My granddad, a two time silver star winner, and survivor of D-Day kicked the bucket last December at the ripe old age of 94. It turns out he has been actively managing his portfolio for quite a while and he’s got around 5 million worth of assets. His portfolio has a good mix of equity and fixed income and is well diversified. His widow needs only about 6k a month to live off of until she dies, so really there is not too much need for this money at the moment (the fixed income portion alone is generating much, much, much more than that). My parents are retiring and have plenty of cash for themselves. My siblings and I are all employed gainfully. I’m the only one in the family with any financial experience (everyone else is medical). But I’m not some ace portfolio manager. My family wants me to decide what to do with the money. The obvious thing would be to hand it over to some wealth management firm, but my family (and myself included) think those people are generally idiots and that we could do just as well with a simple passively managed portfolio. I’m tempted to take this money and about 2 million from my dad and about two million from myself and my brothers, and start a small family hedge fund. Since it’s my family’s money I don’t think I could get away the usual fees but would get the responsibility of pissing everyone off when we lose money. Not sure it is worth it, but on the other hand, it might be better than getting a real job. I’m currently employed overseas, and this could be done from just about anywhere. There isn’t a huge rush on when I start this (if I start this), as the money will otherwise just sit in the existing portfolio until then. I’d be curious to see what you guys think about managing your own family’s PA, if you’d do it it, or wouldn’t. I currently manage my own US equity portfolio of real estate investments in India. This is all the experience I have.
If all that money was left in the widows name you have far bigger issues than figuring out if you want active vs passive. Think estate taxes. Figure that out first. You may find that those wealth managers know a bit more than you give them credit for. Managing your families money can be a minefield depending on family dynamics. Usually the bigger the AUM the bigger the minefield.
My mother has sole custody of the estate. She’s asking me what to do with it. Obviously, I’ll have lots of questions like this to ask whomever we put in charge of the money. The minefield is an issue. But basically, it boils down to my parents asking me for help.
Well, I answered that in a US centric way. Were are your parents based?
Estate is in Virginia. There is also about 2 million worth of real estate. This is all right in time for my level 3 studying too by the way.
You said: “I’m not some ace portfolio manager” But: You want to start a hedge fund with retirement money? - Did I miss something or are you not making any sense? Kind of reminds me of the guy who posted that he didn’t have enough time to study for CFA but wanted to day trade on the side. -
Well he picked a good year to go. There are no estate taxes owed. I’m sure you could make a few improvements to the portfolio, but it sounds like the main constraint placed on it is providing income to the widow who needs the cash flow from the portfolio, as little as it may be. You may or may not want to pursue hiring a WM. I don’t manage my parent’s money because I feel that it’s a large conflict of interest. If the market turns south they only have me to blame. I do review my parent’s holdings quarter to quarter, but that’s about as far as I’ll get involved. Most RIAs are going to charge anywhere from 0.5% to 1.25% on $5MM. They’ll most likely just run an SMA strategy with 7 to 8 different managers covering the major asset classes.
If you don’t have experience, then you probably want to have a simple rules-based asset allocation portfolio that gets rebalanced fairly regularly. You might carve out a small section (like 5%) that you can use for trying to beat a benchmark, using a core-satellite structure i.e. structure 95% of the portfolio passively, and then use 5% of the portfolio to try to locate opportunities for improvement. If you lose it all because you don’t know what you are doing on the active management part, your family is only out 5%. The rules would have to be pretty straight forward and of course your family would need to have rights to redeem from you on demand. The ways to screw yourself on this are multiple and many. It is probably best not to manage large portions of your family money. Most likely, they will be complaining at you when the stock market outperforms you, and then be upset when you lose money, even if the market lost more than you. They will be happy when the stock market is up and you do even better, but without taking lots of risk, that may be less often than you think. Remember that things can go wrong on the legal and execution side of the story too, not just the investment strategy. Your ideas may be great or even just normal, but if you can’t document your trades appropriately, you may be accused of embezzling, self dealing, etc., especially if there are more distant family members like cousins involved. If anything goes wrong for you, you are out a family, and new families are hard to pick up at the corner store.
Thanks there is some good advice here already. I’m leaning towards finding a WM to do this, just to be clear, but my idea of a mini-family hedge fund is kind of a fun side thought. BChadwick, thanks your input on structure that is really useful. I hear you with regards to the active portion of the portfolio and keeping that portion relatively small. Chuck - do you think there is generally a big advantage to having these WM pick money managers on your behalf? What’s to stop us from doing this directly? This is what my granddad was doing. Zesty - i see your point; i’m using the word hedge fund very loosely. My family has already been managing its money on their own so to give it to someone else is actually a bit foreign to us. We tend to think we are smarter than the average finance person (because everyone else in my family is a Doctor and thinks finance people are much dumber thank doctors). Their “doctor investment strategy” is just to buy debt and equity of blue chip companies and hold it forever. I don’t think they’ll allow me to deviate too much from that with most of the portfolio. I’m not sure if I have anything to gain from this - but I really don’t want some sleeze-bag WM who knows less about finance than I do to be calling my elderly parents trying to get them to buy whatever their boiler room is trying to sell that day. I’ll be 60 or so when my parents die and frankly hope to be wealthy enough to retire then on my own money.
