EXECUTIVE
SUMMARY |
CPAs WILL FIND THAT
ULTRAWEALTHY CLIENTS DEMAND a
broader range of services and skills than
the merely wealthy. To serve this group,
CPAs will need to tailor their offerings
and sharpen their estate planning and
investment management skills. Most
financial planners define the truly rich
as families with more than $25 million in
net worth.
THE DISTINCTION BETWEEN
THE MERELY RICH and the truly
rich rests on two pillars—the amount of
the client’s net worth and his or her
goals for using it. The ultrawealthy
ones generally plan that their assets
will outlive them and need help
transferring these funds to their heirs
or to charity.
CPAs WHO WORK WITH
ULTRAWEALTHY CLIENTS have
several options for meeting their needs.
Some choose to add a variety of services
to their offerings, including bill
paying, account aggregation and due
diligence. Others elect not to provide
these services and instead refer clients
to specialists. Those who expand their
range of offerings are typically
operating a family office or providing
personal CFO services. CPAs who work
with more than one such client form a
so-called multifamily office.
PLANNING FOR MULTIPLE
GENERATIONS DEMANDS that CPAs
be familiar with specific tools to
advise their clients properly. This
includes knowledge of certain strategies
and techniques such as private
foundations, charitable remainder trusts
and family limited partnerships.
CPAs INVOLVED IN MANAGING
THE WIDE RANGE of issues very
wealthy clients face should be prepared
to draw heavily on their counseling
skills. CPAs may need to educate parents
about making distributions from trusts
to younger family members. In some
instances they may need to offer more
money-handling advice to families with
newer money as opposed to those with
second- or third-generation wealth.
| CYNTHIA
HARRINGTON, CFA, has been a money manager
specializing in domestic stocks for
high-net-worth individuals and small
institutions. Now a full-time journalist,
her work appears in Bloomberg Wealth
Manager, Plan Sponsor and
Entrepreneur magazine. Her
e-mail address is
cynharrington@mindspring.com .
|
ost of the financial advisory
clients CPAs work with require a full range of
products and services to meet their investment
needs. The ultrawealthy client, however, demands
broader services and skills than the merely
wealthy one. Because the number of ultrawealthy
families is growing at a rate of 12% a year, more
CPAs face the happy prospect of serving this
market. To do so they will find themselves
tailoring services and sharpening their skills in
estate planning and investment management to meet
the special needs of the very rich. This article
outlines the unique character of the ultrawealthy
client and the new skills and services CPAs need
to assist this growing demographic group.
TRULY RICH OR MERELY RICH?
In today’s world of the millionaire
next door, the definition of what it means
to be wealthy has changed. In 2004 even
average Americans need to be
millionaires—in 401(k) plans, IRAs or
personal savings—simply to ensure a
comfortable retirement. For CPAs,
recognizing the difference between the
comfortably wealthy and the ultrawealthy
is the first step in providing the right
services. The distinction between the
merely rich and the truly rich rests on
two pillars—the amount of the client’s
net worth and his or her goals for using
it. The ultrawealthy expect their assets
to outlive them and thus need help
transferring these funds to their heirs
or to charity. The merely wealthy expect
to spend their assets and leave only a
modest inheritance. Most CPA financial
planners define the truly rich as
families with more than $25 million in
net worth. But some clients with net
worths of $5 million or $10 million act
like the ultrawealthy while others worth
more than $25 million don’t qualify as
truly rich, depending on the composition
of their assets—illiquid real estate vs.
cash and securities. |
The Growing Wealth
Management Industry
The number of
families with
intergenerational wealth is
increasing at a rate of 12% a
year.
Over 3,500 U.S.
families have dedicated family
offices.
More than 50
institutions or families have
started multifamily offices
(MFOs). Source: Family
Office Exchange,
www.foxexchange.com .
| |
Lifestyle issues such as an affinity for art,
photography, convenience flying in an executive
jet or an extravagant second home raise the amount
the client needs to spend on his or her own needs.
Longer life expectancies also increase the amount
required. “At $5 million to $10 million we begin
to see ‘ultrawealth’,” says Thomas Tracy, CFA,
CFP, of Kochis, Fitz, Tracy, Fitzhugh & Gott
Inc., in San Francisco. At Kochis Fitz 2% of its
client base qualifies as ultrawealthy,
representing 25% of the firm’s assets under
management. But sometimes even the ultrawealthy
don’t have much to give to charity or leave to
their heirs. Tracy says “some clients’ lifetime
projected cash needs top $7 million for their
personal use.” Ultrawealth can vary with
location because of differing costs of living and
lifestyle expectations. “Here in central Ohio you
find more clients with net worths of $5 million to
$10 million looking for high-end services,” says
Peggy Ruhlin, CPA/PFS, CFP. Ruhlin’s
Columbus-based firm, Budros & Ruhlin, counts
clients in the ultrawealthy category as 15% of its
client base, representing 40% of the assets under
management. “These are the quietly wealthy who
live below their means and have charitable
inclinations.” (See the box on page 36 for
charitable-giving resources.) Whatever the
number, at some point on the wealth scale the
client’s circumstances demand different services,
planning approaches and investment management
techniques. CPAs differ in how they choose to
deliver that advice to wealthy clients.
