123: Invest Like a Centimillionaire with Richard Wilson!
Buck: Welcome back to the show everyone. Today my guest on Wealth Formula podcast has been on before. His name is Richard C. Wilson. Richard helps high net-worth families of say about a hundred million plus to create and manage their single family offices. He currently manages 14 clients including mandates with three billionaire families and is the CEO of a 500 million dollar single family office and is the head of direct investments for another 200 million plus in assets. He’s also the author of the number one bestselling book in the family office industry which is called The Single Family Office: Creating, Operating, and Managing the Investments of a Single Family Office and a recently released book How to Start a Family Office: Blueprints for Setting Up Your Single Family Office. Richard welcome back to Wealth Formula podcast.
Richard: Yeah thank you for having me.
Buck: So just to get people caught up a little bit, tell tell us exactly what a family office is and kind of how did you get involved in this space.
Richard: Sure essentially a family office is a wealth management solution for those that are ultra wealthy. So the wealthier you get the more that a 1% or a 3% mistake either on selling an asset the wrong time so it’s a tax mistake or regulatory fines or you’re paying too much in fees etc. can really add up to a lot of money and you could have paid for a full-time team perhaps just to prevent those types of mistakes and reduce chaos in your personal life and get your regulatory and licensing related affairs or legal structures all tied up etc. So essentially a family office is put in place to help have a more holistic 360 degree oversight of your balance sheet.
Buck: So is there is there advantages to the family offices other than obviously having, you know, people to watch this, and make sure there’s not 1% errors and execution and that sort of thing. But is there also leverage that’s created you know for the investments themselves?
Richard: For sure. I had a call this morning with a professional athlete that’s worth around 40 million dollars and we had this exact same conversation. And essentially the solution providers themselves should be seen as an investment. There should be a good ROI from that investment, you know, should get good financial reporting from your accountants or the tax advice from your tax attorney or tax accountant should more than pay for that professional’s fees. And many times there’s such a good return on getting the right advice in that area it might pay for a good percentage of your whole family office’s cost. and what’s interesting is that um some people that are 20 million to 100 million or even up to 200 million sometimes say oh well I don’t know if I want to pay the fees and have a family office. And I always tell them well unless you’re gonna sit on cash there’s an opportunity cost and inflation eating away at you there, you’re gonna be paying fees no matter where you go. Don’t think you’re avoiding the family office fees by going straight to the private bank, because they’re charging you more layers of fees and almost anyone else on planet earth and they’re usually not too transparent with them. If you go to a multi-family office or a traditional wealth management firm, there’s fees for the part of assets they manage. So anywhere you go there’s going to be fees. It’s just a matter of what is most aligned and who do you feel most comfortable with and how do you create a solution that gives you the reality that you want to live within going forward now that you’ve had this liquidity event or now you looked around and realize that you might want to have a family office in place. Buck: So, and just for clarity because this is something that I’ve kind of recently kind of figured out as a little different a family office doesn’t necessarily mean just one family, right? It could be multiple high net-worth individuals who are consolidated into this this vehicle is that correct?
Richard: Right that’s correct. So a single family office is when it’s just for one individual or one family. And a multi-family office is essentially a wealth management firm that’s more holistic more 360-degree and they might serve three or four clients or they might serve 30 clients or some that have 500 clients that are all worth 10 million dollars or more. That’s typically the threshold that people will talk about as if you’re at 10 million dollars or higher you might become a client of some of these multi-family office. And that’s the difference between the two types, single and multi.
Buck: And again just for clarity, when you work with a family office, are you, is effectively you know what we call the fees, but in this case it’s really overhead right? Are you paying employees, or are you still sort of commission-based at that point?
