Buck: Welcome back to the show everyone today my guest and Wealth Formula Podcast is Richard Wilson. Richard helps 100 million dollar-plus families in terms of net worth create and manage their single-family houses and currently manages 14 clients including three billionaire families. He’s also the CEO of a 500 million dollar plus single-family office and head of direct investments for another family with over 200 million dollars in assets. Richard is also the author of the number one best-selling book in the family office industry, The Single Family Office Creating, Operating, and Managing the Investments of a Single Family Office and recently released a book called How to Start a Family Office: Blueprints for setting up your single family office. Richard welcome back to Wealth Formula Podcast.
Richard: Yeah thanks for having me out here Buck.
Buck: So you were on before but I do want to kind of review some of the things because it’s been a while it’s been over a year and I’m sure a lot of listeners are new. How did you, just give us a little sort of review on how you got into the space in the first place right it’s a pretty unique thing to be doing and just looking at your bio, your bio included a master’s degree in psychology or something like that and I’m thinking wow how did you go from there?
Richard: Right well I had already been working in capital markets and I took the psychology courses to try to figure out how to effectively communicate better yeah position myself better so my classes were full of psychiatrists and psychologists and I was the one person who was there to kind of learn the stuff to put to use in the business world and in the investment world and then around that same time I found this concept of family offices has taken off and that was in 2007 and I was in the right place at the right time and then just put a lot of focused energy over the last 12 years and really sharing the journey you know every time I learn something I shared online I’ve shared on stage somewhere I’d shared on a podcast like this and the more that I give away that you know different insights I get from meeting with family offices the more that family offices reach out and want help with something such as setting up their family office.
Buck: Sure, sure absolutely and you know so before we get sort of into the nuts and bolts of the family offices itself I’m just still curious because you’re in a unique position you know to see where the wealthiest people in the world really made their money in the first place and I’m specifically interested in not those that necessarily have been inherited their money over generations but some of the people who are coming in say in the last decade or two, what are the most common sources of the wealth that you’re seeing?
Richard: A lot of times manufacturing or high-tech companies or they’ve had an exit when there’s a lot of M&A; then there’s a lot of liquidity events right so high intellectual property companies. Manufacturing is a surprisingly high number compared to you know you don’t hear about it in society much on Shark Tank you don’t see a lot of manufacturing companies going up there right so these might be companies have been around for thirty years it might be seen as kind of a dirty or a niche business making zippers or little metal fasteners etc but somebody might have an exit there for 80 million dollars you know in an area that you know by society has not seen often so I think people forget about the number of manufacturing families out there and then like in your space I know you do a lot of work and commercial real estate there’s a good percentage of families that come from that world and they’ve made their money through real estate development and they’re still doing so but it’s spinning off enough cash they’ve created such a net worth they also need a family office around their activities.
Buck: Right, right so it’s pretty interesting that you know I think the idea of the sort of the boring business being surprisingly profitable is something that I see often right I mean it’s not right the the sexiest stuff that necessarily becomes the most profitable I have a friend whose father started out as a you he was a janitor and then built one of the largest janitorial companies in the country it’s just phenomenal but yeah and I he passed away but he’d tell people he cleaned toilets for a living and the guys like you know well north of 100 million easy though that was what he used to tell people. So the next question might seem a little odd and it may be related to the first one but also again you know you have a psychology degree and when I think about the types of people you’re dealing with and the types that are here which is you know a lot of really smart people probably the kids who have finished I you know at the top of their class and you know a lot of these centi-millionaire’s weren’t even close what’s is there a fundamental difference in the mindset of the ultra-wealthy compared to say the rest of us you know highly educated you know working slugs who are doing fine but at the end of the day we’re not anywhere near that level of well.
Richard: Yeah I do think there’s a mindset of focus and going all in on the strategy. Nobody became ultra wealthy by diversifying their energy into ten projects and diversify their investments into 50 uncorrelated assets you know you don’t become ultra wealthy doing that. So like Warren Buffett you know having a few eggs in your basket and watching them very carefully, it’s not a recommendation for somebody’s total investment portfolio but if you want part of your portfolio to create wealth for you, you can’t diversify into 200 things and expect your net worth to jump from 1 million to 20 million, in my experience is just not likely to happen so I think having a focus on something and also having a unique game that they’re playing so perhaps globally or in their industry or at least regionally perhaps they are developing a unique game to play that nobody else is playing that same game or is that same type of focus or they’re keeping the score a different way where their business operates in a different way that makes it hard for competitors to react to that and I think that many of them have kind of changed how their industry works by the unique game that they invented to play in their space.
Buck: Interesting. So let’s kind of jump back into you know the family office idea itself. So the family office is you know it’s it’s sort of technical terminology right I mean what exactly is a family office and you know what are the components that make it up?