PRACTICE MANAGEMENT FOR THE
ULTRAWEALTHY
The business model for dealing with
ultrawealthy clients varies. Some CPAs opt
out of adding services and simply refer
high-end clients to specialists. Others
provide some services such as bill paying,
account aggregation and due diligence on
investments and refer out financial
planning, asset allocation and actually
investing the client’s money. (With
account aggregation CPAs gather
information about a client’s assets from
all sources and “aggregate” it into one
statement.) Yet others expand to offer all
services under one roof. This one-stop
shopping approach is referred to as a
“family office,” since a distinguishing
factor of ultrawealthy clients is the
transfer of wealth to succeeding
generations. Family offices come in all
sizes and shapes. Sometimes the family
itself sets it up and hires the
necessary professional and
administrative staff. In other instances
professionals such as CPAs and attorneys
will set up a family office either for
one family or several. |
Family
Office Issues
|
What
scope of services will
you provide to the
family members?
What
governance structure
is appropriate for
the family?
Which
family members are
interested in
serving in a
leadership capacity?
What
are the family
values they want to
see maintained?
What
are the assets the
family wants to
enhance or preserve?
What is
the time period for
working together on
wealth management
issues (how long is
“long-term”)?
Source: Family
Office Exchange,
www.foxexchange.com
.
| | |
Tracking the details to form an overall picture
of a client’s assets is an important core service
CPAs can provide to very wealthy individuals and
families. Sometimes called personal CFOs, such
advisers provide family office services ranging
from data collection, general ledger accounting,
workpaper files, cash-flow analysis and investment
performance reporting to due diligence on
investment alternatives, asset allocation and
actually making investments. According to
the Family Office Exchange, personal CFOs are a
growing field. While some families with net worths
above $100 million establish these services on
their own, those with smaller fortunes demand less
than full-time coverage and outsource the work to
multifamily offices (MFO), which provide services
to two or more wealthy families. In deciding how
to access this kind of help, a family faces
certain issues other than cost. CPAs who don’t
provide such services themselves can coach clients
through the process of choosing an MFO using the
questions provided by the Family Office Exchange
at
www.foxexchange.com (see exhibit above).
CPAs
choosing to set up their own MFO might
employ a full staff of bookkeepers,
financial advisers, asset managers,
attorneys and psychological counselors.
Instead of assembling such a costly staff,
other CPAs work as the quarterback of a
team of independent specialists.
Tanager Financial Services of
Waltham, Massachusetts, chose to set up
two separate divisions to serve wealthy
and ultrawealthy clients. The family
office division serves clients with
above $25 million in net worth and
handles the full spectrum of needs from
administrative tasks to actually
investing assets. A client with a
minimum of $2 million qualifies to open
an account with the other division,
which offers planning and investment
services. Tanager invests clients’
assets in traditional markets such as
stocks and bonds and offers in-house
limited partnerships in alternative
investments and real estate. “We may
oversee everyday services such as bill
paying or approving expenditures as well
as direct decision making in all our
clients’ financial affairs,” says
Tanager’s Glenn Frank, CPA/PFS, CFP,
“but with the family office group, we’re
more likely to actually perform the
function rather than just see that it
gets done.” |
|
PRACTICAL
TIPS TO REMEMBER
|
CPAs planning to
set up multifamily offices
(MFO) should understand the
full range of staff members
they will need to hire to do
the job properly, including
bookkeepers, financial
advisers, asset managers,
attorneys and psychological
counselors.
When considering
opening an MFO, CPAs should be
aware of the wide variety of
tasks they may be called on to
perform for clients and see
how they match their own
training, expertise and career
goals.
Before taking on
the special needs of ultra
high-net-worth clients, CPAs
should familiarize themselves
with the special tools and
techniques that will be
beneficial to this group,
including private foundations,
charitable remainder trusts,
family limited partnerships
and other charitable and asset
transfer strategies.
CPAs who want to
work with very wealthy clients
and their families should be
as comfortable with the role
of counselor as they are
offering financial and
investment advice.
| |
Some advisers, such as Dallas CPA Carol A.