Richard: Well I think that we may back up 1/2 step just to make my previous statement more clear for your next question. So the single family office they are is basically your overhead if you then decide as a single family office investment organization that you want to invest in a private equity fund manager or a real estate deal that deal that fund manager or independent sponsor might have their own fee structures. The difference is you’re paying overhead, and then the fees, instead of paying a flat you know wealth management fee to a third party, who hopefully most of that asset management fee is going towards things you need. But as a single family office you just put in place the things that you need the most, and if you don’t do a lot of charitable giving now maybe you don’t have a head of philanthropy on the team which you know a multi-family office or private bank might have that resource internally. But essentially the smaller single family offices will call themselves a virtual family office when they have just one or two employees or an outsource kind of CEO of the organization that might be working part-time and helping manage their single family office. So in that case they’re keeping the structure very lean because they don’t want to have the cost of it be a high percentage of their assets perhaps per year. And then typically every 50 million in net worth is typically one to two more professionals added to the team is a good rule of thumb. So a four hundred million dollar family, you know, it’s usually gonna have you know 8 to 16 team members. Could have far more it could have far less. I’ve met a 800 million dollar family they just had one person running everything. He just outsource everything and only traded some of the ETFs for the family and everything else was outsourced to about 50 different fund managers and, you know, they were having trouble keeping up with it all, but they did it with one person. So it just depends on the…
Buck: Big insurance policy on that one guy I guess.
Richard: Yeah hopefully.
Buck: You know in one of the other things I just want to mention is you know having a work with operators myself with my investor club and operators that often work with family offices. The family office structure sometimes provides a better deal than the retail investor. In other words you know say there’s a split, a certain split that an operator usually uses when they’re raising capital on their own, if, you know, what I’ve found is that if you’re able to say well we’ll bring 5-10 million dollars of equity, that the deal may sometimes sweeten on the side of the investor. So that’s, I presume that’s one of the major advantages as well.
Richard: For sure. I think a savvy team or just individual or two helping you manage a single family office could pay for half of their own cost or their whole cost just through fee negotiations. I think a lot of people want to have more anchor family office investors who could add strategic insight or help with adding credibility to what somebody is doing inside their investment firm so a lot of times people just want to get the deal done and they won’t say it but they might be very flexible on fees more so than you’d imagine and also to your earlier question I think it’s important note that those listening who work in wealth management or private banking, the family office industry growth which is growing every year doesn’t have to be a bad thing for your business because if you know about the trend and your you know up on it, then when somebody brings it up, you can help them get into place parts of a single-family office or bring them family office quality service providers. And almost always, the single-family office even hundreds of millions of dollars does not want to do everything in-house. They still need someone for cash management. They’ll still need someone to do due diligence on fund managers and travel all over the world doing that themselves typically in more than one industry. They still need to manage their liquids you know and things that are semi liquid and being ETFs and different real estate vehicles etc. So even the ones who try to do a lot of things internally, there’s still opportunities for a wealth manager or private banker to be managing a portion of that portfolio and continue to grow if the family has a trusted advisor I think.
Buck: One of the things that you know just to shift topics a little bit, you know one of the things that I find to be true and really I think the premise of this entire podcast that I do and this all of my content, is that there seems to be in my view sort of two sets or two rules or paradigms to investing. One is sort of for the poor and middle-class but also the upper-middle class fall on that too because there’s really not a lot of tools for that group. However, people who may say mid six figures are often just investing the same possible, the same way that you know the middle-class or somebody who’s making thirty or forty thousand dollars a year. But the affluent really invest differently, don’t they? I mean there is a different style. It’s not like you’re just gonna take you know Porsches, stocks, bonds and mutual funds and, you know hand them off to one wealth manager and off you go. There’s a lot, there’s a lot more to it.