Richard: Sure, sure. Well there’s two types and in both cases you’re trying to create a more holistic solution for the investor so things are managed for them as much as they want it to be things are done more holistically and it’s not all in the brain of the individual most high-net-worth individuals they have to remember what their CPA said with their insurance agent recommended what wealth advisor said and keep track of all this but when you become ultra wealthy you have way more going on a lot more people trying to meet with you a lot more things on your plate maybe 50 LLC’s you’re involved with in some way a lot of investments. So there’s more chaos you’re more likely to drop a ball and every dropped ball might cost you enough that you could hire a full-time person to help you. So a $50,000 mistake here a $300,000 over paying taxes because you sold one week late on an asset there lack of trust and estate planning could cost you Millions so having a holistic solution is important. And the two types of family offices there’s a single family office that if you are worth 30 to 50 million or 100 million plus you might want to consider having a single family office in place so it’s a team dedicated just to helping you and your family alone, where a multi-family office is like a more holistic wealth management firm and they might have 10 or 20 or 100 clients that are all worth you know 10 million 20 million plus and it’s just a more holistic long-term minded wealth management firm that’s really equipped to work with the ultra-wealthy because there’s a different level of challenges and headaches that come with the wealth.
Buck: So we certainly have you know a fair number of people I know who listen to the show or you know over the 10 million net worth mark is that typically what you’re talking about in terms of is it usually you know liquid assets that you’re talking about though when you when you’re talking about those different levels?
Richard: Liquid or becoming liquid it could be assets that might be turned for every five to seven years because it’s a real estate asset or it could be locked within a company – you’re going to sell but maybe if you’re a high income earner you can still be taken on as a client of one of those if you’re earning a million dollars plus a year but you know that your practice might be worth five or ten or twenty million dollars etc you might be able to get a family office to take you on as a client but typically or some of the multifamily offices will have a bare minimum of 10 million liquid assets or 25 million investable assets it just depends on the multifamily office of what their minimums are.
Buck: Right right. And at what point I guess would it make sense for somebody who’s I think when you talk about you know somebody who’s making seven figures four years a million over a million dollars per year you know has a net worth of five to ten million or ten million or whatever for them I mean if they are high income earners and they’re not necessarily business people but they have a lot of like investments they are doing cetera what is the real value to them as opposed to necessarily just having you know really good CPA a really good estate attorney I mean is there is there what I guess the question is for the lower tier of people which I think probably some of the certainly I hate to call them lower tier because they’re they’re doing pretty darn well in our group, but when what’s it what’s a good sort of reason to to join if you feel like well gosh you know I’ve got a good CPA I’ve got a good state planning or asset protection attorney is there additional value that you can gain you know through a family office just by being you know part of a group or you know this entire you know group of significant amounts of money?
Richard: Yeah for sure as many benefits of it. So if you love your CPA or if you love your estate planner usually people only really like one of their solution providers if any and that’s why they feel like they need to come figure out their family office solution but let’s say you like both your estate planner and your CPA then the benefit would be that you can have a multi-family office helping coordinate with the CPA with the estate planner being a second opinion on what trust should be set up when you’re purchasing an apartment building or transacting through an independent sponsor what capital should come from what trust to go with the estate planning that the multifamily office with the estate planner helped overlook and design they can help you with philanthropy they could help you with tax optimization a lot of CPAs who are excellent it might have done your bookkeeping for 20 years and helped you sell your practice or your business etc don’t do a lot of tax planning going forward they might not help you plan for the next transaction how to structure that it might not plan or look at every part of your portfolio and the issue is that a lot of CPAs and accounting firms it’s a relatively commoditized service or solution many times so they have to have 200 clients to be successful or 400 clients as a firm so it’s very hard to get to know individual clients and spend a lot of time on them because a lot of them are priced to serve the mass affluent and the lower you know the one to three million dollar net worth individuals and with a multi-family office will take the time to get to know you your goals your children the second generation coming what you plan to do and help you set up those vehicles to be tax efficient moving through this new reality that you want to live in now that your ultra wealthy. So reduction of chaos better management of all the moving parts and typically the tax savings and the state planning savings alone will pay for the cost of setting up and establishing and paying for the family office for several years to come.
Buck: So what are those kinds of costs? I mean say we’re you know again talking about individuals in some individuals in this group may fit you know the description of seven figures in ten million what kind of costs of set up typically in ongoing fees you know would you would you typically be looking at in this scenario or is it sort of depend on you know the complexity and all that?
Richard: The spectrum where you are in the spectrum depends on the complexity but it might start you know as high as 1% or one point two five percent of your assets and it could go as low as 30 to 50 basis points if you’re at the high end of net worth and it would get charged less for how much you’re worth but importantly you know it could be that you have a private jet but you’re not documenting the business use versus personal you could get dinged on that pretty hard during an audit that will almost inevitably come it could be that the estate planning has not been done right or updated as laws changed so you might lose millions of dollars if there’s a death in the family etc and many times individuals are using retail custody and retail wealth management solutions and they’re paying double triple what they should be on there their custodian accounts and they’re trading and their investment management work etc.