Cashman, specialize in oversight and reporting.
Cashman’s firm serves about 20 clients, from a
minimum of $2 million net worth to a handful “way
above $75 million.” In working with these clients
she describes her role as that of a facilitator
but not a decision maker. She accounts for and
reports on her client’s entire asset picture,
performs due diligence on investments and advises
other specialists involved in the process on tax
and accounting issues. CPAs who choose the
facilitator model would hire efficient bookkeepers
and effective client communications personnel, but
would only coordinate the legal and investment
work performed by outside specialists.
THE CHALLENGES
Running a single or multifamily
office practice isn’t for everyone. CPA Jeff
Diercks of Tampa, Florida, established an MFO but
ultimately found he preferred to do only a narrow
part of this work—researching and managing hedge
funds for high-net-worth investors.
Diercks set up InTrust Advisors as an MFO,
initially serving a $100 million client. He added
several other clients with $20 million and above.
But in the process of digging deep into hedge
funds on behalf of his clients, Diercks found he
preferred the analytical work in the unregulated
field of alternative investments owned or acquired
by many very high-net-worth clients. “I started
doing the due diligence on hedge funds for my
larger client,” says Diercks. “I realized I
enjoyed the technical challenge of working out how
alternative investments fit with other strategies
more than looking at tax structures.”
Diercks maintains his family office practice
for current clients but has closed the door to new
ones for the time being. To service additional
clients he would have to add both staff and
services—a commitment he is unwilling to make at
the present time. “The MFO is a low margin
business that’s difficult to market,” says
Diercks. “The newly wealthy are more likely to
chose an established relationship, for example the
investment bankers that handled the sale of the
family business that generated the client’s liquid
wealth.”
PLANNING FOR PERPETUITY
CPAs will find that
planning for multiple generations demands new
skills and tools, in addition to an overarching
understanding of how the different pieces of the
plan work together. Planning for wealthy families
might include trusts, private foundations, gift
programs and family limited partnerships. With so
many moving parts, investment and tax planning
become more complex. Managing the multiple needs
and personalities of a family also calls on the
CPA to be a skilled counselor and communicator.
The basic planning process for the
ultrawealthy is similar to that for any client.
The adviser determines the client’s goals and
investment horizon and reviews his or her current
holdings. But since the focus is on transferring
wealth, the actual plan will be different than for
a merely wealthy client. “For the ‘less rich’ the
goal of wealth preservation strategies is to help
clients not run out of money before they die and
minimize income taxes,” says Ruhlin. In contrast,
ultrawealthy families have to “worry about how to
give their money away to charity or heirs and need
to minimize estate and gift taxes.” Here
are some strategies CPAs can recommend to
high-net-worth clients to help lessen the estate
tax burden on future generations.
Private foundation.
Clients can set up this entity to
save estate taxes and leave ultimate control for
specific charitable goals in the hands of family
members. Foundation assets are exempt from taxes
and contributions are tax deductible. The strategy
usually is reserved for the very wealthy who are
assured of never needing the assets they put in a
foundation for their personal use. “The general
consensus is that families with less than $1
million shouldn’t establish a private foundation,”
says Tracy. “This group would be better served
with a planned-giving program that offers greater
flexibility.”
Charitable remainder trust
(CRT). This is a way for
taxpayers to transfer assets out of their
personal estate. It usually is funded with
appreciated stock. The trust beneficiary
is a charitable organization, but the
income stream from the trust can be paid
to the client or another family member
during his or her lifetime. Upon the
income beneficiary’s death, the full value
of the assets in the CRT passes to the
charity without estate tax liability.
Family limited partnership.
Similar to the CRT this
strategy transfers assets out of the
estate and into the hands of family
members, who own part of the assets in
the form of limited partnership
interests. The client retains
decision-making control. CPAs should,
however, be aware of the impact of a
2003 Tax Court case, Estate of
Albert Strangi, on the use—and
abuse—of family limited partnerships.
Each of these vehicles has unique
legal and tax ramifications. Some such
as the private foundation and charitable
remainder trust require minimum annual
distributions; others require annual
contributions. CPAs can help oversee the
annual cash management and tax-planning
process to meet the requirements these
complex arrangements impose. |
RESOURCES
Membership in the AICPA
personal financial planning
section is open to all AICPA
members,
www.aicpa.org/pfp .
Conferences
AICPA Conference
on Tax Strategies for the High
Income Individual April
19 and 20, 2004 The
Mirage, Las Vegas
AICPA Advanced
Investment Management
Conference May 20 and
21, 2004 Fairmont Hotel,
New Orleans
CPE
Financial and Tax
Planning for High Income
Clients. CPE self-study course
(# 732248JA).