Richard: Yeah you’re so right, you’re so right. My latest project that I’m most excited about is documenting the top headaches of Centa-millionaires, hundred million dollar net worth clients. And one of them is this control issue. Is that when you’re a self-made individual, it’s usually through exerting your strategic influence on a portfolio or an operating business or a real estate development strategy. And so it’s very unnatural to say oh okay well I’ve created 20 million or a hundred and forty million of net worth, now let me just hand it over to my banker or wealth manager and let him diversify it like crazy, and then I’ll just sit back here and retire and play golf. It’s really not in the DNA of most self new people. And so usually most of my clients have, you know you never want to take any advice from anyone here in a podcast and use it for investing, but like just to give you a picture of like a broad stroke. There’s a lot of families that are self created, will put 20-25 percent in cash flowing real estate assets even if they didn’t make the money in real estate, they’ll take then a healthy percentage and put it back into the industry where they created their wealth. So they have the information advantage, resource advantage, connections, maybe yeah they’re seen as a Titan of that space and have great deal flow. And then they’ll put some of that traditional bucket, and those percentages should change drastically based on who those people are, and what their risk references and time horizons are obviously. So I don’t like to like say the percentages too much, but I think that when you say that they invest differently I see that when you get to third/fourth generation, a lot of times a family will lose their money because they diversify to death and they’re just playing defense, defense, defense, and they’re no longer propelling the wealth forward through entrepreneurship, through being thrifty, resourceful, creating value and businesses. They’re just playing a diversification defense. And I think that is the game that a lot of high net worth in those that are middle class or even affluent sometimes get into playing. But it’s not how the ultra-wealthy became ultra wealthy, and they know that. And so exerting control and their investments transparency for a percentage of their holdings is really important. And then we can talk as well about real estate and debt and you know leveraging strategies like that, but I think that’s in core to the mentality a lot of a lot of these families.
Buck: Yeah you know it’s what’s funny is when you call what you call “playing defense” really is the paradigm for most, you know, most of everybody else, right?
Buck: It’s what do they tell you to do, just hand money and it’s basically a wealth preservation thing, and mutual funds, that are you know for most people have very high fees and you know they’re making three, three and a half percent per year on average if you look over the past three decades, that’s defense. That’s really hurts and that’s all we really kind of see a lot of times for the majority of the people out there. And you know, and that sort of takes me to the other part of my thesis which is that many of those strategies of the ultra-wealthy, and you talked about real estate for example, are actually available to country club accredited investors like a lot of my listeners. But most people don’t even know about them. What do you think of that?
Richard: For sure it’s true. For sure. And I think that there’s so many so many answers you know we can talk for an hour on that exact thing you just said. It’s so interesting but there’s a lot of real estate investments that you know you might have collateral behind it. For example a yogurt company came to me one time and we did due diligence on this investment and they needed to raise capital no one would lend to this yogurt company, but the family owned a condo overlooking Central Park that was worth 1.5 million dollars and they’d be willing to put that up as collateral if the family office gave them a million dollars as a debt note, they would pay out 10% but if they failed to pay that you could collect on the condo and you would get title to the condo and you would own it. So it’s kind of one of those things where you either get 10 percent or you get a condo in Central Park that you could sell within a week, given how New York works with real estate. So there’s more…
Buck: The downside ends up being in the upside.
Richard: Right. Yeah, yeah for sure for sure. And this guy is not like a loan to own type mentality, but you know the deal happened to be too small for the investor to bother with. But it’s a good example of, you know, families to get a lot to deal flow they start feeling like they’re drowning and normal, and what you’re talking about is that the high net-worth don’t even get a taste of what’s normal for the ultra-wealthy to see, so the advantage is that ultra wealthy not only have a lot of access to these ideas which themselves on average are probably sometimes better for investment, but also when you see so many ideas, you know, choosing the standard deviations away from the norm, the abnormal deals is one of the families are looking for. So they start to feel like after a few years of being a family office, that they’re drowning in normal. Everyone’s got the same private equity offering, real estate offering, but that’s a healthy thing so that you know if you’re only getting ten deals a year, your top ten percent of deals you’ve got one to choose from. You’re getting a thousand deals a year, your top ten percent is a hundred to choose from, so you can go to the top one percent and just consider those top ten for hardcore due diligence. So your ability to go a couple standard deviations out on lean fees, amazing team, credible asset, can do thorough due diligence on, something you understand how it makes money, they’re not invested in some cannabis crypto mobile app that promises to make you rich, but you actually know the mechanics of how they’re creating value I think that that’s a really big part of, you know, having a family office really help you, is having all those things happen naturally over a couple years.