Buck: Is there advantages to people within these family offices in investment opportunities for example or do you tend to get better terms than the typical mom-and-pop accredited investor if you’re looking at a private placement?
Richard: Some people set up a family office and they still don’t negotiate hard on terms or think too creatively but if you are doing direct investments you should look for a multi-family office that’s really specialized in helping you do that and most multifamily offices are not equipped to do that it’s a really small minority and that’s something I think is going to change in the industry but is one of my you know biggest complaints about it or at this point and at our firm at Centimillionaire Advisors we find that family offices who are most successful in setting up their direct investment programs look at their portfolio and three compartments they look at their defensive compartment which is traditional wealth management high diversification getting into uncorrelated assets etc and just plain pure defense and your arm’s length away an advisor is doing that for you typically then we find that three using independent sponsors maybe a real estate fund manager maybe direct to a couple properties but usually through an independent sponsor you have the second compartment of cash flowing commercial real estate where it’s hard asset it’s tangible usually local or semi local and in one or two asset classes you’re comfortable with like self storage and multifamily or data centers and multifamily etc and the third compartment is usually direct investments into operating businesses where it’s where you created your wealth in manufacturing zippers or in you know a cosmetic surgery etc and that’s where you play the most offense and your the most control you’re not really relying upon sponsors you’re not having a wealth advisor do that for you you’re investing in cosmetic surgeon you know practices or in technology or IP related to it. So when you separate things into those three buckets it allows you to look at yourself your goals your risk preferences your time horizon and look at potential people that you’re gonna add your family office team or potential multifamily offices and say is this group equipped to help me and if they are in which bucket are they gonna be helping are they just the defensive portion now I need to go and find and figure out my cash flowing commercial real estate portion etc.
Buck: Right so you know you’re you’re it’s interesting that what you say about those buckets because you know and you hear buckets from typical financial advisors there those buckets are full of different things like you know a doctor or lawyer six-figure mid six-figure person or whatever going to portfolio manager the first thing they tell them is well we need a diversified portfolio of stocks bonds and mutual funds which of course is never gonna make you ultra wealthy right. What can a person learn from the way Centimillionaires invest their money?
Richard: Yeah so I think that many times people here their whole lives anything related to wealth is about diversification. Just play it safe ultimate defensive strategy and that’s what everyone beats the drum on in the whole industry and I think with direct investments it can be diversification. You know if you’re investing in data centers mobile home parks cell storage and multifamily and office parks and you’re doing that in Singapore San Diego Brazil and Mexico or even five different cities in the US you’re in so many asset classes and so many geographies there’s no way to be an expert or even know the base facts about what’s going on even if you manage three billion dollars you’re not going to be excellent at doing those things so there’s a place in a portfolio to play defense there’s a place to have a moderate approach in a place to play offense but with direct investments if you look at 50 stem-cell investments or 50 surgical centers or 50 self-storage properties by the 50th one you’re gonna be able to tell a good apple from a bad apple on a relative sense even if you didn’t know anything about the space before hopefully you do or you have someone advising you but just like focus will allow you to make better direct investments get better deal flow people know what deal flow to send you you’ll know what’s normal what’s typical what looks more credible than usual what’s better priced than usual and you’ll find specialist service providers to help you get a third-party valuation or manage a property or manage a business etc you lose all of that when you try to diversify your direct investments especially in an extreme way so I think that Centimillionaires and family offices in general when it comes to direct investments they need to choose one or two types of commercial real estate constrict geography to the degree that makes sense for the risk level that’s appropriate for them and then look at the direct investments are doing in operating businesses and be focused there as well and not diversify direct investments too much or you lose all the learning curves that gives you any sort of advantage in the marketplace.
Buck: How much how much do you see actually invested within publicly traded markets for these Centimillionaires? I mean are people also I mean do they buy you know ETFs I mean do they do that kind of thing or is that kind of just very pedestrian for them?
Richard: Sure so a lot of private banks and multi-family offices they hire will buy ETFs for them most of them aren’t trading those internally themselves but I had breakfast with a 300 million dollar family a few weeks ago and because they created their wealth in the public markets they’re all about that and they control that internally they’re the exception if you made your money in commodities or running a hedge fund then of course here you know the stranger family office who keeps that all in-house and has their own thoughts about how to do that that’s your backyard but the average family office is outsourced in that part and honestly they almost always should be outsourcing that and only doing the things internally they’re excellent at. So the takeaway for someone listening to this perhaps then is also if your whole career you’ve been a dentist in managing a chain of dental clinics or if you’re running a business of some type and then you sell it you know unless you’re a huge passion is now stem cells or now the stock market or ETFs probably should leave that to a best-in-class expert look at your DNA your background where there’s opportunities where there’s momentum where your passion is what you’re naturally excellent at and combine those things and find the crossover so that your energy is invested where you get the most power per hour out of that instead of doing your own bookkeeping so figuring out your own estate planning and which would be which would be crazy to try to do etc you should focus on what your unique abilities and what your strengths are and pour your energy into that.
