFERENCE MAY 19-20, 2014 David Krauss, Managing Director Commerce Family Office

“YOU’VE SEEN ONE FAMILY OFFICE.”

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WEALTH MAP Who are the “High Net Worth Individuals?” $1MM-$5MM “Millionaire Net Door”

$5MM-$30MM

“High Net Worth”

> $30MM “Ultra High Net Worth”

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WHERE ARE THE ULTRA HIGH NET WORTH INDIVIDUALS?

167,000 UHNWIs per The Wealth Report (2014)

199,000 UHNWIs per Wealth-X/World Ultra Wealth Report (2013)

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THE UNITED STATES WEALTH MAP Total US UHNW Population

UNITED STATES UHNW

65,500

2013

2013

UHNW POPULATION

TOTAL WEALTH (USD in billions)

$1 billion

515

2,064

$750 million to $999 million

285

270

$500 million to $749 million

925

656

$250 million to $499 million

1,945

945

$200 million to $249 million

3,830

890

$100 million to $199 million

5,080

995

$50 million to $99 million

20,605

1,890

$30 million to $49 million

32,320

1,375

65,505

9,085

NET WORTH

TOTAL

Source: Wealth-X Report (2013) 5

THE UNITED STATES WEALTH MAP Distribution of UHNWIs by State California

#1

(12,500)

New York

#2

(8,900)

Texas

#3

(6,300)

Florida

#4

(4,200)

Oklahoma

#23

(890)

Missouri

#24

(800)

Kansas

#25

(550)

Arkansas

#26

(550)

Source: Wealth-X Report (2013) 6

THE UNITED STATES WEALTH MAP

States such as Arkansas, Kansas and Texas are also well placed to benefit. “Arkansas is a

massive beneficiary of the booming agribusiness and the return of manufacturing,” says Sr. Mamgren. “Nationwide, transport networks and the cheap energy/fracking story are going well. When people get priced out of major cities like New York and San Francisco, they move to cities like Kansas City and Houston. The middle of America is where the economic action is now.” The number of UHNWIs in Houston, for example, is expected to rise by 57%

by 2023, far outstripping the overall US growth rate of 21%.

Source: Wealth-X Report (2013) 7

WHAT IS THE ONE THING THAT WE KNOW ABOUT ALL OF THESE AFFLUENT INDIVIDUALS?

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CHALLENGES OF SIGNIFICANT FAMILY WEALTH

FAMILY

Family Trusts

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WHAT HAS EVOLVED FROM THE “CHAOS OF FINANCIAL SUCCESS?” The Family Wants… Family Trusts

Special Projects

Business Succession

Family Education

Family Governance

Continuity of Family Legacy

Investment Planning & Analysis

Philanthropic Activities

Lifestyle Management

Accounting, Reporting & Compliance

Family Communication

FAMILY

Management of Administration

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CONCEPT OF A FAMILY OFFICE An integrated and coordinated service delivery model:

— Objective and personalized advice — Centralization of risk & other services — Support system for meeting the challenges faced in managing wealth and trust administration — Governance/Management infrastructure — Assistance in the accomplishment of long-term goals — Bifurcation of family vs. family business

—

Highly-sophisticated investment consulting

— High investment returns — Collaboration among financial disciplines — A reliable resource to handle day-to-day demands

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CONCEPT OF A FAMILY OFFICE The advisor sees:

— Relationship building with family — Revenue growth — Next generation relationships — Expanding the closely held business CFO role — Job opportunities

OVERALL OBJECTIVE: To maximize opportunities for managing and growing wealth while preserving the family’s legacy, values and continuity

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FAMILY OFFICE MODELS

Single Family Office

Multi-Family Office

•

Totally controlled by 1 family

•

Shared operating costs

•

Governance varies

•

Sometimes shared philosophies investment principles

•

Generally “outsiders” serve as COO & lesser position

•

Ability to alternate talent

•

Increased privacy

•

Ability to alternate outside resources

•

Increased confidentiality

•

Tendency to spread too thin

•

Enhanced business models

•

Diseconomies of scale?