Buck: Is there a general sentiment among these larger investors right now about, you know, the way the economy is right now and a general trend maybe that is is dictating behaviors?
Richard: For sure. I mean everyone knows that we’re late in the real-estate game so starting three four years ago people started to say their net sellers. The tax law got changed and people now are saying most often, we run twenty events twenty conferences a year with 400 investors on stage per year at the family office club and our events. And so we get a lot of these opinions coming. And essentially what we hear is that people are only investing in distressed or value add or areas that they have their downside really well protected, because they know we’re not earlier in the game, they’re holding on a little bit more cash than usual, but they feel like having a president who knows a lot about commercial real estate, and as a commercial real estate owner helps and the tax law helped for sure. And so I think that almost everyone is kind of cautiously optimistic. But one advantage these families have, is that the market goes down, they typically are sitting on enough cash in general and now that they have been kind of net sellers for two to four years already, perhaps if the market goes down, they’re just going to be able to acquire more assets and grow their wealth further. And some might say you know oh well that’s that’s kind of unfair because the rest of us get hurt because we’re all in the broader market. But it’s kind of to your point of you know being able to structure things that protect your downside and being able to structure things where you have some control and can work out of situations etc. I think it’s like is one of those benefits you’re kind of alluding to earlier.
Buck: One of the other things that I’ve found, and again having worked with some operators who are frequently involved with family offices, is that you know, this is this is, again this is one of those things that you would never see in the high net-worth world, but I mean I you know I have some eager investors in my group who are always sending me an offering memorandum and saying hey what do you think?
Buck: And the response is always I don’t know anything about this group and I don’t care what the numbers look like, okay? I mean I’ve not done any due diligence and at the end of the day relationships are such a big part of this for me and I can’t imagine that that same idea which call tribal investing, right? It’s almost like a group of people who, you know, have, you know, operators or people who they go to, who, on their and have a very good track record and they also have a sense of responsibility to perform, right? So everybody’s getting getting richer. Everybody is, you know, doing well because of this trust factor. Do you feel like there’s that kind of you know upper echelon community that people benefit from as well?
Richard: For sure. I mean on multiple levels there is, you know, it comes from learning from best practices from other really smart people and you only get access to those people because of maybe what groups you’re in, and maybe it’s a golf club that cost two hundred and fifty thousand a years to get a golf with smart people who have been successful, or it might be being a YPO or Tiger or something else. And I think that it also comes from just being well-known in a space and being able to write that check. You’re gonna see deals that smaller investors won’t ever see. And just seeing those deals makes you be very aware of where the market is and you gain extra insight. And so you just get extra invitations, extra looks and sometimes can benefit from the due diligence of others. But you know I think some families get burned because they’ll just invest in a deal because of a sense of tribal kind of trust exists, when really they should do their own thorough due diligence. So sometimes people get you know driven off a cliff by stuff like that. And it doesn’t often make the press that people don’t want to talk about losing their money. So I do think that um it can be, when you talked about the default mode being diversification, I was kind of laughing because I just feel like indirect investing, if you’re not careful, it can be the opposite of what could be a de-risking strategy. So if you’re investing in a mobile app and then a biotech company and then a cannabis, you know, retail center, and then an office building, and you let those investments play out over seven years, you’re gonna learn in each of those niches, but then how does that really connect, unless your expertise is debt structuring or how you syndicated the deal. The strategic fruits that are born off of each of those things, I’d be lucky if even one or two of them connect at all. And so the thing is if you focus on an area an industry a sector an industry that you’ve had experienced and it made wealth in, then you can do due diligence faster, you see more deal flow, you’ll see deals first, you’ll get a better valuation on a deal, you can be on strategic board, and they know you can add value and take them places and open distribution and open doors to other investors because you are the Titan of the space. And there’s like such a number of benefits that even if you, even if your industry is horrible, and you made your money there but you’re just so glad to be out, put in a flag in the ground and a couple areas that you know is a not risky percentage of your portfolio and just building that expertise at least. It’s something really important because it’s going to bear strategic fruits, but you can’t eat any of that fruit if your trees are all over the place and you’re growing all different types of crops, you know?