Buck: Out of curiosity you know I have been somewhat interested in the world of digital currencies and been sort of following the movement on you know institutional involvement family offices there’s some pension funds involved now believe it or not is there are you seeing any family office interest in things like digital currencies like Bitcoin?
Richard: Yeah for sure I mean both in Bitcoin and just blockchain in general I think there’s an interest. I think some families don’t know what to make of it but they put it in that bucket of maybe a couple percent of their assets they say well you know it’s either gonna go from X to zero or it’s gonna go up 50 times or a hundred times long-term as countries currencies keep failing every seven years on average and they start adopting the use of you know using Bitcoin via their mobile phone or some other crypto acid etc. So I think some of them take a little bit of a flyer on it because the upside is much much higher than the potential downside but a lot of them if they didn’t make their money in technology or didn’t make their money in some related space related to hi-tech IP and a lot of them don’t understand it enough to make like a big investment into the space I found.
Buck: But there’s I think what seems to be interesting to people about this space that even don’t know about as they understand there is a there is a significant asymmetric risk profile as you said you know one or two percent goes in okay if you don’t understand it and you think there’s a possibility this goes to zero it doesn’t hurt you as much as it potentially could help if it you know goes a thousand X.
Richard: Right if it becomes true mainstream I know there’s a five years seven years ago you were strange if you even talked about it and then I got up to $1,000 per coin and then five thousand it jumped up to twenty thousand and everyone felt like oh my gosh it went mainstream and now it’s too expensive and obviously with the Bitcoin price at least it’s come back down a little bit but long term if it truly became globally kind of a mainstream global currency then you know that’s the scenario that people are putting a little bit money into it prepared for.
Buck: I can imagine especially when you’ve got the likes of you know Fidelity and some of these other that are coming along getting involved that that’s probably getting people more interested well tell us about your tell us about your podcast and you know why you started it who is it for what value, I mean is your value for people who are you know I guess maybe not Centimillionaires in there as well.
Richard: Sure, sure yeah it’s just called a Family Office Podcast and every Thursday we’re releasing some conference content because we host 25 events per year we’ll put a discussion panel on commercial real estate or a discussion panel on how to raise capital from family offices or a discussion panel and how to set up a family office etc and we’ll have five experts on stage at our events talking about it and we’ll rip the audio from that and put it out on the podcast every Thursday in on Mondays I talk about what my clients are looking for what’s happening internally it’s just a one or two minute update on the family office Club and since millionaire advisors and just talking about what our clients are seeking investment mandate wise and then we’ll put other little insight videos out there so I think anyone who’s looking at putting together their own family office solution or thinking they might want to engage with a multi-family office and figure out how they should navigate the space would benefit from potentially listening to that and it’s because of feedback from the podcast and the events that we just recently released this new book called Centimillionaire Migraines and I’m reminded of it by your question because the podcast as I’m sure you have found has been a great way to get people to reach out cold to you and it’s through all of the connections from the events the podcast books etc they’ve been able to see that almost all of the ultra-wealthy really starting at 30 to 50,000,000 there’s no word for 30 millionaire otherwise we would have called it 30 millionaire Migraines but it’s called Centimillionaire Migraines because of that level it’s inevitable that you have these headaches they really started you know 25-30 million and the same headaches just keep coming up again and again with their clients and a couple of them you know they don’t cost any money to solve they’re really just approaches like mental awareness intentionality that need to be integrated into what you’re doing.
Buck: Absolutely so where else can we learn about what your work get a hold of you if appropriate etc we’ll put in the show notes as well.
Richard: Sure there’s just three quick places and 30 seconds I could rattle off if you’re just getting introduced to the family office industry and you want to learn more we have our events schedule or membership a free book on family offices all at familyoffices.com. If you’re listening to this because you’re raising capital and you’re trying to figure out the family office industry for that purpose we have capitalraising.com and we’ve got an 80 page book you can download there in PDF format that gives my five step system for raising capital away for free and then the last resources if you’re ultra wealthy you’ve had a liquidity event or you’re a high seven-figure per year income earner and you want to figure out a family office solution for yourself then our latest book in a whole data room of free resources can be downloaded for free at Centimillionaires.com.
Buck: Again we will put those in the show notes as well. Richard thanks so much for being on Wealth Formula Podcast again.
Richard: Awesome thanks for having me here Buck, appreciate it.
Buck: We’ll be right back.