The Family
Limited Partnership: Saving
Taxes and Protecting Clients.
CPE self-study course (#
734449JA).
Publication
Planning for
the Affluent by Donald
R. Levy and Richard H. Mayer,
Aspen Publishers (# 017236JA).
Available at a special member
price. For more
information, to register or to
make a purchase, go to
www.cpa2biz.com or call
the Institute at 888-777-7077.
| |
INVESTMENT MANAGEMENT DIFFERENCES
The legal and tax
implications of private foundations, charitable
remainder trusts and family limited partnerships
also affect how assets are invested. CPAs must
address the client’s portfolio as a whole,
choosing investments that provide a desired return
with the least risk possible. Allocating assets to
the different structures is as much an art as a
science. For instance, trusts require annual
income distributions and private foundations must
have liquid assets for required giving. “After
we’ve made the overall asset allocation decisions,
we have to go back and fit the investment vehicles
into the different buckets as best we can,” says
Tracy. Personal preferences enter into the
allocation process as well. Some clients prefer to
take less risk with the capital they manage on
someone else’s behalf. Clients might choose to
place the bond portfolio in the charitable
remainder trust and keep the investment in
emerging-market equities in their personal
account, for example. Other times wealthy clients
might make an investment with little regard to the
planned allocation process. “The ultrawealthy
sometimes invest for reasons other than just
making money,” says Frank. “He or she makes the
investment for the enjoyment of being on the board
of the company or using his or her personal
expertise to advance the company’s fortunes.”
A NEW RANGE OF SKILLS
CPAs will find that
effectively managing the multitude of issues for
very wealthy clients draws heavily on their
counseling skills. For example, Cashman once had
to convince a client of the wisdom of distributing
cash from a trust to a 17-year-old family member.
She demonstrated an overall reduction in the
family’s tax bill of $13,000 because of the
relative tax brackets in trusts vs. personal
accounts. “I spend 20% of my time educating
parents who are scared to death their kids don’t
understand that part of the distribution is their
inheritance and spend it,” she says. In
another instance one 18-year-old family member
arrived at Cashman’s office, planted her hands on
her desk and demanded to know why she was being
bothered with her first car insurance bill. The
role of explaining to the client’s daughter that
her financial affairs now were her responsibility
was left to Cashman. “Sometimes the emotional
issues are the hardest part,” she says. “In most
instances these are people who have grown up in an
affluent environment and don’t understand the
value of a dollar.” Ruhlin says she spends
more time educating rich clients who made the
money themselves as opposed to those with second-
or third-generation wealth. Clients who are
already rich have experienced the tradition of
making gifts and handling money from an early age.
The so-called self-made millionaires, Ruhlin says,
are “frightened of losing control. It’s all new to
them.”
Training. CPAs who want to
upgrade their skills in dealing with very wealthy
clients have many resources available to them.
Membership in the Family Office Exchange grants
access to a broad range of educational
opportunities. In addition to the regular updates
in newsletters, members learn about industry
trends and issues; about maximizing families’
human, intellectual, financial and social capital;
and about family office best practices. FOX tracks
its own seminars and webcasts as well as those
sponsored by other organizations. An updated
schedule is available on its Web site at
www.foxexchange.com/public/fox/calendar/conf_calendar.asp
.
PLANNING TO STAY WEALTHY
Despite expectations
that the ultrawealthy can’t spend their
considerable fortunes, staying rich is not
guaranteed. Consider the fortunes made and lost in
the recent tech boom. Investors who followed
professional advice and took some money off the
table before the crash still maintain their
“ultrawealth” standing. Most of those who didn’t
diversify fell out of the top ranges. Tracy at
Kochis Fitz describes the assets concentrated in a
single stock or in illiquid real estate as
“suspicious excess capital.” He says, “That’s why
we stay conservative with clients in the $5
million to $10 million range and don’t use
irrevocable situations such as foundations and
trusts for them, just in case.” Families
that don’t look well into the future also risk
moving down the wealth scale. “The family might be
ultrawealthy today but tomorrow its assets get
split among five children, who each have five
children, and estate taxes are taken out,” says
Cashman. “Pretty soon the fortune is spent.”
Prudent investment advice also is a cornerstone
for staying rich. “Clients with $40 million
invested at 5% can live just fine,” says Cashman.
“But I have to dissuade them from some of the
things they want to do such as buying a golf
course or putting money in a risky oil and gas
businesses venture. I remind clients that maybe
they can’t spend all of their money, but with poor
performance they certainly can invest it away in a
nanosecond.” |