Buck: Yeah absolutely I mean I think and you know I think the other thing is when you’re just playing a defensive game like everybody else does, I mean, you don’t, you know, it’s really hard to grow your money and, without having some specialization in something where you might be able to get ahead rather than just not lose. And you know that’s that’s something that I see a lot with investors. Honestly I think it’s a particularly big problem these days just because of the economy and, you know, with the debt and, you know, I’m sure you know, you guys probably follow they’ve had a number of economists on the show talk about this potential demographic cliff and in another you know 10 years or so and what that could do with the economy. I just worry about the future of people playing a defensive, purely defensive game at this point.
Richard: Right yeah right I mean I think I connected to that I think it’s really important to mention that on some of the investments that high net worth are most exposed to are the worst types of direct investments so they’re gonna be introduced to the Kickstarter campaign or the equity funding thing and some social media platform that gets blasted the millions of high net worth before they’re gonna hear about their friends, you know, latest hot, you know blockchain technology consulting firms. And I think it’s really important to point out that the people who do the best in Direct Investing almost never invest in startups unless it’s right in their backyard and they know that field so well and they usually even then take a controlling position. They’re usually investing in companies that have survived in the ocean if climbed up to the sand and been producing a profit for a while, and then they go in and take a controlling stake or a significant stake and really drive that value up. So even if they know what they’re doing, they know that most businesses fail, most teams fail, and a new idea that hasn’t been proven the team before hasn’t been proven at marketplace before the price and his improvements, the execution, the consistency of the executives etc. It’s just such a high level of risk, I don’t want anyone to hear this and be like oh yeah great yeah I’m gonna invest my four friends’ you know, crazy ideas for their startups. Family offices rarely invest in startups. It could be a couple of percentage points of their total portfolio, but they usually are going into companies are already producing, at very low end two hundred, five hundred thousand a year profit. But usually they’re looking at a million profit a year or a couple million in profit a year to really take the business seriously. And the larger the family and usually the more profits they look for before they invest. Buck: So tell me, one other thing that I want to talk about a little bit because we haven’t covered this before, something that I have been exploring and learning more about. There’s some financial products that are available out there and and to a certain extent not to just deca millionaires, but are not investments per se, but even say life insurance products things like that. Why do you think it is that people who, for example let’s take premium financing, and IULs for example and another of my high net worth friends are using some kind of, you know, some kind of you know insurance base growth because of the tax advantages, because of the, you know, estate planning benefits and all that. Why do we not hear about this in sort of the, you know, the upper-middle class world when when a lot of these things are actually available?
Richard: Well what’s interesting is that as some of these products are not used by a lot of family offices even, not as high a percentage as they should. And part of it is it takes a while to get educated and understand what options make sense for somebody. So the high net worth individual doesn’t get as much benefit as the family office, they have less patience to learn. Unless desire to save that you know five, ten, twenty percent on taxes. And then also the sales person knows there’s family offices out there for you know twenty million dollars ten million dollar net worth people they could be educating, so they don’t take time sometimes to educate the smaller people. And then also I think there’s a feeling of mistrust of financial advisers globally. I think most people feel like they don’t know what the different types of life insurance there are, and if I know someone who does know a lot they’re probably trying to sell them as big a plan as possible, and after being educated, the recommendation will be to spend a whole bunch of money on life insurance. That’s like typically what’s in the back of people’s brains when they get any type of financial advice and I think it’s important for people to kind of address that you know at the forefront if you’re in the financial advisory business, even at the wealth management or multifamily office level, there’s a feeling that you know is the person gonna just try to manage like all my wealth right out of the gates, even though maybe you know you’re not comfortable with that at the beginning. So I just feel like there’s a lot of work to be done and unlike the industries behalf I’m just kind of taking educational kind of client first approach to things.
