For families for whom we manage $10 million or more of their financial assets in house, Defender Capital makes available, a unique offering, “Family Advocacy”. Defender acts as a watchtower, helping a client understand and monitor their investments, insurance portfolios, important documents, advisors and professional relationships.
Unlike most firms, we do not require nor believe affluent families should have all their investable assets with one firm. Lastly, we assert that a family cannot truly determine the value of their multiple professional relationships without a transparent cost/benefit analysis. How do we Advocate and Defend on behalf of our clients? Here are some of the areas for which we provide clarity, oversight and protection. If there are any questions we may answer, please contact Tom Worth. He can be reached at email@example.com or 704.965.3001.
Overall financial success is dependent on the growth of all assets and the minimization of investment fees and other expenses. The investment management industry is distinct in compensation structure, unlike in industries such as legal and accounting where a customer typically understands the amount their advisor charges, investment management compensation is wrongly opaque. In this industry, it is common for there to be numerous “layers of fees.” In addition to the fee paid to your investment advisor, your portfolio often may contain accounts managed by “outside managers.” Many investment advisors also rely heavily on mutual funds. While the fees paid to your investment advisor is seen as a charge against the account, the outside managers and mutual funds themselves cost the client. Those charges are not clearly seen as they are deducted from the account and the client sees a reduced overall return on those funds. Even less clear and visible are what the SEC aptly refers to as “hidden fees.” When a manager of a fund (mutual fund or outside/separately managed account) performs a trade, there are transactional costs involved. These various fees can easily add up to be in excess of 1% of the value of the account depending on the frequency or “turnover” of the account. When coupled with the advisory fee, the layering of fees can be very expensive and significantly erode returns.
Defender Capital, like others in the industry, receives compensation through management fees. This fee is a percentage of assets we manage. We use outside managers only in cases where clients would need exposure to a specific industry in which we do not specialize. The use of these managers represents a small percentage of the total amount managed for the client by Defender Capital, typically 30% or less. The majority of the assets are managed by Defender Capital and the fee charged is one of the lowest in the industry. Our trading costs, due to the long holding periods indicative of our investment philosophy are de minimis. For example, a $1mm account would have trading fees totaling $100. Consequently, the erosion of returns is considerably mitigated. An investor may be comfortable with paying an extra 1% because, on the face of it, that amount appears not too detrimental. However, over a 10 year period, the impact of 1% of extra fees compounded on a $5mm investment is $680,000. Defender Capital believes in transparency and adding clarity, not opacity to a family.
We analyze any fees for all investment accounts owned by the family. In the event we find a manager is charging an excessive amount we will, should the client permit us to do so, contact the other manager(s) to negotiate a lower fee. In the case of one client, we reduced the family’s fees paid to other advisors by over $100,000 per annum.
Two extremely important areas often overlooked by families are their estate plans and their insurance portfolios. We find most families treat both areas as static issues. The family creates their Revocable Trusts, Irrevocable Trusts, GRATs, ILITs, FLPs, Wills and the like, they then file them away in a safe or with their estate attorney and forget about them for years. We reach out to the estate attorney for guidance on the intent at the time of implementation. If any of the fact pattern for the client or the tax law has changed and adjustments to the plan need to be made, we partner with the estate attorney to ensure the clients current wishes are incorporated into their plan. Estate attorneys have told us that they greatly appreciate our proactive approach and clients may enjoy the reduction in billable hours charged by the attorney.
Insurance is typically subject to the same “purchase, file and forget” mentality. We review all insurance policies including Long Term Care, Disability, Life and P&C to help the family understand which are performing and which are not. We analyze and organize the insurance portfolio and, in the process, determine which are fairly priced and whether or not the needs for which the policies were purchased are still pertinent. If after discussions with the client we discover any changes to be made, we will advise accordingly. If the existing policies are not being properly managed, we will provide the client references to firms who do properly oversee insurance portfolios.
As a family’s wealth increases, a client’s life, both personal and financial, becomes more complex, which often morphs into complicated. We bring clarity to the complexity so our clients truly understand their entire financial picture. Defender Capital illustrates the client’s current picture while living and at their passing. Additionally, we are able to illustrate updated scenarios based on our recommendations. Families find tremendous comfort in seeing their financial lives depicted simply rather than spreadsheets and statements which may cause information overload. We are only limited by what the client wishes to disclose.
Additionally, we utilize software that enables a family to log in to one website to view all of their accounts, both the ones at Defender Capital and those held elsewhere. This up to date snapshot proves to be invaluable for our clients who wish to keep informed about their financial lives.
Defender Capital utilizes trust companies to oversee the trusts implemented by clients in order to facilitate the transfer of wealth to their heirs. Most wealth creators wish for two things to happen upon their passing: One, their family to be good stewards of their inherited wealth and for that wealth to afford comfort and opportunity while being protected. Secondly, wealth creators typically wish to achieve or maintain family unity.
Too often the Settlor (originator/funder) of the trust will choose family members to be the Trustees for the trusts they create. Our experience has shown this choice is often far from optimal. If the Settlor (for example the Father) wishes to have his son become a Trustee, we recommend the father instead have the son be a co-trustee. Most trust companies will agree to act as a co-trustee which greatly reduces the strain on the family member. If the father decides NOT to have any of his family members to act as trustee, Defender Capital can act become a co-trustee in conjunction with the trust company. If the Settlor (father in this example) wishes only to have the trust company act as sole trustee, Defender Capital can still act as the family advisor and manage the portfolio, but all trustee duties will be carried out by the trust company itself.
As previously mentioned, wealth can lead to discord within a family. We believe that that wealth itself may not be the cause of the discord, but it certainly can act as an amplifying catalyst to worsen the pre-existing issues. Much of that discord can be mitigated or eliminated with clear and open lines of communication among family members and with education for the next generation about money. This process instills both a sense of how the wealth was created and how the next generation can become a steward to the inheritance. There are essentially two roads for the next generation to take: steward or spender. We believe a family meeting occurring annually or, at the very least, every other year is a wonderful way to bond a family while keeping them very informed. Secondly, we act as a resource to answer financial questions that arise within the family.
As part of our Family Advocacy, we act as a “second set of eyes” to our clients. For example, when one of our families is presented an investment opportunity, whether it be in the private equity, alternative investment or the real estate space, we provide unbiased feedback. We do so by examining the opportunity and helping the client understand the impact, positive or negative, on their financial picture.
Defender Capital becomes, for these clients, the one place for a family to call when the patriarch or matriarch of the family passes. By having typically full knowledge of where assets are located, how they are structured and who needs to be contacted, our clients have an advocate to walk them through this difficult time. Sadness that a loved one has passed and joy that they had lived should be the only two emotions our clients experience. Confusion and fear of what happens next will already have been properly planned for and mitigated by the very nature of the relationship with Defender Capital.
Statistics indicate that 85% of the time, women in a family will be in charge of the household’s finances at some point. Clients have spent a lifetime building wealth and, most often, wish to have control over what will happen to these resources when they pass. Though much of what will happen next can be carried out through a properly prepared and monitored estate plan, we believe there is another vital part too often missed. We believe it is the responsibility of the wealth creator, be it the patriarch or matriarch, to vet out a trusted team of advisors to help the surviving spouse and loved ones when they are no longer here.
If there are any questions we may answer, please contact Tom Worth. He can be reached at firstname.lastname@example.org or 704.965.3001.