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FAMILY OFFICE MODELS Either model requires decisions:

— In-house v. outsourcing – Allocation/Diversification

– Record retention – Philanthropy – Risk management – Financial controls vs. budgeting – Financial literacy

– Business succession – Legacy planning – Everyday activities — Family involvement — Specialized activities — Experts

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FAMILY OFFICE SERVICES Family offices generally provide the following broad category of services:

Family Wealth Stewardship/ Governance

Risk Management/ Advisory Services

Investments

Family “CFO”

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FAMILY WEALTH STEWARDSHIP — Long-term objectives – Family mission statement — Family governance

—

Family wealth education

— Philanthropic planning — Family business consulting – Succession planning — Family communication – Information dissemination – Family meetings

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RISK MANAGEMENT Assessment and mitigation of risks aligned to key family objectives:

— Life cycle events — Tax compliance — Estate and legacy planning — Life insurance review — Property and casualty insurance review — Executive benefits

—

Retirement planning

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FAMILY CFO — Family balance sheet and income statement — Cash flow planning — Income tax projections and preparation

— Real and personal property management/oversight — Collaboration with all family advisors — Foundation management — Bill pay — Other daily services

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INVESTMENTS — Develop investment policy statement — Asset allocation advice — Investment consulting and manager selection

— Investment management — Monitor advisor performance — Consolidated performance reporting

SETTING YOUR INVESTMENT POLICY Meet with Client to Discuss Needs & Objectives

Perform an Asset Allocation Study

Work with Client to Determine Investment Policy

IMPLEMENTING YOUR PORTFOLIO Finalize Asset Allocation

Select Managers

Implement & Monitor

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WHAT DIFFERENTIATES THE FAMILY OFFICE FROM “REGULAR” PRIVATE CLIENT SERVICES?

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BENCHMARKS OF FAMILY OFFICE SERVICES Broader role in strategic planning for the family & oversight of progress toward goals—with multi-generational focus

Assistance with family communications & coordination of activities based on the needs & desires of individual family members

More responsibility for coordination among other key advisors & outside services providers

Highly-tailored solutions to meet the unique needs of each family

A “deeply engaged”/”highly intensive” service model

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FAMILY OFFICE STAFFING Team Lineup Managing Director/ Relationship Manager

Wealth Advisor

Portfolio Manager

•

Stewardship

•

Financial planner

•

Investment policy statement

•

Education

•

Technology skills

•

Portfolio construction

•

Strategic planning

•

Day-to-day resource

•

Investment reviews

•

Liaison with outside advisors

•

Coordination the team

•

Business development

Private Banker

Trust Administrator

Tax Planner

•

Credit

•

Administration

•

Tax returns

•

Lending

•

Trust interpretation

•

Estimated tax projections

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FAMILY OFFICE STAFFING Team Lineup Insurance Advisor

Estate Planner

Business Consultant

•

Property/casualty insurance

•

Documents

•

•

Life insurance

•

Estate tax strategies

•

Coordination with estate

•

Valuation

planners

•

Succession

Real Property & Personal Property Manager

Oversight of closely held business ties within family

Additional Staff

•

Property management

•

Technology Consultant

•

Property services

•

Support staff

•

Household staff

•

Legal

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FAMILY OFFICE STAFFING Challenges

— Ideal combination of technical skills & soft side personality — Career path

—

Succession planning

— Transition

Skills

— Personality — Technical — Language — Detail 24

COSTS OF OPERATING A FAMILY OFFICE

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COMPONENTS OF COSTS — Internal family office costs – Staff

— Allocations of costs – Investment management

– Training

– Internal office costs

–

–

Technology

– Operations — Outside advisors – Professional fees – Accounting

– Compliance — Investment costs – Consulting

External advisory costs

— Staff compensation – Costs for highly-qualified professionals — Complexity drives costs — Communications – Client service agreement – Survey

– Research – Custody

– Manager fees

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PRICING OF A FAMILY OFFICE

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PRICING MODELS

FLEXIBLE MODELS

Fixed fee

% of AUM

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BEST PRACTICES

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HOW CAN A FAMILY OFFICE DISTINGUISH ITSELF? — Clearly-defined value proposition

— Reliable referral partners

— Commitment to the long-term needs of the family

— Knowledge of target market

— Confidentiality

— Regular and timely communications

— Risk management oversight

— Good clients

— Prudent growth rate

— Goals-based investing

— Ongoing assessment

— Talent development

—

—

Consistent/flexible pricing

Technology upgrades

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