Buck: Yeah I think and in that and particularly for I think for the upper-middle class, I am a physician by trade. I don’t practice, I haven’t practiced in a couple years now. Luckily for me, but I will tell you, that you know when I finished my training it was only you know 2008-2009, had every you know financial advisor out there trying to get my business, and I was not I would say very financially sophisticated at the time. But instinctually I kind of had this you know this lack of trust as you called it. And in retrospect I look back at a lot of the products that were offered to me, I’m glad I did you know mistrust them. Because now I’m looking at it from a different lens, now I’m seeing like for example if you take life insurance in particular, you know I’m looking at over-funding products etc. that that actually make a lot of financial sense and those were never even brought up to me and when I found out about them and I talked to people who were trying to sell me initial products, they acted like they had no idea what I was talking about.
Richard: Right, it’s just how complex it all is I guess on one level. And I think that one thing I’ve been seen a lot recently is that deals just don’t get done unless there’s a lot of trust in the process and there has to be trust with the individual and the team. Best be trust in kind of the industry or the ecosystem surrounding the idea and there has to be a lot of trust in the idea itself. So I think there has to be trust on all three levels and you know lots of times it’s missing. And so those listening that are raising capital for something you might have gone to friends and family first because their way of that trust curve on who you are, but once you get past that you really have to think you know is this person you know close to the self-storage asset I’m raising capital for in Denver? If so okay great, it’ll be easy to build their trust on that but you know if you live in Toronto and they’re in Denver you know it might be hard to move up that trust curve with you individually. So I think being aware of those three trust curves is something that a lot of people raising capital miss and I see it all the time at our ur family all this club events people run around think they have the deal of a lifetime, but no one knows who they are and they might not even be interested in their industry. And so they really need to narrow their focus and build trust first, you know?
Buck: Tell me about those events, your talk that you do.
Buck: Do you have one coming up anytime soon? And who are they appropriate for?
Richard: Sure yeah we’ve done a hundred conferences over the past 11 years. We’ve had over 25,000 people attend, we have 5,000 people a year come to our 20 events per year now. Ten of those events per year are investor summits, and then 10 of them are investor relations workshops where we train people in capital raising, and kind of a bootcamp you know, a small group exercise format, and we have at one of our standard events there’s 30 investors speaking on stage, six or seven sponsors who might be raising capital for something. We’re serving the family office space and we have them in Toronto, London, New York, Miami, San Francisco, Dallas, Chicago, just spread out all over the US and Canada and Europe. And you know our next couple events we have our Real Estate Investor Summit September 21st, our deal flow summit October 12th, and then our thousand-person Family Office Super Summit is actually December 10th and 11th down here in Miami. And those are our next next three events. So we pretty much have you know one to two events happening each month.
Buck: Where can we learn more about those events? Is there a website you can give us?
Richard: Yes for sure it’s Familyoffices.com and right on the homepage there’ll be this blocks, you’ll be able to see the rundown of all the events scheduled. And importantly our whole business model you know like you it’s just to give away as much value as possible, just to build kind of a business friendship before anyone spends a single dollar with us. We have a free book on Familyoffices.com and YouTube channel and we’re just we’re as always producing as much as we can and giving away as much as we can on this niche because the whole industry is just so inefficient and confusing and secretive in general.
Buck: Richard Wilson everyone. Richard, thanks so much for being on Wealth Formula podcast today.
Richard: Sure yeah, thank you for having me. Appreciate it.
Buck: We’ll be right back