Chuckrox8 Wrote: ------------------------------------------------------- > Well he picked a good year to go. There are no > estate taxes owed. I’m sure you could make a few > improvements to the portfolio, but it sounds like > the main constraint placed on it is providing > income to the widow who needs the cash flow from > the portfolio, as little as it may be. > You can always give all of your money to your spouse without estate taxes. It doesn’t matter that there wasn’t an estate tax in 2010 (which isn’t entirely true). The problem now is the if the Mother were to pass away the majority of the assets would go to the US government unless there are multiple trusts involved. You are piddling around trying to find a bit of alpha here or there when most of the value in this scenario has to do with financial planning. With the facts given the Mother is sitting on a tax bomb.
mwvt9 Wrote: ------------------------------------------------------- > Chuckrox8 Wrote: > -------------------------------------------------- > ----- > > Well he picked a good year to go. There are no > > estate taxes owed. I’m sure you could make a > few > > improvements to the portfolio, but it sounds > like > > the main constraint placed on it is providing > > income to the widow who needs the cash flow > from > > the portfolio, as little as it may be. > > > > You can always give all of your money to your > spouse without estate taxes. It doesn’t matter > that there wasn’t an estate tax in 2010 (which > isn’t entirely true). The problem now is the if > the Mother were to pass away the majority of the > assets would go to the US government unless there > are multiple trusts involved. > > You are piddling around trying to find a bit of > alpha here or there when most of the value in this > scenario has to do with financial planning. > > With the facts given the Mother is sitting on a > tax bomb. Not true. I thought the Mom received the assets hence my reference to the 2010 estate tax elimination and not to the UMD. For the next two years the exemption for estate, gifting, and GST has rolled up to $5MM per person. Under old tax/estate law gifting and estate tax exemptions were entirely separate and imposed different limits. Residual amounts can be transferred amongst spouses so if a spouse dies without using their exemption it then ports over to the surviving spouse allowing them to pass $10MM in assets without triggering any type of tax. This is only a temporary patch for 2011 & 2012, but it’s important to note that when the estate & gift exemptions have been increased congress has never come back and lowered those limits. This holds true dating back to WWII.
> Chuck - do you think there is generally a big > advantage to having these WM pick money managers > on your behalf? What’s to stop us from doing this > directly? This is what my granddad was doing. Not really. If you were to use one of the large brokerage platforms (Schwab, TDAM, Fidelity, etc…) you would have almost the same research and data available to you as any WM. My time is split down the middle between my firm’s investment consulting and wealth management groups so I am fairly versed in the SMA world. The value add from a WM comes from their first hand experience with multiple SMA managers and their strategies. SMAs, as opposed to mutual funds, are great because you receive some economies of scale with your dollars. The initial purchase restrictions for equity managers are usually $100K and the fixed income managers vary between $100k and $250k. With a mutual fund you have no control over what they purchase on a day to day basis. If for some reason you decide that you hate Altria because they make cigarettes then you could tell the SMA not to purchase that particular security or tell them to stay out of the tobacco industry altogether. SMAs also provide much more flexibility in the fixed income space and allow you to build ladders or manage a specific duration. They’re also really useful in the municipal bond space as you can go state specific if need be. There are a few other benefits, but those are the main ones. As I said above managing money for friends and family can come with a cost. Doing it yourself would help to eliminate fees. I would do some research on bchad’s core-satellite strategy. In that particular strategy you dedicate a heavy proportion of the portfolio’s assets to traditional equity & fixed income assets through SMAs. That’s your core. This mix largely depends on the level of risk you are willing to undertake as an investor coupled with the rate of return you are trying to achieve. Income generation would also be another variable in the mix. The satellites of your portfolio would be additional low correlating sub-asset classes as well as some alternatives (Real Estate, Commodities, Emerging Market Equity/Debt, Private Equity, & Hedge Funds). The satellite portfolio of the portfolio probably would not comprise more than 30% of the total portfolio under any scenario.
Am I the only poor person on this board? You already have 2 million and dont even have a job. I feel angry about something but can’t quite define it…
wow…congrats…how to manage 5 million inheritance…wish I could have that headache…here I am wondering shall i go for the repair job in my car that i am postponing for 6 months now
I don’t think he mentioned currency…could be indian ruppee
I do have a job. Currency is dollars.
Chuck - good point about congress not rolling these back. So the money is still in my grandmother’s name and she is 89 or so. My mother is the trustee. Our accountant told us that we are in limbo with regards to the estate tax. I told my mom to get a second opinion on that. If anyone has any helpful links on this I’d be very appreciative. i think the tax implications will be very important here as MWVT9 pointed out. Muddahadda, don’t feel bad I won’t see this money until I’m too old to enjoy it and it will be split up between my three brothers and I.
Think about setting up the estate and cash in trusts, with you as trustee, if everyone can live off distribtuions, you will protect everyone from liability should you someone get sued etc, and may be able to defer taxes for another generation. Review the wills, beneficiaries, how the real estate is owned tenancy by entirety, tenants in common, etc. Asset allocation and the like is Phase II
Why not just to split it among family and spend it nicely? If everyone’s fine with what they have
clearly you need help from a professional. You called half the people on this forum an idiot when you said that about wealth managers. So good luck with all that…